Our Approach to Tax Administration

The Canadian tax system is based on voluntary compliance and self-assessment, which means taxpayers determine their own liability under the law and then pay the correct amount of tax. Our fundamental approach to tax administration is to enable individuals and businesses to comply with their obligations, without our direct intervention. A high rate of voluntary compliance reduces the costs of administration, and allows us to direct our resources to high-risk areas, such as the underground economy, aggressive tax planning (including the abusive use of tax havens), and GST/HST fraud. We aim to ensure that all Canadians meet their tax obligations.

Taxpayer Behaviour

The model below illustrates typical taxpayer attitudes toward compliance and major factors that influence taxpayer behaviour, as well as the CRA's strategy to support voluntary compliance, and identify and address non-compliance. The model shows that as the level of non-compliance increases, so does the level of CRA involvement.

In Canada, the vast majority of individuals pay their taxes on time without our intervention. We believe that people are more likely to participate in Canada's tax system and pay the taxes they owe if we provide the services necessary to help them do so. Research shows that rates of compliance are positively affected by access to information, tools, and assistance that encourage taxpayers to meet their obligations.

We use a mix of service and enforcement activities to ensure compliance with Canada's tax laws, whether taxpayers are willing to comply, do not succeed in complying, or choose not to comply.

We use risk management to identify current as well as emerging compliance risks, and to assess them for their potential effect on the revenue base and on compliance in general. We then develop strategies to address specific segments of the tax population or particular areas of non-compliance that pose the greatest risk.

Our compliance activities include providing outreach (education and information), offering high-quality, innovative and secure services, and simplifying tax administration through harmonization and burden reduction. To detect and deter non-compliance, we conduct reviews and audits, and communicate the results of previous compliance actions. We also conduct investigations, which can lead to fines and prosecutions.

In addition, we are committed to treating taxpayers fairly and to ensuring their rights are upheld through the administration of taxpayer relief provisions and dispute resolution. When taxpayers disagree with us, we provide them with the opportunity for redress, which is a formal, objective review of their file. This fosters taxpayers' confidence in the fairness of our self-assessment system, and encourages them to meet their obligations.

Factors Influencing Taxpayer Behaviour

The model on identifies factors that may influence taxpayer behaviour. These factors can influence the degree to which a person complies with their tax obligations and can be grouped into three broad categories: social, economic, and governmental.

Social factors include sociological and psychological elements such as a person's level of trust in the taxation system and the government as a whole, and their sense of social responsibility. Other factors, such as moral and ethical values, and general attitudes toward government, can also influence an individual's willingness to comply.

Economic factors related to business, industry, and the economy can also affect the compliance rate. Changes in the labour market, the profit margins of firms, or the general state of the economy can all have an impact. For example, during slower economic periods when profits decrease, a greater number of businesses may choose not to comply.

Governmental factors also have an impact on taxpayer behaviour. Laws and regulations can influence compliance. The complexity of tax laws may make it difficult for some taxpayers to understand or meet their obligations. Penalties and fines for non-compliance can induce people to comply. Integrating the tax and benefits administration system can also provide an incentive to comply because potential benefit recipients are more likely to fulfil their tax obligations if they know, that by doing so, they may receive a benefit payment.

Our Role in Addressing Taxpayer Behaviour

Although many of the factors that influence taxpayer behaviour are not within our direct control, the CRA still has a significant role to play in facilitating and enforcing compliance. Our most important role in influencing taxpayer behaviour lies in our ability to instill trust in the integrity and fairness of the tax administration system.

Maintaining trust is essential. A loss of confidence in the CRA or in the tax legislation that we administer can erode the high levels of voluntary compliance that Canada currently enjoys. At the CRA, we work hard to maintain Canadians' trust by operating in accordance with our four core values: integrity, professionalism, respect, and cooperation.

The CRA understands that the public's perception of the way we deal with taxpayers is a key factor in maintaining their trust and supporting compliance. Through surveys and other research, we carefully monitor taxpayers' perceptions of the Agency. According to the CRA's 2006 Annual Corporate Survey, we continue to have a positive image with Canadians (see Figure shown below).

Public Perceptions of the CRA

Understanding the factors that influence taxpayer behaviour helps us direct our compliance efforts efficiently and effectively. As a result, taxpayer attitudes and behaviour are important to our compliance approach. This approach, which is discussed in the remainder of the report, focuses on helping taxpayers meet their obligations, detecting and deterring non-compliance, and enforcing legislation.