OTTAWA - The Canada Revenue Agency has uncovered millions of dollars worth of missing taxes by doing a simple credit check that the banks have been using for years.
The project found almost $3 million of GST revenue that had been collected from customers by new businesses but was never handed over to Ottawa, or was fraudulently refunded to them.
The money turned up after 439 firms were targeted by running their tax-registration information through a commercial credit-screening service from Equifax Canada Ltd.
Banks and other financial institutions have for years vetted potential customers applying for mortgages, loans and credit cards through commercial credit-checking services.
But the Canada Revenue Agency had not been doing so with companies newly registering as collectors of GST/HST taxes — some of which simply kept the money.
The agency's pilot project was launched in 2010, as part of a wider effort to flush out some of estimated $35 billion that remains untaxed in the underground economy.
The so-called Interactive Warning System project, or IWS, focused on missing GST/HST revenue and was slated to run for two years. But the results were encouraging enough that it was ended in 2011 after just 12 months.
Internal documents outlining the project were obtained by The Canadian Press under the Access to Information Act.
"The project was considered a success," said agency spokesman Philippe Brideau. "The procedures and approaches tested provided us with risk indicators that are part of the regular procedures."
Brideau says the agency is "currently exploring follow-up use of IWS products for GST/HST compliance."
Documents show the agency eventually wants to catch income-tax cheats and people improperly receiving government benefits by using credit checks.
IWS is a financial-industry term for a system that identifies problems with names, addresses, social insurance numbers (or SINs), telephone numbers and dates of birth that suggest possible fraud. The system automatically flags high-risk credit applications.
The agency's final report on the project, dated September last year, describes how the system worked.
"For example, if someone is attempting to mask their identity by using the SIN of a deceased person, this would be flagged by the IWS products and a warning message would be generated to prompt further review," says the heavily blacked-out report.
"The warning messages are generic, such as 'Applicant's SIN is reported as misused.' Additional personal information is not provided with the warning."
Equifax's system, called SafeScan, might also flag a file if the postal code and telephone number were inconsistent.
The Canada Agency Revenue used SafeScan to target 439 firms for a GST/HST audit. Each audit uncovered an average of $6,800 in missing tax revenue. Brideau says no charges were laid.
Quebec was excluded from the project because federal GST there is collected by the provincial tax agency on behalf of Ottawa.
The agency completed a so-called privacy impact assessment, or PIA, in late 2007 to demonstrate the project would not put personal information at risk.
The assessment noted that "at no time will the interactive warning system database interact with the CRA's databases," and said access to the information would be limited to a few authorized individuals.
Privacy commissioner Jennifer Stoddart pressed the agency to use only one credit-service provider to further reduce risks to privacy. The other major provider in Canada is TransUnion of Canada Inc.
A spokesman for Stoddart said CRA agreed to conduct an evaluation after the pilot project to review privacy risks before expanding the program nationally.
"To date, our office has not received a revised or additional PIA for this project," Scott Hutchinson said.
The internal report shows the project cost $2.4 million, mostly salaries, to uncover about $3 million in missing GST/HST revenue, for a net gain of less than $600,000 — a relatively poor return compared with other CRA programs.
The project was one of a series of underground economy initiatives launched in the last few years that have included audits of restaurant serving staff in St. Catharines, Ont., and maple-sugar producers in Quebec.
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9 Tax Filing Tips That Will Save You Money
9. Unemployed? File Anyway
Some low- or zero-income earners still think there's no need to file a return. This misunderstanding can cost thousands of dollars in lost benefits and credits like the GST/HST credit and the Canada Child Tax Benefit. More and more benefits are being distributed through the tax system these days. So if no return is filed ... no benefits get sent. For some benefits, like the Guaranteed Income Supplement and the Working Income Tax Benefit, recipients need to apply every year. Provinces also offer sales tax credits and property tax credits for low income earners. But again - no tax return, no credit. Teenagers who earn a few thousand dollars should also consider filing. That creates RRSP room that can be carried forward indefinitely to use at a time when they will owe tax.
8. Take Advantage Of Income Splitting
It's possible for Canadians to split Canada Pension Plan (CPP) retirement income if both partners are 60 or over. Those 65 and over can split several other kinds of pension income, such as life annuity payments from a company pension plan, RRIF payments and annuity payments from an RRSP or deferred profit sharing plan. Income-splitting can save thousands of dollars in tax as income is shifted from someone in a higher tax bracket to someone in a lower bracket. Sometimes, splitting can succeed in reducing or eliminating the clawback on Old Age Security payments or the age credit for the higher-income spouse. Pension income splitting can also allow both partners to claim the $2,000 pension income tax credit. Income splitting goes well beyond pensions. Spousal RRSPs, income-splitting loans that can be made at just one per cent interest, and employing spouses and kids if you're a business owner are several other ways to minimize a family's tax bill.
7. Transfer Unused Credits
A variety of tax credits - such as the Child Tax Credit - can be transferred between spouses. Several credits for students - such as the tuition, education and textbook credits - can be transferred to a spouse, a parent, or even a grandparent once the credits are used to reduce the student's tax payable to zero. The credits can also be carried forward indefinitely so the student can use them later when he or she starts earning money.
6. Know Limits Of Tax Software
Once you tell most of the well-known tax software programs that you're a student, or a senior, or a parent, or have medical expenses, or have a spouse or equivalent, they'll prompt you with relevant questions and automatically make sure you end up applying for any relevant credits. You can also avoid those pesky math errors. Many of these programs will also offer suggestions to transfer credits and optimize deductions between spouses and family members. They're also great for performing some of those "what-if" scenarios. But for those with a more complicated tax life, such as those with rental properties or self-employment income, it may be a good idea to call in a pro.
5. Claim Medical Expenses
Tax experts say missed medical expenses are one of the most overlooked tax breaks. Many people don't bother to add everything up because of the income-related threshold: only expenses that exceed the lesser of $2,052 or three per cent of net income can be claimed. But what they don't realize is that there's a long list of expenses that qualify, so it's often not too difficult to reach that threshold. Travel expenses even qualify when people need to go more than 40 kilometres to get medical treatment that isn't available closer to home. Medical expenses can be claimed by either spouse or partner.
4. Take Advantage Of New Credits
Last year's federal budget introduced several new tax credits. A new non-refundable children's arts tax credit was rolled out to complement an existing tax credit that went to parents who enrolled their kids in sports programs. This new arts credit is provided on the first $500 parents spend on artistic, cultural and recreational activities for their children. With a 15 per cent federal tax credit, the maximum claim is worth $75 per child. Volunteer firefighters who perform at least 200 hours of service a year also get a break, courtesy of a new volunteer firefighter tax credit. It's worth a maximum of $450. There's also a new family caregiver tax credit that's worth $300. But it doesn't apply until the 2012 tax year so it can't be claimed on the 2011 return.
3. Keep Good Records
Receipts are necessary to claim medical expenses or to file for a wide range of other tax credits. While they don't need to be sent along if a taxpayer is netfiling, the paperwork must be kept for at least six years. For a small business owner, good receipts are an absolute necessity. Be aware, too, that the Canada Revenue Agency carries out spot checks on tax returns. Extraordinary child care expense or moving expense claims can be red flags for CRA auditors. So can big interest deduction claims. If you're not hiring a pro to do your taxes, know what you can and can't deduct.
2. Be Proactive With Your Taxes
The experts point out that there's only so much you can do to minimize taxes once you're actually at the point of filing your return. Once you've made your tax-related transactions, it's not easy to revisit them at tax time. So now's the time to plan strategically if you're thinking of selling or acquiring investments or exercising stock options in 2012.
1. Report All T-Slips
Here's a possible scenario: You file your 2011 return and later discover that you've failed to include a T-slip reporting income or a dividend payment. No problem, you think, because you know the slip's issuer also sends the same information to the Canada Revenue Agency. You think you don't need to bother forwarding this late slip to the tax department because the CRA will know about it. That turns out to be a big mistake. If you fail to report income in 2011 and also failed to report income just once in any of the three previous years, you can be nailed with what's called a "repeated failure to report income penalty." The penalty, which is automatically generated by the CRA's computers, is 20 per cent of the amount you fail to report in 2011.