Vol. 147, No. 49 — December 7, 2013

Regulations Amending the Income Tax Regulations (Mandatory Electronic Filing — Prescribed Information Returns)

Statutory authority

Income Tax Act

Sponsoring agency

Canada Revenue Agency

REGULATORY IMPACT ANALYSIS STATEMENT

(This statement is not part of the Regulations.)

Issue

The Income Tax Act (the Act) and the Income Tax Regulations (the Regulations) impose various reporting obligations, including the requirement for certain taxpayers to file information returns with the Canada Revenue Agency (CRA) in a specified manner.

Every year the CRA receives a vast amount of data that must be captured and verified against taxpayers’ income tax returns. Electronic filing enables the CRA to do this quickly and efficiently. Mandatory electronic filing was first implemented in 1998, when the Regulations were amended to require electronic filing by persons who file more than 500 information returns in a year. While growth in Internet filing was steady, it had not yet reached levels that would enable the CRA to achieve desired savings and efficiencies in the delivery of its programs.

In addition to the above, the existing penalty for not filing as required is considered to be excessive where a large number of the same type of information returns is filed. This is due to the term “information return” not being defined either in the Act or the Regulations. As a result, both individual slips (e.g. Statement of Remuneration Paid — T4 slip) and the related summary (e.g. T4 Summary, Summary of Remuneration Paid) are included in this term. Although the individual slips and the related summary are filed together, each individual slip is considered to be a separate information return. Therefore, the existing penalty applies to each individual information return not filed in the manner required.

With more businesses using automated tools, and recognizing the cost savings and administrative efficiencies generated by electronic filing, the Government announced, in Budget 2009, that it would expand the mandatory electronic filing requirements to submissions with more than 50 information returns. It also announced that it would introduce a graduated penalty structure with a much lower minimum and maximum penalty that would enable the CRA to enforce the mandatory electronic filing requirements of the Regulations more equitably. These amendments were included in the Budget Implementation Act, 2009, which received Royal Assent on March 12, 2009. However, the new graduated penalty provision of the Act is inoperative pending the enactment of the consequential amendments described in this Regulatory Impact Analysis Statement.

The proposed amendments would address the following issues:

  • — The Regulations currently require information returns to be filed in electronic format when the number of returns to be filed by a person exceeds 500. However, the penalty under the Act is triggered when the number of information returns that are not filed in the manner required by the Regulations is greater than 50.
  • — The Regulations currently apply to all information returns that are required to be filed under Part Ⅱ of the Regulations. However, the CRA currently does not have the systems capability to accept certain types of Part Ⅱ information returns electronically.
  • — The Regulations currently require information returns to be filed in “an electronic format.” This term is ambiguous, meaning that a taxpayer could submit a type of electronic file that the CRA is unable to process.

CRA statistics show that before the 2009 Budget announcement regarding the new penalty, the Internet filing rate for relevant returns was at 20.7%. Since the announcement, the number of submissions received in paper format has declined from 38.6% to 2.8%. For the 2012 taxation year, close to 97% of approximately 95 000 submissions received in respect of relevant returns were filed by Internet.

Objectives

The objectives of this regulatory proposal are to

  • — enable the implementation of the new graduated penalty structure; and
  • — expand the scope of mandatory electronic filing to achieve cost savings and increase efficiency.

Description

The proposed amendments to the Regulations would

  • — reduce the mandatory electronic filing threshold from 500 to 50 information returns;
  • — prescribe the types of information returns that must be filed electronically (see Appendix A); and
  • — require that the Internet be used as the method of filing the listed information returns electronically.

The proposed Regulations would apply to information returns required to be filed after 2013.

“One-for-One” Rule

This regulatory proposal is expected to increase administrative costs for some businesses. However, since it relates to tax administration, it is carved out from the application of the “One-for-One” Rule.

Small business lens

The small business lens does not apply to this proposal as there are no disproportionate costs imposed on small business. This assessment is based on an analysis of the potential incremental impact of this proposal on those few small businesses that are not currently complying with the new mandatory electronic filing requirements.

For the 2012 tax year, the CRA received approximately 45 000 submissions from small businesses in all formats with respect to the types of information returns that will be covered by the proposed amendments that fell within the 51–100 slip range. More than 43 000 of these submissions were made via the Internet, indicating that over 95% of the small business sector is voluntarily complying with the new requirements.

It is anticipated that the possible need to purchase software to convert existing files to an Internet compatible format, as well as related training costs, could result in incremental costs being experienced by slightly fewer than 5% of small businesses that are not currently filing via the Internet (approximately 2 000 businesses). The estimated maximum total annualized average cost for these small businesses is $275,326, or $131 per small business. However, the CRA currently provides any filer with the means to file an unlimited number of the proposed prescribed information returns free of charge. The CRA Web site explains how to easily file a return by using Internet File Transfer (XML) or Web Forms.

The CRA has taken the needs of small businesses into account with the implementation of mandatory electronic filing and has provided much support to help these businesses prepare and comply with the proposed requirements by continuously expanding its E-services and business support initiatives. In addition, at the request of stakeholders, the CRA has delayed the implementation of the new graduated penalty from 2009 so that businesses could prepare for the transition to electronic filing.

Furthermore, based on feedback from stakeholders, the CRA has chosen the Internet as the medium to receive electronic files as it offers the most flexibility and low-cost options for all users, and has not mandated the software to be used.

Rationale

The proposed amendments are required to give effect to the mandatory electronic filing enhancements announced in Budget 2009. When developing the list of types of information returns to which the new penalty would apply, the CRA identified those returns that were most commonly filed in bulk in order to maximize the relief provided by the new penalty structure.

The CRA also looked at the most flexible and accessible method of transferring information electronically and identified the Internet, and its XML format, as the best option. This decision was based on stakeholder input, recent innovations to CRA systems and the fact that the cost of maintaining the infrastructure necessary to receive and process data submitted on CDs and DVDs made the continued use of these media unsustainable. The proposal does not prescribe the type of software to be used for the data conversion in order to allow businesses the greatest flexibility in choosing tools that best meet their needs.

It is anticipated that businesses that maintain paper-based books and records would have expended approximately the same amount of time filling out paper returns as they will need to enter data into the Web Forms application. However, businesses that use an accounting package or payroll software that compiles the data and generates information returns automatically could see administrative cost savings by filing these returns by Internet.

Although most areas in Canada have broadband coverage where the transfer of information electronically can be done quickly and securely, there are some areas that may not have Internet access. For filers that do not have access to the Internet and that have been assessed a penalty for non-compliance with the electronic filing requirement, the penalty can be waived under the Act’s Taxpayer Relief provisions.

There are many benefits to electronic filing:

  • (1) A reduction in paper consumption: From 2008 to 2012, the amount of paper submitted to the CRA in respect of information returns decreased by over 92% as a direct result of the increased use of electronic filing.
  • (2) Secure transmission of data: The CRA uses the Secure Sockets Layer (SSL) protocol, which provides a safe passage for the transmission of data and authentication processes by encrypting the information. SSL ensures the privacy of information passing between the filer’s browser and CRA Web servers. Filers who send their returns on paper, CDs, or DVDs are open to the risk that their information will be misdirected and received by someone other than the CRA.
  • The CRA security protocol requires the use of Web access codes (WAC) — an eight-digit number assigned to each filer. The WAC and a business number are used by the business filer for authentication purposes and represent the official signature for filing information returns via the Internet. Internet filing is not allowed unless the CRA has determined that the sender has been properly identified through the use of their individualized WAC.
  • (3) Convenient and cost effective: Internet filers receive immediate confirmation that their submissions have been received by the CRA. Further, the CRA does not charge a fee to file via the Internet.
  • The CRA also provides any filer, through its Web Forms program, with the means to manually input their data and file any of the prescribed information returns free of charge. The CRA Web site explains how to easily file a return by using Internet File Transfer (XML) or Web Forms. Internet filers also benefit from reduced mailing, handling and storage costs that are associated with hard media or paper returns.
  • (4) Improved data integrity: Electronic filing virtually eliminates the possibility of transcription errors by the filer and the CRA, resulting in enhanced data accuracy.
  • (5) Government cost savings and increased efficiency: Expanding the scope of mandatory electronic filing helps the CRA achieve the desired cost savings regarding the processing of the proposed prescribed information returns and it would also increase efficiencies in the delivery of CRA programs.

Consultation

The mandatory electronic filing requirements and the associated penalty were first announced as part of Budget 2009, and subsequently posted on the Finance Canada Web site. Discussions regarding the new filing requirements were held at that time with various organizations, including The Canadian Payroll Association, Canadian Federation of Independent Business, Canadian Institute of Chartered Accountants, Certified General Accountants Association, Investment Industry Association of Canada and Canadian Chamber of Commerce. None expressed any concerns with the mandatory electronic filing requirement.

The CRA’s Web site has included information regarding electronic filing since 2009. In addition, all filing publications for all return types included an announcement and description of the new penalties.

Contact

Ms. Kathleen Butler
Director
Third Party Reporting Division
Canada Revenue Agency
7-8026, 750 Heron Road
Ottawa, Ontario
K1A 0L5
Telephone: 613-941-5816
Email: Kathleen.Butler@cra-arc.gc.ca

Appendix A

Name of Information Return

Prepared By

Government Service Contract Payments (T1204)

Federal departments, agencies and Crown corporations

Past Service Pension Adjustment (PSPA) Exempt from Certification (T215)

Registered Pension Plan administrators

Pooled Registered Pension Plan (PRPP) Information Return

Administrators of PRPP (payers or carriers)

Registered Retirement Savings Plans and Registered Retirement Income Funds Non-qualified Investments

Administrators of RRSP and RRIF (payers or carriers)

Registered Retirement Savings Plan (RRSP) Contribution Information Return

Administrator of RRSP (payers or carriers)

Statement of Amounts Paid or Credited to Non-residents of Canada (NR4)

Payers or Agents

Statement of Benefits (T5007)

Any provincial, territorial, municipal agency, worker’s compensation board, or similar person that makes social assistance payments or pays workers compensation

Statement of Canada Pension Plan Benefits [T4A(P)]

Service Canada — CPP Régie des rentes du Québec — QPP

Statement of Contract Payments (T5018)

Individual, partnership, trust or corporations whose primary business activity is contracting

Statement of Distributions from a Retirement Compensation Arrangement (T4A-RCA)

Custodians of an RCA trust

Statement of Employee Profit Sharing Plan Allocations and Payments (T4PS)

Employers and Payers

Statement of Employment Insurance and Other Benefits (T4E)

Employment and Social Development Canada

Statement of Farm Support Payments (AGR-1)

Government bodies and producer associations

Statement of Fees, Commissions, or Other Amounts Paid to Non-Residents for Services Rendered in Canada (T4A-NR)

Employers and Payers

Statement of Income From a Registered Retirement Income Fund (RRIF) (T4RIF)

Administrator of RIF (payers or carriers)

Statement of Investment Income (T5)

Employers and Payers

Statement of Old Age Security [T4A(OAS)]

Service Canada

Statement of Pension, Retirement, Annuity and Other Income (T4A)

Payer of other amounts related to employment

Statement of Remuneration Paid (T4)

Employers

Statement of Registered Retirement Savings Plan (RRSP) Income (T4RSP)

Administrator of RRSP (payers or carriers)

Statement of Securities Transactions (T5008)

Traders or dealers in securities

Statement of Trust Income Allocations and Designations (T3)

Trustees, administrators, liquidators, executors

Tax-free Savings Account Annual (TFSA) Information Return

Administrator of TFSA (payers or carriers)

Universal Child Care Benefit Statement (RC62)

Canada Revenue Agency

PROPOSED REGULATORY TEXT

Notice is given that the Governor in Council, pursuant to section 221 (see footnote a) of the Income Tax Act (see footnote b), proposes to make the annexed Regulations Amending the Income Tax Regulations (Mandatory Electronic Filing — Prescribed Information Returns).

Interested persons may make representations concerning the proposed Regulations within 30 days after the date of publication of this notice. All such representations must cite the Canada Gazette, Part Ⅰ, and the date of publication of this notice, and be addressed to Denyse Bertrand, Senior Policy Analyst, Legislative Policy Directorate, Canada Revenue Agency, 320 Queen Street, Ottawa, Ontario K1A 0L5 (tel.: 613-957-2079; fax: 613-954-0896; email: Denyse.Bertrand@cra-arc.gc.ca).

Ottawa, November 28, 2013

JURICA ČAPKUN
Assistant Clerk of the Privy Council

REGULATIONS AMENDING THE INCOME TAX REGULATIONS
(MANDATORY ELECTRONIC FILING — PRESCRIBED
INFORMATION RETURNS)

AMENDMENT

1. Subsection 205.1(1) of the Income Tax Regulations (see footnote 1) is replaced by the following:

205.1 (1) For the purpose of subsection 162(7.02) of the Act, the following types of information returns are prescribed and must be filed by Internet if more than 50 information returns of that type are required to be filed for a calendar year:

Government Service Contract Payments

T1204

Past Service Pension Adjustment (PSPA) Exempt from Certification

T215

Pooled Registered Pension Plan (PRPP) Information Return

 

Registered Retirement Savings Plan (RRSP) Contribution Information Return

 

Registered Retirement Savings Plans and Registered Retirement Income Funds Non-qualified Investments

 

Statement of Amounts Paid or Credited to Non-residents of Canada

NR4

Statement of Benefits

T5007

Statement of Canada Pension Plan Benefits

T4A(P)

Statement of Contract Payments

T5018

Statement of Distributions from a Retirement Compensation Arrangement (RCA)

T4A-RCA

Statement of Employee Profit Sharing Plan Allocations and Payments

T4PS

Statement of Employment Insurance and Other Benefits

T4E

Statement of Farm-support Payments

AGR-1

Statement of Fees, Commissions, or Other Amounts Paid to Non-residents for Services Rendered in Canada

T4A-NR

Statement of Income from a Registered Retirement Income Fund (RIF)

T4RIF

Statement of Investment Income

T5

Statement of Old Age Security

T4A(OAS)

Statement of Pension, Retirement, Annuity and Other Income

T4A

Statement of Remuneration Paid

T4

Statement of RRSP Income

T4RSP

Statement of Securities Transactions  

T5008

Statement of Trust Income Allocations and Designations

T3

Tax-free Savings Account (TFSA) Annual Information Return

 

Universal Child Care Benefit Statement

RC62

APPLICATION

2. Section 1 applies to information returns that are required to be filed after 2013.

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