The Canada Revenue Agency announced earlier this year that it would not conduct a full review of more than $15 billion in Canada Emergency Wage Subsidy benefits that the auditor general reported may have been sent to ineligible recipients. This follows a similar move last year when the CRA offered amnesty to ineligible Canada Emergency Response Benefit (CERB) recipients that likely cost the treasury in excess of $2 billion. These decisions by the CRA – declaring that deeper investigations or audits are not cost-effective – come with potential consequences. Specifically, the CRA may inadvertently be undermining compliance with the rules of eligibility in future subsidy programs by fostering a perception of lax oversight and enforcement.

In her December 2022 report, the auditor general of Canada determined that 51,049 employers received $9.87 billion in CEWS payments despite monthly sales tax filings that demonstrated their revenues had not declined sufficiently to be eligible for the program. The auditor general extrapolated from this finding that $15.5 billion in potential CEWS overpayments were made (15 per cent of the total benefits disbursed) and required further investigation. In the private sector, the discovery of potential overpayments of this scale – either in dollars or as a percentage – would almost certainly result in additional scrutiny by auditors.

Tax compliance research has consistently shown that audits and perceptions (or fear) of audits matter a lot when it comes to improving tax compliance. For example, at a public corporation which must continually make disclosures, tax audits have the potential of forcing a reversal of previously reported financial results. In other words, while audit procedures should include a cost-benefit analysis, the consequences of appearing too lenient, and the potential impact on tax compliance, should also be taken into account.

CEWS was designed to flow through employers to workers to maintain wages during the COVID-19 lockdown and to avoid layoffs. While approval was swift, the rules made it clear that recipients would have to pay back benefits if they were later found to be ineligible. Senior financial officers with businesses applying for the program were required to sign off on this key condition. At the same time, safeguards to screen CEWS applications were limited as CRA program administrators worked from home.  All the while, the amounts being disbursed were sizeable.

What followed were news stories in the financial press exposing examples of CEWS recipients who reported higher profits, higher dividend payouts, or both. Reporting higher profits or paying out higher dividends does not imply that such CEWS recipients didn’t play by the rules. But it may suggest that a decline in monthly revenues was fleeting. The public needs assurances that such large subsidies were delivered to eligible businesses, and businesses need to know that their competitors did not enjoy an unfair advantage.

The CRA disbursed $100.5 billion in CEWS subsidies for 5,069,760 approved applications (a 99.5 per cent acceptance rate) during the life of the program. The high approval rate is not surprising since it was reasonably easy for eligible businesses to demonstrate the main criterion, namely a revenue reduction percentage of varying amounts over time compared with the pre-pandemic baseline period.

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The large volume of applications was expected since businesses felt compelled to apply for CEWS for competitive reasons if other firms in their industry were also receiving benefits. Company administrators could argue their responsibility to shareholders to take advantage of income tax and CEWS legislation to legally minimize taxes payable and maximize subsidies receivable, since otherwise they would face a disadvantage vis à vis their competitors.

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How the public perceives tax dollars are being used influences tax compliance. Helpful subsidies such as CEWS and CERB, delivered when needed most, can improve tax compliance. Inequitable amnesties that fail to hold people and businesses accountable to the written rules can weaken the social norms of paying taxes and can impair tax compliance.

The CRA needs to clarify why it believes further study of monthly revenues to detect ineligible CEWS recipients may not be worth the time and cost. After all, preserving social norms and enhancing tax compliance in Canada’s self-assessment system remains one of the CRA’s core mandates.

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Amin Mawani
Amin Mawani is an associate professor of taxation at the Schulich School of Business at York University in Toronto.

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