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.