Tax Law Services Portfolio Evaluation

4. Key Findings

4.3. Performance — Demonstration of Efficiency and Economy

The Treasury Board's 2009 Policy on Evaluation defines efficiency as production of "a greater level of output ... with the same level of input or, a lower level of input with the same level of output", and economy as the achievement of expected outcomes using the minimum amount of resources required (Treasury Board of Canada Secretariat, 2009). Applying these definitions to the TLS Portfolio, an analysis of its efficiency and economy considers actions taken by the Portfolio to reduce cost while maintaining the level and quality of service. This section first considers the cost of TLS Portfolio legal services, followed by a description of actions taken to manage costs and demand for legal services.

4.3.1. Costs of TLS Portfolio Legal Services

Under the TLS Portfolio method of cost recovery, the amount billed to CRA is based on the number of FTE staff (counsel and paralegals) rather than the level of effort (in hours). A rate for legal services that is set annually by the Treasury Board is then applied to each FTE in order to determine the cost to be recovered. Between 2008/09 and 2011/12, the cost of legal services collected from CRA (excluding disbursements) rose by 83% (see Table 17).

Table 17: Tax Law Services Portfolio (Cost of Services Provided to the CRA)
  2008/09
Actual
2009/10
Actual
2010/11
Actual
2011/12
Actual
2008–2012
% change
Cost of legal services 55,107,208 58,664,323 70,844,150 76,466,443 +39%
Disbursements over $200 2,524,535 2,521,590 2,691,908 2,256,826 -11%
Fixed costs: ADAG Group 2,077,393 3,053,258 3,228,681 3,353,569 +61%
Total cost of services provided to the CRA 59,709,136 64,239,171 76,764,739 82,076,838 +37%
Less A-Base 28,936,555 28,351,671 28,999,514 28,163,886 -3%
Total cost recovery charged to the CRA 30,772,581 35,887,500 47,765,225 53,912,952 +75%
Total Collected from the CRA
Legal services 28,248,798 33,362,146 45,073,317 51,656,127 +83%
Disbursements 2,524,535 2,521,590 2,691,908 2,256,826 -11%
Total collected 30,773,333 35,883,736 47,765,225 53,912,953 +75%

Source: Cost of legal services based on cost recovery MOU tables for 2008/09, 2009/10, 2010/11, and 2011/12.
Disbursements over $200 and collection information based on year-end cost recovery reports.

Based on the information provided by the TLS Portfolio, the cost increase to the CRA appears to be due to several factors:

  • The A-Base remained constant, while costs rose.
  • The number of FTE counsel and paralegals rose by 18% between 2008/09 and 2011/12 (see Table 18).
Table 18: Tax Law Services Portfolio Human Resources (FTEs)
  2008/09 2009/10 2010/11 2011/12 2008–2012
% change
Counsel 292.13 314.51 339.45 344.82 +18%
Headquarters 41.05 43.93 47.93 48.63 +18%
CRA LSU 31.45 31.89 33.28 32.58 +4%
Regional offices 219.63 238.69 258.25 263.62 +20%
Paralegals 37.33 37.78 42.54 45.39 +22%
Headquarters 9.19 10.32 10.00 9.54 +4%
CRA LSU -- -- -- -- --
Regional offices 28.14 27.46 32.54 35.85 +27%
Total FTEs – Counsel and Paralegals 329.46 352.29 381.99 390.21 +18%
  • To cover costs of salary, benefits, and operations and maintenance, the rate applied to each FTE increased by 22%, compounded, during the same time period.

Information provided by the Portfolio to explain the increase in staffing focused on three areas for which the Portfolio received additional funding:

  • Additional counsel were required to manage the demands of project files, which target tax avoidance schemes that involve potentially thousands of taxpayers. These files are described in more detail in Section 4.3.2.
  • Starting in 2009/10, seven counsel were exclusively assigned to support the CRA in large business audits involving aggressive tax planning and international tax, complex tax shelter cases, international compliance issues, tax treaty abuses, and residency determinations. These files are described in more detail in Section 4.3.2.
  • As of 2009/10, the CRA administers most corporate taxes for Ontario, and the TLS Portfolio provides legal support on those files.

Table 19 shows the rise in the cost for legal services, factoring in the rate increase and staffing increases discussed above.

Table 19: Year-to-year Increase in Legal Service Costs Provided to CRA
  2009/10 2010/11 2011/12
Ongoing (previous year total cost of legal services minus disbursements) 57,184,601 61,712,878 74,072,831
Rate increase 1,429,615 8,701,516 Footnote 39 1,925,894
Additional funding/specific requirements
Donations/Projects 2,790,002 5,364,078 5,364,078
Counsel at the Audit Stage 774,359    
Corporate Tax Administration for Ontario 425,651    
Estimated total cost of services (minus disbursements) 62,604,228 75,778,472 81,362,803
Actual total cost of services (minus disbursements) 61,712,878 74,072,831 79,820,012

Source: TLS Portfolio.

The results are an estimate of the total cost of legal services provided to the CRA and exceed the actual cost of legal services (minus disbursements) based on cost recovery. Given the complexity and all the factors involved in cost recovery, an exact alignment is not possible.

Potentially offsetting the cost of TLS Portfolio legal services is the recoupment of taxes owed. As noted in Section 2, the TLS Portfolio supports the government and CRA's efforts in collecting taxes and, as a result, contributes to a source of government revenue. A cost-benefit analysis would weigh the cost of TLS Portfolio legal services against the amount of taxes recovered. This analysis would provide important context for assessing the costs of the TLS Portfolio services to the CRA. In addition, a cost-benefit analysis could also provide useful information for Portfolio management on the ratio of costs to benefits for certain types of files (e.g., by risk or complexity level, by legal issue). Portfolio management could then focus efforts on improving the efficiency in handling files with relatively higher costs to benefits. Currently, the data required for a cost-benefit analysis, such as the amount of taxes recovered through court order or settlement for each file, are not tracked in iCase.

4.3.2. Managing Demand, Reducing Cost, and Improving Efficiency

The TLS Portfolio has taken several actions intended to reduce the cost and/or improve the efficiency of providing legal services to the CRA. The success of these efforts can be measured, in part, by the perception of the CRA, and overall, the evaluation found strong opinions among CRA key informants and case study interviewees that the Portfolio conducts its work in an efficient and cost-effective manner. To provide a more detailed analysis, this section considers several of the key methods used by the Portfolio to manage its workload and contain costs.

Staffing and managing workload on files

Developing practices for the efficient management of its workload are part of the TLS Portfolio's approach to improving efficiency while maintaining the quality of legal services. The steps taken by the Portfolio align with the literature on law practice management by considering the value of the work in the assignment of staff to files and delegating "low value" work (i.e., work that is not of high importance to the client or, in the case of the Portfolio's work, low-risk or low complexity) to more junior counsel who manage the files with senior counsel supervision (Hodgart, 2010). Other examples include taking advantage of resource specialization by assigning lawyers with particular expertise and experience to files that will draw on that expertise.

File assignment: distribution and competencies. The TLS Portfolio's process for assigning files uses a national approach whereby files are not necessarily assigned to the regional office where the litigation or request for legal advice originates. Instead, files are allocated by the Associate ADAG (Tax Assessment) to regional TLS Sections within the TLS Portfolio based on workload and/or expertise required for the files. The Director and Deputy Director of the TLS regional section are then responsible for assigning files to specific lawyers. When assigning files, the Director and Deputy Director also take into consideration the capacity of the counsel in the section, as well as each lawyer's caseload requirements and workloads (Internal Audit Branch, 2011a, 2011c).

The evaluation found that the file assignment process is working effectively. The 2011 internal audit reports for the Prairie Region and Ottawa Section identify that files are assigned to lawyers with appropriate knowledge, skills and experience (Internal Audit Branch, 2011a, 2011c). Justice and CRA key informants and case study interviews confirmed that the TLS Portfolio assigns appropriate counsel to files based on expertise, seniority and expertise, and file complexity. The majority of CRA key informants indicated that the Portfolio rarely assigns a lawyer to the file with whom the Agency was not comfortable. They also said that, when this has occurred, the CRA has been able to approach the Portfolio, and the Portfolio has made changes to assignments accordingly.

The one question raised by Justice and CRA representatives involved the Department of Justice's Supreme Court of Canada Advocacy Program, which relies on a roster of approved counsel to argue cases before the Supreme Court of Canada. Counsel who have handled the matter before the Tax Court of Canada and/or the Court of Appeal transfer the file to the roster counsel once it reaches the Supreme Court. Opinion was divided on whether this approach adds to the cost of the file over any benefit derived from having a counsel experienced with arguing before the Supreme Court handle the file. Given the complexity of tax files and the level of risk once they have reached the Supreme Court, continued involvement of counsel who handled the file at the lower court levels was preferred by some CRA representatives and Justice counsel interviewed. Concern was also expressed that more tax counsel need to be assigned to the roster, and the Department is making efforts to replace retiring tax lawyers on the roster.

Targeting resources to risk and complexity of file. Based on an analysis of iCase data, the TLS Portfolio is targeting its legal resources based on the risk and complexity of the file, which demonstrate that the Portfolio is using practice management techniques intended to minimize cost and increase efficiency. The three indicators analyzed for the evaluation are the number of counsel, level of counsel, and hours devoted to files by their risk and complexity levels.

The average number of counsel assigned to a file increases with the risk level. For advisory files, the average number of counsel rises from 1.41 for low-risk files to 2.17 for high-risk files. Similarly, the average number of counsel for litigation files rises from 1.68 for low-risk files to 2.89 for high-risk files. The number of counsel assigned to the files also increases by the complexity level for litigation files. For advisory files, there is also an increase with complexity level except for high complexity files, which have fewer lawyers assigned than medium complexity files. See Table 20 and Table 21 for details.

Table 20: Total Number of Counsel Assigned to Files by Risk Level
(2009/10 to 2011/12)
Advisory Files
  Low Medium High Risk not yet evaluated Unable to assess Total
Total counsel assigned 3,952 7,366 141 3,225 674 15,358
Total files 2,796 4,864 65 2,339 357 10,421
Average counsel per file 1.41 1.51 2.17 1.38 1.89 1.47

Litigation Files
  Low Medium High Risk not yet evaluated Unable to assess Total
Total counsel assigned 23,155 42,500 1,511 858 315 68,339
Total files 13,778 23,401 522 561 194 38,456
Average counsel per file 1.68 1.82 2.89 1.53 1.62 1.78

Note: Counsel are assigned to multiple files so the total number of lawyers assigned to the files exceeds the total number of counsel in the TLS Portfolio.
Source: iCase (Actively managed files)

Table 21: Total Number of Counsel Assigned to Files by Complexity Level
(2009/10 to 2010/11)
Advisory Files
  Low Medium High Mega Risk not yet evaluated Not indicated Total
Total counsel assigned 1,626 9,889 2,349 66 751 677 15,358
Total files 1,247 6,678 1,680 21 444 351 10,421
Average counsel per file 1.30 1.48 1.40 3.14 1.69 1.93 1.47

Litigation Files
  Low Medium High Mega Risk not yet evaluated Not indicated Total
Total counsel assigned 7,928 47,457 12,277 534 63 80 68,339
Total files 4,655 27,328 6,202 170 42 59 38,456
Average counsel per file 1.70 1.74 1.98 3.14 1.50 1.36 1.78

Note: Counsel are assigned to multiple files so the total number of lawyers assigned to the files exceeds the total number of counsel in the TLS Portfolio.
Source: iCase (Actively managed files)

Files with higher risk have a larger proportion of senior counsel assigned to them than lower-risk files. Footnote 40 For example, in low-risk litigation files, more than half (53%) of the lawyers assigned to those files are LA-00 and LA-1A, although these junior counsel constitute only 19% of the lawyers on high-risk files. Conversely, 37% of counsel on high-risk litigation files are LA-3A and above, although they constitute only 8% of lawyers assigned to low-risk files. Advisory files also show that more senior counsel are involved in high-risk files, as opposed to medium or low-risk. Results are similar for file complexity, with high or mega complexity litigation and advisory files staffed with more senior counsel, as compared to low or medium complexity files (see Figures 4 and 5).

Figure 4: Proportion of Counsel per File by Risk Level (2009/10 - 2010/11)
Figure 4: Proportion of Counsel per File by Risk Level (2009/10 - 2010/11)
Source: iCase Footnote 41

Figure 4 - Text equivalent

The chart is divided into two categories; Litigation and Advisory

The horizontal axis on the chart indicates Risk Level by Low, Medium or High

The vertical axis indicates % of counsel and by colour indicates in a bar graph the % by four classification levels; LA-00 and LA-1A, LA-2A, LA-2B and LA-3A and above

For Litigation Files:

  • Low Risk Level
    • Approximately 51% are shown as LA-00, LA-1A level Approximately 30% at LA-2A level
    • Approximately 15% at LA-2B
    • Approximately 2% at LA-3A and above
  • Medium Risk (litigation files)
    • Approximately 23% are shown as LA-00, LA-1A level Approximately 44% at LA-2A level
    • Approximately 20% at LA-2B
    • Approximately 11% at LA-3A and above
  • High Risk (litigation files)
    • Approximately 19% are shown as LA-00, LA-1A level Approximately 26% at LA-2A level
    • Approximately 23% at LA-2B
    • Approximately 31% at LA-3A and above

For Advisory Files:

  • Low Risk Level
    • Approximately 30% are shown as LA-00, LA-1A level --Approximately 38% at LA-2A level
    • Approximately 22% at LA-2B
    • Approximately 8% at LA-3A and above
  • Medium Risk (advisory files)
    • Approximately 18% are shown as LA-00, LA-1A level Approximately 31% at LA-2A level
    • Approximately 34% at LA-2B
    • Approximately 15% at LA-3A and above
  • High Risk (advisory files)
    • Approximately 25% are shown as LA-00, LA-1A level Approximately 20% at LA-2A level
    • Approximately 20% at LA-2B
    • Approximately 32% at LA-3A and above

Figure 5: Proportion of Counsel per File by Complexity Level (2009/10 - 2010/11)
Figure 5: Proportion of Counsel per File by Complexity Level (2009/10 - 2010/11)
Source: iCase Footnote 42

Figure 5 - Text equivalent

The chart is divided into two categories; Litigation and Advisory

The horizontal axis on the chart indicates Complexity Level by Low, Medium, High or Mega

The vertical axis indicates % of counsel and by colour indicates in a bar graph the % by four classification levels; LA-00 and LA-1A, LA-2A, LA-2B and LA-3A and above

For Litigation Files:

  • Low Complexity
    • Approximately 69% are shown as LA-00, LA-1A level --Approximately 20% at LA-2A level
    • Approximately 5% at LA-2B
    • Approximately 3% at LA-3A and above
  • Medium Complexity (litigation files)
    • Approximately 38% are shown as LA-00, LA-1A level Approximately 40% at LA-2A level
    • Approximately 18% at LA-2B
    • Approximately 6% at LA-3A and above
  • High Complexity (litigation files)
    • Approximately 15% are shown as LA-00, LA-1A level Approximately 42% at LA-2A level
    • Approximately 23% at LA-2B
    • Approximately 18% at LA-3A and above
  • Mega Complexity (litigation files)
    • Approximately 12% are shown as LA-00, LA-1A level Approximately 21% at LA-2A level
    • Approximately 19% at LA-2B
    • Approximately 46% at LA-3A and above

For Advisory Files:

  • Low Complexity
    • Approximately 49% are shown as LA-00, LA-1A level --Approximately 31% at LA-2A level
    • Approximately 11% at LA-2B
    • Approximately 9% at LA-3A and above
  • Medium Complexity (advisory files)
    • Approximately 18% are shown as LA-00, LA-1A level Approximately 38% at LA-2A level
    • Approximately 28% at LA-2B
    • Approximately 15% at LA-3A and above
  • High Complexity (advisory files)
    • Approximately 8% are shown as LA-00, LA-1A level Approximately 19% at LA-2A level
    • Approximately 34% at LA-2B
    • Approximately 38% at LA-3A and above
  • Mega Complexity (advisory files)
    • Approximately 22% are shown as LA-00, LA-1A level Approximately 21% at LA-2A level
    • Approximately 12% at LA-2B
    • Approximately 41% at LA-3A and above

Efficient law practice management goes beyond counsel assignment but also includes the level of effort as evidenced by hours spent on files. The TLS Portfolio is in the process of developing level of effort benchmarks for types of files, which are intended to improve monitoring and efficiency of legal services.

Based on information available to the evaluation, the TLS Portfolio is engaging in efficient utilization of resources. For litigation and advisory files, average hours per file increased as the legal risk and complexity level increased, which indicates that legal resources are targeted on files with higher potential impact. Some key informants noted that lower profile files (low dollar value, risk and complexity) can take a disproportionate amount of resources due to factors outside of the TLS Portfolio's control, such as court rules and taxpayer legal strategies (See Table 22 and Table 23).

Table 22: Average Number of Hours per File by Risk Level — 2009/10 to 2011/12
Risk Level Litigation Advisory
Low 32.4 36.3
Medium 68.8 33.1
High 810.4 154.4
Not assessed 49.1 23.9
Total 60.2 30.0

Source: iCase (Completed files)

Table 23: Average Number of Hours per File by Complexity Level — 2009/10 to 2010/11
Risk Level Litigation Advisory
Low 19.8 17.6
Medium 44.3 28.7
High 181.6 43.0
Mega 360.8 399.6
Not applicable 144.2 301.3
(Not indicated) 13.1 16.0
Total 60.2 30.0

Source: iCase (Completed files)

In addition, the proportion of hours billed to files by category of counsel also shows that lower risk and complexity files have more time billed by LA-00, 1A and 2A, while high-risk and complexity files have more time billed by more senior counsel (see Figures 6 and 7 below).

Figure 6: Proportion of Counsel Hours per File by Risk Level (2009/10 - 2010/11)
Figure 6: Proportion of Counsel Hours per File by Risk Level (2009/10 - 2010/11)
Source: iCase Footnote 43

Figure 6 - Text equivalent

The chart is divided into two categories; Litigation and Advisory

The horizontal axis on the chart indicates Risk Level by Low, Medium or High

The vertical axis indicates % of counsel hours and by colour indicates in a bar graph the % by four classification levels; LA-00 and LA-1A, LA-2A, LA-2B and LA-3A and above

For Litigation Files:

  • Low Risk Level
    • Approximately 63% are shown as LA-00, LA-1A level Approximately 30% at LA-2A level
    • Approximately 3% at LA-2B
    • Approximately 1% at LA-3A and above
  • Medium Risk (litigation files)
    • Approximately 22% are shown as LA-00, LA-1A level Approximately 52% at LA-2A level
    • Approximately 12% at LA-2B
    • Approximately 11% at LA-3A and above
  • High Risk (litigation files)
    • Approximately 19% are shown as LA-00, LA-1A level Approximately 23% at LA-2A level
    • Approximately 20% at LA-2B
    • Approximately 36% at LA-3A and above

For Advisory Files:

  • Low Risk Level
    • Approximately 16% are shown as LA-00, LA-1A level --Approximately 41% at LA-2A level
    • Approximately 23% at LA-2B
    • Approximately 18% at LA-3A and above
  • Medium Risk (advisory files)
    • Approximately 121% are shown as LA-00, LA-1A level Approximately 41% at LA-2A level
    • Approximately 28% at LA-2B
    • Approximately 9% at LA-3A and above
  • High Risk (advisory files)
    • Approximately 29% are shown as LA-00, LA-1A level Approximately 10% at LA-2A level
    • Approximately 8% at LA-2B
    • Approximately 52% at LA-3A and above

Figure 7: Proportion of Counsel Hours per File by Complexity Level (2009/10 - 2010/11)
Figure 7: Proportion of Counsel Hours per File by Complexity Level (2009/10 - 2010/11)
Source: iCase Footnote 44

Figure 7 - Text equivalent

The chart is divided into two categories; Litigation and Advisory

The horizontal axis on the chart indicates Complexity Level by Low, Medium, High or Mega

The vertical axis indicates % of counsel and by colour indicates in a bar graph the % by four classification levels; LA-00 and LA-1A, LA-2A, LA-2B and LA-3A and above

For Litigation Files:

  • Low Complexity
    • Approximately 71% are shown as LA-00, LA-1A level --Approximately 23% at LA-2A level
    • Approximately 2% at LA-2B
    • Approximately 1% at LA-3A and above
  • Medium Complexity (litigation files)
    • Approximately 42% are shown as LA-00, LA-1A level Approximately 44% at LA-2A level
    • Approximately 8% at LA-2B
    • Approximately 4% at LA-3A and above
  • High Complexity (litigation files)
    • Approximately 15% are shown as LA-00, LA-1A level Approximately 49% at LA-2A level
    • Approximately 18% at LA-2B
    • Approximately 19% at LA-3A and above
  • Mega Complexity (litigation files)
    • Approximately 11% are shown as LA-00, LA-1A level Approximately 39% at LA-2A level
    • Approximately 12% at LA-2B
    • Approximately 39% at LA-3A and above

For Advisory Files:

  • Low Complexity
    • Approximately 32% are shown as LA-00, LA-1A level --Approximately 39% at LA-2A level
    • Approximately 15% at LA-2B
    • Approximately 12% at LA-3A and above
  • Medium Complexity (advisory files)
    • Approximately 22% are shown as LA-00, LA-1A level Approximately 48% at LA-2A level
    • Approximately 19% at LA-2B
    • Approximately 11% at LA-3A and above
  • High Complexity (advisory files)
    • Approximately12% are shown as LA-00, LA-1A level Approximately 31% at LA-2A level
    • Approximately 32% at LA-2B
    • Approximately 21% at LA-3A and above
  • Mega Complexity (advisory files)
    • Approximately 15% are shown as LA-00, LA-1A level Approximately 20% at LA-2A level
    • Approximately 3% at LA-2B
    • Approximately 61% at LA-3A and above
Paralegal initiative.

According to internal documents, the TLS Portfolio is also increasing its use of paralegals on files. This delegation of suitable tasks to non-lawyers is discussed in the literature as an effective approach to reducing legal costs for clients and/or freeing counsel to focus on work that requires their skills (Hodgart, 2010). Table 24 shows that paralegal hours are increasing over time, particularly for litigation files. However, as a proportion of hours spent on legal services, paralegal time for advisory and litigation files has remained fairly constant at about 4-5% and 10-11%, respectively.

Table 24: Distribution of Paralegal and Counsel Hours by Year (2007–2012)

Litigation
  Paralegal Hours Counsel Hours Total Legal Service Hours % Hours by Paralegals
2007/08 31,578 300,440 332,018 10%
2008/09 40,570 319,958 360,528 11%
2009/10 40,550 347,771 388,321 10%
2010/11 44,118 386,360 430,478 10%
2011/12 49,007 395,532 444,539 11%
Total 205,824 1,750,060 1,955,884 11%

Advisory
  Paralegal Hours Counsel Hours Total Legal Service Hours % Hours by Paralegals
2007/08 3,338 77,208 80,546 4%
2008/09 3,685 77,679 81,364 5%
2009/10 3,901 85,981 89,882 4%
2010/11 4,391 90,175 94,566 5%
2011/12 3,744 90,213 93,957 4%
Total 19,060 421,256 440,316 4%

Total Legal and Advisory
  Paralegal Hours Counsel Hours Total Legal Service Hours % Hours by Paralegals
2007/08 34,916 377,648 412,564 8%
2008/09 44,256 397,637 441,893 10%
2009/10 44,451 433,752 478,203 9%
2010/11 48,510 476,535 525,045 9%
2011/12 52,751 485,745 538,496 10%
Total 224,884 2,171,316 2,396,200 9%

Source: iCase (Actively managed files)
Note: Total amounts may be different than the sum of annual amounts due to rounding

The distribution of paralegal work by legal risk and complexity is shown in Table 25 and Table 26. The results show that paralegals are used in files of all levels of risk and complexity. In addition, their use appears strategic. For example, paralegals account for 44% of the total legal service hour for low complexity litigation files.

Table 25: Distribution of Paralegal and Counsel Hours by Risk Level — 2009/10 to 2011/2012
Litigation
  Paralegal Hours Counsel Hours Total Legal Services Hours % Hours by Paralegals
Low 32,511 217,865 250,375 13%
Medium 81,493 798,936 880,429 9%
High 18,504 98,668 117,172 16%
Not yet evaluated 455 9,317 9,773 5%
Unable to assess 712 4,877 5,589 13%
Total 133,675 1,129,663 1,263,338 11%

Advisory
  Paralegal Hours Counsel Hours Total Legal Services Hours % Hours by Paralegals
Low 2,053 50,129 52,182 4%
Medium 8,119 117,806 125,925 6%
High 603 6,807 7,410 8%
Not yet evaluated 29 75,631 75,660 <1%
Unable to assess 1,232 15,997 17,229 7%
Total 12,037 266,369 278,406 4%

Table 26: Distribution of Paralegal and Counsel Hours by Complexity Level — 2009/10 to 2011/2012

Source: iCase (Actively managed files)
Note: Total amounts may be different than the sum of risk level amounts due to rounding.

Litigation
  Paralegal Hours Counsel Hours Total Legal Services Hours % Hours by Paralegals
Low 16,663 21,451 38,114 44%
Medium 56,682 649,375 706,057 8%
High 39,911 396,610 436,522 9%
Mega 16,666 60,747 77,412 22%
Not applicable 3,717 135 3,852 96%
Not indicated 36 1,344 1,380 3%
Total 133,675 1,129,663 1,263,338 11%

Advisory
  Paralegal Hours Counsel Hours Total Legal Services Hours % Hours by Paralegals
Low 1,210 13,320 14,530 8%
Medium 7,802 145,671 153,473 5%
High 1,685 43,051 44,736 4%
Mega 545 4,023 4,568 12%
Not applicable 794 22,600 23,394 3%
Not indicated 0 37,705 37,705 0%
Total 12,037 266,369 278,406 4%

Source: iCase (Actively managed files)
Note: Total amounts may be different than the sum of complexity level amounts due to rounding.

The above data show that paralegal time as a proportion of overall legal services effort has not changed during the evaluation period. In light of this finding, the TLS Portfolio should consider a study on whether it is optimizing its use of paralegals on files. If the Portfolio considers its initiative to increase the use of paralegals to be a source of efficiency and cost savings, a more detailed assessment of paralegal use could be beneficial for Portfolio management.

Resolving matters efficiently

The TLS Portfolio has taken steps to resolve litigation cases more efficiently. Four strategies are of particular significance: two involve complex files (legal advice at the audit stage and project files); one involves files of lower legal risk and complexity (resolution process); and the final strategy considers all files (dispute resolution [DR] processes generally).

Enhanced Delivery of Legal Advice at the Audit Stage.

The Portfolio has supported the CRA's increased focus on compliance activities by providing assistance with large business audits involving aggressive tax planning and international tax, complex tax shelter cases, international compliance issues, tax treaty abuses, and residency determinations. This initiative, called the Enhanced Delivery of Legal Advice at the Audit Stage, involves specifically assigning advisory counsel at the CRA LSU and regional litigation counsel to assist with these complex audits handled by the ILBD. The rationale is that these files would benefit from earlier counsel involvement, given their complexity and the often intensive involvement of taxpayer counsel at the audit stage. Key informants for both Justice and the Agency believe that this initiative is working well. The early involvement of TLS Portfolio counsel in these files is believed to have improved the preparation of these files for litigation, supported the CRA in discussions with the taxpayers' counsel, and led to earlier resolution for some files.

Project files.

The TLS Portfolio and the CRA have begun grouping taxpayers involved in similar tax avoidance schemes into what are termed "project files". This approach has been taken to manage workload, as these schemes involve the same legal issue across potentially thousands of taxpayers. Pursuing the cases against these taxpayers individually would not be feasible, so they are grouped and test cases are selected for the CRA to pursue in court. The intention is that the test case will proceed while the other similar files are held in abeyance. This approach has enabled the TLS Portfolio to meet this new demand, while not sacrificing its ability to provide legal services to the CRA in other types of files. However, key informants raised concerns that, unless the similar files are held in abeyance, which the court can refuse, and unless the similarly situated taxpayers are bound by the court decision in the test case, the workload for the TLS Portfolio has the potential to expand exponentially. The grouping of project files certainly offers an efficient and cost-effective method for resolving these files, but the effectiveness of this approach is largely outside of the control of the TLS Portfolio.

Resolution process.

According to key informants, the TLS Portfolio and the CRA have been placing greater emphasis in the last few years on the resolution of cases and on pursuing alternatives to litigation, particularly with regard to low-risk, low-impact files that are not expected to impact tax law. The resolution process allows counsel more discretion in how to handle a file and reduces the time required to consult with the Agency. That being said, some consultations do occur on these files.

The evaluation found that the support for the resolution process may differ between the TLS Portfolio and the CRA. TLS Portfolio counsel believe that the resolution process is working, and they favor its expansion to more types of files with only factual issues involved (based on key informant and focus group results). In the counsel survey, two thirds of respondents consider the resolution process effective in facilitating settlement. The evaluation found less support among CRA representatives, as there was some discomfort in the reduction in consultation with CRA litigation officers on these files.

Counsel believe that the resolution process reduces the cost to CRA on these files. Data to support that view are very preliminary, as the TLS Portfolio only began tracking the files using the process in January 2012. Based on a review conducted by the Portfolio of files from January to June 2012, the ability of the resolution process to achieve substantial efficiencies appears limited given the level of its use. Although a comparison with similar files shows that the process results in a reduction in average days files remain open (265 compared to 465 days for similar files) and in the average hours spent on files (45 compared to 71 hours), the number of files using the resolution process is small (n =167). Although this reduction in hours is the equivalent of approximately three counsel FTEs, this result must be placed in the context of a Portfolio with approximately 345 counsel FTEs. The Portfolio's review has limitations, as it does not explore the level of use of the resolution process. In particular, the Portfolio may want to investigate the reasons behind the small number of files where the process was used, which could include low usage of the process by counsel, underreporting of its use in iCase, or only a small number of files suitable for the process.

The resolution process may take time to receive widespread acceptance, as it requires a culture shift for both Justice counsel and CRA officials. Counsel who are used to seeking client instructions have more autonomy on these files, which some counsel are embracing more than others. Correspondingly, CRA litigation officers are having less involvement in these files, which requires them to change their expectations on consultations. As is the case with counsel, acceptance of this shift in practice is likely uneven among litigation officers in the Agency. Changing the expectations and practice of CRA litigation officers may be difficult when they are experiencing different approaches to consultation on early resolution files, depending on the counsel involved. More communication by the TLS Portfolio and more consistent practice by counsel may assist in the adoption of the resolution process, as well as enable the TLS Portfolio and the CRA to consider expanding its use.

Dispute resolution more generally.

The percentage of litigation matters settled has not changed substantially during the period covered by the evaluation, varying only a few percentage points, from 42% to 46% (see Table 27). Footnote 45 Overwhelmingly, the type of DR used is negotiation, with very few files resolved using methods such as arbitration or mediation. Footnote 46 Although iCase does not capture whether DR processes are credited with affecting the outcome, it would appear from the data that DR is much more likely to occur in files that are settled. Approximately half of settled files have used some form of DR compared to between 3-4% of files that are adjudicated.

Table 27: Use of Dispute Resolution Type by Case Outcome (2007–2012)
  2007/08
(n=6,318)
2008/09
(n=5,999)
2009/10
(n=6,071)
2010/11
(n=7,537)
2011/12
(n=7,278)
Total
(n=33,203)
Adjudicated 40% 38% 37% 40% 36% 38%
No dispute resolution 36% 34% 34% 36% 34% 35%
Arbitration <1% <1% - <1% <1% <1%
Arbitration + Negotiation <1% - - - - <1%
Arbitration + Voluntary Mediation <1% - - - <1% <1%
Mandatory Mediation <1% <1% <1% <1% - <1%
Negotiation 3% 2% 2% 2% 1% 2%
Negotiation + Other Judicial Process <1% - <1% <1% <1% <1%
Other Judicial Process 1% 2% 1% 1% <1% 1%
Voluntary Mediation <1% 0% <1% <1% <1% <1%
Settled 43% 44% 44% 42% 46% 44%
No dispute resolution 23% 26% 27% 24% 31% 26%
Arbitration <1% - <1% <1% <1% <1%
Mandatory Mediation <1% <1% <1% - - <1%
Negotiation 19% 17% 15% 17% 13% 16%
Negotiation + Other Judicial Process <1% <1% <1% 1% <1% <1%
Negotiation + Voluntary Mediation - <1% - <1% - <1%
Other Judicial Process 1% <1% 1% 1% 2% 1%
Voluntary Mediation <1% 1% <1% <1% <1% <1%
Closed Administratively /Transferred 15% 16% 18% 17% 16% 16%
No dispute resolution 15% 16% 18% 17% 16% 16%
Negotiation <1% <1% <1% <1% <1% <1%
Not Indicated 1% 2% 1% 1% 2% 1%
No dispute resolution 1% 2% 1% 1% 2% 1%
Negotiation <1% - - - - <1%
Other Judicial Process <1% - - - - <1%
Total 99% 100% 100% 100% 100% 99%

Note: Totals may not sum to 100% due to rounding.
Source: iCase data (Completed litigation files)

Not all cases can be settled, of course, as the ability to reach agreement between the parties relies on many factors, and in Canada, the ability to settle tax matters is more limited. Compared to other jurisdictions, the CRA is somewhat limited in how it can settle files. Unlike in the United States and the United Kingdom, "compromise settlements" (i.e., those based on litigation risk) are not an option in Canada; according to Canadian law, settlement must be in accordance with the Income Tax Act (i.e., it must be "principled") (Mehrban, 2010). Just over one quarter of TLS Portfolio counsel, however, believe that DR processes are underutilized, which rises to 37% when considering only counsel who offered an opinion (n =96) (see Table 28). The most common reasons provided for this under-utilization are that the Agency wants to take the matter to court and that it would take more time to settle the matter than to proceed to court. This finding may indicate an area where the TLS Portfolio and the CRA could work together to improve the use of DR and thereby enhance efficiency.

Table 28: Utilization of Dispute Resolution Processes (Litigation only — n=130)
In your opinion, are dispute resolution processes over-utilized, adequately utilized, or underutilized?
Response %
Underutilized 27%
Adequately utilized 44%
Over-utilized 3%
Not applicable 7%
Don’t know 19%

Source: Legal counsel survey

Knowledge management

Knowledge management is "the behaviours and processes by which a group of people maintains and increases their personal and collective actionable knowledge to compete, increase performance, and reduce risk" (Parsons, 2004). The literature emphasizes the importance of internal knowledge management to share information within the legal unit (e.g., precedent databases, intranet services, opinions), as well as client relationship systems (e.g., shared system that allows the client to track progress and costs) (Susskind, 2010).

As described in Section 4.2.4, the TLS Portfolio has developed tools and structures that are intended to build a shared knowledge base, manage workload and legal risk, and maintain good communication throughout the Portfolio. Although the evaluation found potential areas for improvement, the TLS Portfolio is currently in the process of improving and enhancing some of these tools — notably, the Fiscal Path. It is also contributing to Justipedia.

The literature identifies other potential areas that the TLS Portfolio could consider to both manage knowledge internally, as well as share it with the CRA. The Portfolio has undertaken some of these types of activities already, such as standard pleadings and letters that are available for the use of CRA litigation officers. Other options include online legal guidance, which provides clients with information for legal matters to encourage self-help (Susskind, 2010). Although this type of assistance must be handled with caution so that the Agency does not fail to seek legal advice when needed, it can be used to reduce legal cost without compromising outcomes. For example, if certain legal requests are posed often, materials that respond to them can be provided through this forum. Online legal guidance can also be expanded to other uses, such as providing the CRA with helpful tips on documentation and other evidence that is important to collect on files, and how to formulate a legal request so that it provides sufficient factual information and is clear. The LSU has provided a set of instructions for drafting requests for legal advice on its page located on the CRA's intranet, but as some counsel commented that requests could be more specific (see Section 4.3.3), these instructions could perhaps be improved (e.g., they could offer examples of the type of factual information that should be included in a request or provide more guidance on how to formulate the legal question).

4.3.3. The Role of the CRA in the Efficiency and Economy of Legal Services

Managing the demand for legal services and improving the efficiency and economy of the delivery of those services are joint responsibilities of the TLS Portfolio and the CRA. Consequently, the evaluation explored areas where the Portfolio and the Agency could work together to improve the efficiency and economy of legal services.

The results of the legal counsel survey suggest that there may be a benefit to the TLS Portfolio working with CRA officials to examine ways of improving the management of demand for legal services. Although more counsel responding to the question consider the CRA's understanding of how to manage the demand for legal services to be above average or excellent, a sizable percentage considered it to be below average or poor. Table 29 provides the results for the entire survey sample; note that 23% of respondents did not answer the question. When considering only those respondents who provided an opinion (n =120), one third (33%) considered the level of understanding to be above average or excellent, and 22% considered it to be below average or poor.

Table 29: Level of Understanding of CRA Officials on Managing Demand (n=159)
Based on your experience over the past two years, how would you assess the level of understanding of CRA officials with whom you have worked, with respect to the following?
  Excellent/above average Average Below average/poor Not applicable No response
How to manage the demand for legal services generally 25% 34% 17% 1% 23%

Source: Survey of legal counsel
Note: Summation of percent values for rows may not equal 100% due to rounding.

The evaluation identified several areas through which legal costs could be reduced.

Use of the resolution process

As discussed in Section 4.3.2, the resolution process is a method that is intended to reduce the cost of legal services by reducing the time spent on settling files and encouraging disposition. Based on the evaluation findings, there appear to be different expectations or desires on the level of consultation that should occur on these files between counsel and litigation officers. The TLS Portfolio may need to work with the Agency to address different expectations about the level of consultation on these files, so that the benefit of the process is not reduced.

The potential of expanding the resolution process to further improve efficiencies was suggested for other files that raise issues of fact. This expansion has the support of the TLS Portfolio counsel. The potential of the resolution process to reduce legal costs would appear to support the TLS Portfolio and CRA reviewing whether its expansion is appropriate. Any changes to the resolution process should be supported by training to ensure that expectations are managed and are fully understood by both Justice counsel and CRA staff.

Other dispute resolution strategies

The CRA does endorse mediation of tax disputes concerning income and/or commodity taxes. Appeals Branch staff and the taxpayer may use mediation as an option (before taking the objection to the Tax Court) when they are not able to reach a settlement concerning a dispute. Mediation is typically an option for settling factual matters, rather than matters of legal interpretation (Drache, 2007). However, although mediation is available for tax disputes in Canada, it is not a commonly used option (Mehrban, 2010). In fact, CRA had a mediation pilot that involved the use of mediation at the objection stage, but TLS Portfolio counsel only recalled it being used once. Understanding the reasons for its non-use (e.g., taxpayers are unaware of it, mediation is cost prohibitive, or taxpayers simply want their day in court) might help the Agency and the TLS Portfolio assess whether the program should be resurrected. In addition, the Portfolio could work with the CRA to consider other DR options, which counsel believe are being underutilized. Slightly more counsel surveyed considered CRA's knowledge of when to use DR options to avoid the need to engage the TLS Portfolio to be below average or poor, compared to those who considered it to be above average or excellent. Table 30 provides the results for the entire survey sample; note that one quarter of respondents did not answer the question. Of respondents who provided an opinion (n =109), 33% considered the CRA's level of understanding of when to use DR options to be below average/poor, and 29% considered it to be above average/excellent.

Table 30: Level of Understanding of CRA Officials — Dispute Resolution Options (n=159)
Based on your experience over the past two years, how would you assess the level of understanding of CRA officials with whom you have worked, with respect to the following?
  Excellent/above average Average Below average/poor Not applicable No response
When to use early DR options to avoid the need to engage the TLS Portfolio 20% 36% 23% 7% 25%

Source: Survey of legal counsel
Note: Summation of percent values for rows may not equal 100% due to rounding.

Communication with the TLS Portfolio

Communication issues almost always affect efficiency, as they can adversely impact decision making by confusing lines of authority, create duplication of efforts or unnecessary work, and result in unclear instructions, among numerous other impacts. The communication issues identified by the evaluation have the potential for these effects. Some issues with communication have been discussed elsewhere in the report, namely the need to clarify counsel's role in identifying and assessing legal risk (Section 4.2.4), and the expectations on the level of consultation between counsel and CRA litigation officers on files in which the resolution process is used (Section 4.2 and this section). There also appears to be some confusion regarding the respective roles of counsel and the Agency concerning who is ultimately responsible for making decisions on files. TLS Portfolio counsel also commented that legal costs could be reduced by having greater clarity and specificity in the legal questions posed to the Portfolio counsel (see also Section 4.3.2). The findings suggest considerable value in the TLS Portfolio continuing to work closely with the CRA to resolve these issues.

Early involvement of counsel

The early involvement of counsel at the audit stage in the ILBD is considered to have improved the preparation of those files and is cited as a good practice. In addition, involvement of a litigator is considered useful when there is a high likelihood that the file will be contentious and could end in litigation. The early intervention of counsel assists in the preparation of the file for the court process. This was considered to be a particularly good practice for large files that are not project files, as the TLS Portfolio is already heavily involved in project files.

File preparation

Several TLS Portfolio counsel reported that they have to spend substantial time collecting factual information and documents on files that have incomplete documentation. There appear to be considerable opportunities for the TLS Portfolio to work with the CRA to develop standards for legal file preparation, thereby reducing counsel time spent on non-legal matters. Counsel noted that a short document setting out the facts on which they are relying and their rationale behind the assessment would be very helpful. Counsel would also like more information about access to information requests, so that they know what material has been disclosed to the taxpayer. Some suggestions included potential training possibilities, such as obtaining information from third parties. It was recognized that most files do not have a high potential for litigation, so CRA resources in file preparation must also be considered. Given that this issue affects the efficiency of both the TLS Portfolio and the CRA, a collaborative effort in addressing it is needed.

Management of demand

Managing demand is critical to managing legal cost. Key informants from both the CRA and the TLS Portfolio indicated that collective effort is needed to address this issue through actions such as prioritizing the cases initiated by the Agency.

4.3.4. Alternatives

The main alternative explored through the evaluation was the greater involvement of private counsel. Almost all key informants and case study participants (CRA and Justice) preferred the idea of having legal services provided to the CRA through the TLS Portfolio than through the private sector. Most key informants feel that TLS Portfolio services are more appropriate than private sector services with regard to meeting the needs of the Agency. Key informants identified a number of advantages of using TLS Portfolio services over private sector services. They are:

  • TLS Portfolio employees have developed a strong relationship with the CRA; the trust and understanding between the Portfolio and the CRA allows them to work effectively together. In addition, given the complexity of the Agency's work, it is more efficient to use Portfolio legal counsel who understand the client more fully than would private sector counsel — the TLS Portfolio has substantial knowledge of the CRA and the federal government.
  • The TLS Portfolio has a national perspective on practice and good national coordination practices, which allow it to provide the CRA with similar services across the country. It would be more difficult for the private sector to achieve the same level of consistency in service provision across the country and to "speak with one voice".
  • Private law firms are vulnerable to conflicts of interest, as they may have other clients who work in the same industry or are in the same tax situation as a taxpayer that is involved in a CRA case.
  • The private sector may have a different view from the TLS Portfolio — one more focused on winning for the client (here, the CRA). Whereas the private sector's ultimate goal may be to win, the Portfolio must also consider policy and larger impacts. The TLS Portfolio's primary responsibility is protecting the interest of the Crown, which means ensuring that the rule of law is followed and that taxpayers are treated consistently regardless of location.
  • The legal rates applied through cost recovery are less than the hourly rates of private sector lawyers.
  • The TLS Portfolio has lawyers dedicated to particular CRA priority areas (e.g., international aggressive tax planning). In addition, TLS Portfolio lawyers work closely with CRA staff. These practices allow for a convenient and efficient working relationship that a private law firm could not provide.
  • Working with the TLS Portfolio through Justice Canada means that the Agency also has access to wider Justice Canada services (specialized legal groups, practice groups, etc.).

4.3.5. Challenges Facing the TLS Portfolio

The TLS Portfolio has the following two major challenges that could potentially affect efficiency and effectiveness in providing legal services:

  • The biggest concern mentioned by most key informants is the loss of senior counsel, both to retirement and to the private sector, where wages are higher than those that Justice Canada can offer, and where tax experience is in demand. Some key informants also mentioned the effect of the Law Practice Model, which has limited the Portfolio's ability to promote counsel and replace senior counsel. Audit reports confirm this view (Internal Audit Branch, 2011a, 2011b, 2011c). The increases in the volume and complexity of work, coupled with the loss of senior counsel, are considered to pose a growing pressure on the Portfolio. This situation may affect efficiency and adversely impact effectiveness, if the ability to assign appropriately experienced counsel to files is compromised.

    Another staffing concern involved changes to the Department's staffing practice within the last year, which requires that all staffing be approved at the national Portfolio level. This measure is a response to Budget 2012 and the staffing limitations it implies (Government of Canada, 2012). However, according to a few key informants, this practice is somewhat inefficient, as it causes delays for sections in managing their resource needs; TLS Section directors must wait for approval before counsel or legal assistants can be hired.

  • Cost recovery pressures will grow, as legal costs have increased for the CRA (see Section 4.3.1). The TLS Portfolio recognizes that this will increase pressures to reduce legal costs for the Agency while maintaining the level of service. Moreover, cost recovery in an environment of fiscal restraint will create added pressures to reduce costs while maintaining the quality of legal services.

Date modified: