This is a Thought Leadership Article by PrimeGlobal member firm Shimmerman Penn LLP which provides an update on CRA audit activities.
Government spending on CRA’s audit activities has been subject to routine and consistent increases over the past several years. As a result, we have experienced significant growth in the volume of CRA audit activities as CRA works to identify non-compliance and generate additional tax revenues.
What has the CRA been up to this past year?
Although there are many potential audit triggers, here are some of the recent areas of focus we have seen CRA target.
International Electronic Fund Transfers
Beginning in January 2015, new measures were introduced to require financial institutions to report any single or multiple international electronic fund transfers (EFTs) made within 24 hours that total $10,000 or more, directly to CRA within five working days. The information CRA receives parallels the information collected by the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA).
CRA has begun using this information to dig in further on lower risk taxpayers. This activity is clearly targeted at capturing unreported transfers to and from offshore accounts.
In addition to fishing out traditional offshore income and assets, CRA appears to be particularly concerned with tracing cryptocurrency related transactions and holdings which are otherwise confined to cyberspace.
CRA investigates EFT transfers above a certain threshold with an audit letter containing a comprehensive questionnaire aimed at gathering various information on the transfers. The enquiries are focused on obtaining a plausible explanation for the source and purpose of transfers into and out of Canada, as well as details of any property held outside Canada.
CRA is looking at RRSP/TFSA account statements to better understand transactions and details of the investments held in registered plans. CRA appears to be hunting for non-qualified investments or aggressive tax planning strategies utilising RRSP/TFSA accounts. Such activities carry with them potentially punitive penalty tax assessments.
Capital Gains Reserves
A capital gains reserve allows a partial deferral of tax for uncollected proceeds on the sale of an asset.
CRA is taking a close look at purchase and sale agreements and the calculation of reserves claimed to ensure the timing of income for tax purposes has not been manipulated in favor of the taxpayer.
Don’t mistakenly think CRA has forgotten about GST/HST! It is no surprise that CRA is still going strong on GST/HST desk audits, particularly in situations where a business has consistently reported high net refunds on GST/HST returns.
While it is understandable that CRA would want to perform audits before disbursing multiple large refunds, there are many legitimate situations where consistent GST/HST refunds are the norm.
For example, this situation may occur where a business provides “zero-rated” goods and services (i.e.: exporters). This scenario will result in no GST/HST reported as collected by the business although input tax credits may be claimed for GST/HST paid on expenses.
As a result, these businesses may expect to be audited on their GST/HST filings as they will be consistently reporting refunds.
CRA also continues to dedicate significant resources to review the deduction of professional fees. Professional fees may be paid to a variety of recipients including accountants, lawyers, consultants, management companies and other advisors.
In this review, CRA will request detailed invoices to support professional fees claimed in a given taxation year. One of CRA’s objectives may be to confirm the legitimate business purpose of the fees, in particular if there are transactions with related parties. CRA may also want to verify that the fees deducted are not capital in nature, such as legal services for incorporation or reorganization.
There may, however, be a secondary objective for these reviews. The examination of these detailed invoices can provide CRA with the opportunity to conduct a “spillover audit”. This concept refers to the situation where CRA uses the details provided by the supporting documentation of one taxpayer to initiate the audit of another taxpayer.
For example, where the recipient of the consulting fees under review is a corporation, CRA may initiate an audit to determine whether the consultant’s income qualifies as Personal Services Business income, which is subject to higher corporate tax rates and very limited deductions. Alternatively, CRA may initiate an audit to ensure that the recipient of professional fee revenue has reported appropriately for GST/HST purposes.
Consequently, the information obtained from a professional fee review can also allow CRA to significantly expand its list of potential audit subjects.
Predictions for new audit activity
There have been significant and complex changes to tax legislation in recent years, particularly with respect to the taxation of Canadian controlled private corporations and income-splitting arrangements. These legislative changes can be expected to result in new audit activity in 2019 and going forward, as CRA will likely pursue confirmation of compliance with these new provisions.
What to do if CRA comes calling?
Discovering that you or your business is the subject of a CRA review can be understandably stressful. However, before you worry too much, the first step should always be to verify that the contact is legitimate.
Recently, there have been many “scammers” posing as CRA employees, contacting Canadians and misleading them into paying false debt. Although most CRA communication is still by mail, CRA may also contact taxpayers by phone and email.
If you receive a phone call, you should ask for their name, CRA identification number and office location. This can then be verified by calling back CRA on the general enquiries number (1-800-959-8281 for individuals or 1-800-959-5525 for businesses).
Information will only be received by email if you have previously authorized registration for the CRA online mail service. In this case, the email will only notify you that a new message or document (i.e.: Notice of Assessment) is available to be viewed in a secure CRA portal. Note that CRA will never ask for personal or financial information by email or ask you to click on a link with respect to a refund or to make a payment.
In all cases, CRA will never use aggressive, threatening language or demand immediate payment by e-transfers, bitcoin, prepaid credit cards, gift cards, etc.
Finally, CRA will never contact you by text message – this will always be a scam.
Once it has been determined that the CRA request is legitimate, following the below tips may help ensure the process will run as smoothly and quickly as possible.
Respond in a timely manner
It is very important to be proactive and respond to a CRA review letter within the timeframe provided. Generally, a 30 day window for a response is provided for most CRA requests.
Lack of responsiveness may result in a re-assessment which may require a tedious and time consuming objection to be filed.
Should an extension be required, it should be promptly requested from CRA. We find CRA is generally amenable to reasonable extensions of time to provide the supporting information, but their ability to accommodate these requests has limits.
Professional and courteous communication
Professional and courteous communication with the auditor is also critical for smooth sailing and avoiding unproductive confrontations.
Often, the CRA desk auditor may be a more junior employee and may have limited experience or knowledge of your business. Therefore, actively engaging with the CRA auditor in a professional manner to provide background information may help to narrow the scope of the enquiry and lead to a less stressful experience.
For example, in the case of a GST/HST desk audit, an initial conversation with the auditor with respect to the facts and the nature of business transactions may result in a more efficient audit process and ultimately a quicker resolution.
Seek professional advice
While it is important to communicate with CRA, don’t divulge too much information without first seeking professional advice.
If a situation arises where you are uncertain about the potential tax implications of answering a specific question or the information to be submitted, it is always a good idea to seek professional advice from a tax accountant or lawyer.
Since CRA auditors are often more junior or not knowledgeable in every aspect of taxation, it is important to communicate your tax position effectively to avoid the possibility of creating unnecessary confusion.
Engaging a tax professional as your representative upfront and throughout the course of the audit should ensure that the best possible tax outcome will be achieved.
Shimmerman Penn LLP
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