You've just received a letter from the Canada Revenue Agency (CRA). They intend to conduct a tax audit of your company for the past three years. Your palms are sweating, your heart races, and of course, the timing could not be worse with year-end just around the corner.
What do you do?
First, take a deep breath. Review the letter carefully to ensure that you understand what information is being requested and the scope of the audit. The initial request letter usually outlines general information pertaining to specific years and/or specific transactions in certain years that the CRA is interested in reviewing. This is the initial information-gathering stage, so the CRA may request a lot of documentation, including financial statements, detailed account print outs, emails, memos, letters, faxes. And maybe more.
Why is my company being audited?
The CRA's mission is "... to ensure compliance on behalf of governments across Canada, thereby contributing to the ongoing economic and social wellbeing of Canadians." Your company may have been selected for many reasons, including industry profile, volume of transactions and unusual transactions. Given the current economic environment and declining tax rates, it is more important than ever that the CRA ensures compliance by all taxpayers to preserve or increase the country's revenue base.
What if they want the kitchen sink?
Depending on the extent of the information requested, it may be wise to request a meeting with the auditor to discuss the scope of the audit and the relevance of the information requested. In this meeting, your goal should be to understand the CRA's concerns and risk areas, and why certain information is being requested. It is also beneficial if you can identify which area the auditor is from (i.e., Business Audit, Taxation Centre, International or Aggressive Tax Planning) if it is not noted on the letter. This is a clue about the scope and intent of the audit.
If the CRA plans a full audit of specific taxation years, ask the auditor where their concerns lie. Is it with a specific transaction, certain expenses incurred or particular facts? An upfront meeting could save you and your staff countless hours of finding information that may be irrelevant and slow down the audit. In any case, remember that delays in responding or non-response could prompt the CRA to seek a compliance order.
What does the CRA expect of me during the audit?
Once you understand what information is requested, it is important that you give the CRA clear and accurate documents. If some of the documents are confusing or incomplete, it is worthwhile to walk the auditor through them to fill in any gaps. You should also discuss the timeline with the auditor: when do they expect you to provide the documents and responses? Be careful about what information you give them. Never release information that is privileged, has not been requested or is unrelated to the transactions being reviewed.
Once the auditor has reviewed the documents provided, he or she likely will have more questions. You should respond to CRA queries openly and frankly. Recognize that subsequent additional requests for information are not unusual. These can be extensive if the CRA identifies any issues. The CRA is not restricted to the years or issues noted in the initial request.
What if I feel my auditor is not objective or impartial?
Auditors are supposed to follow a CRA audit manual designed to guide them in conducting an audit. However, sometimes auditors do not follow CRA policies and put forward unprincipled positions.
The CRA has four guiding principles:
- Integrity is the foundation of our administration. It means treating people fairly and applying the law fairly.
- Professionalism is the key to success in achieving our mission. It means being committed to the highest standards of achievement.
- Respect is the basis for our dealings with employees, colleagues, and clients. It means being sensitive and responsive to the rights of individuals.
- Co-operation is the foundation for meeting the challenges of the future. It means building partnerships and working together toward common goals.
If you feel your auditor is not being objective, you have the right to escalate your concerns to the auditor's team leader. If necessary, you can escalate the matter within the Tax Services Office (TSO) – Audit Manager, Assistant Director, Audit, etc.. As well, the CRA introduced its fairness pledge to taxpayers (to be responsive, impartial and consistent) under the 2007 Taxpayer Bill of Rights. A Service Complaint Program is in place to handle service-related complaints. Finally, a Taxpayer's Ombudsman deals with all service-related complaints from taxpayers.
How long will the audit take?
As part of your initial meeting with the CRA, you should ask how long the auditor estimates the audit will take. This will help you understand their timelines and gives you the opportunity to identify and communicate potential issues that could impede information gathering, such as staff vacations or turnover.
The CRA is committed to administering the tax system in a way that minimizes the costs of compliance for small businesses. Therefore, knowing the relevance of obtaining certain information for the CRA is important. As well, the auditor should understand the costs associated with retrieving this information. For example, if the auditor wants to obtain all correspondence for a specific year, it is important to understand the purpose because it could take months of dedicated resources to cull all emails and correspondence for an entire year. The CRA recognizes "the need to keep to a minimum the time, effort and costs you incur to comply with tax and benefit legislation we administer, while balancing [its] responsibility to administer the legislation efficiently and economically." The CRA "strives to make [their] dealings with you as straightforward and convenient as possible." You should expect the CRA to be forthright and transparent about their intent and scope.
What should I expect once the auditor has the information?
Once you have done your best to provide all the relevant information requested and responded to follow-up questions, you should find out when the auditor expects to conclude the audit. You should also ask to be advised if referrals are made by the auditor to other areas such as Rulings, Valuations, their Headquarter functions, Aggressive Tax Planning, etc. so that you can provide input into the facts and representations provided to these areas.
If you maintain open discussions with your auditor throughout the audit, you should be receiving continuous feedback on the issues and not be surprised by any proposed reassessments or concerns raised. Sometimes issues arise that could put you at risk, because the facts don't support your position well or your position is aggressive, your goal should be to negotiate the best outcome based on the facts, legislation and documents supporting the tax position, and of course, assistance from your advisers.
What if I disagree with the auditor's position or proposed reassessment?
One of the Taxpayer's Rights is the right to expect the CRA to warn you about questionable tax positions in a timely manner. Therefore, it is important to discuss and understand the auditor's concern before he or she proposes a reassessment. In our experience, dissuading an auditor from a position is much more difficult once it is written in a proposed reassessment.
Ensure that the auditor understands all the facts and has the appropriate information before raising a reassessment. Many disputes are caused by a lack of clear information or miscommunication. If you find that discussions with the auditor are going in circles because of misunderstandings of facts, it is useful at this stage to provide the key facts in writing and agree on the statement of facts. That makes resolving the real issues much easier.
If the CRA continues to raise a reassessment, and you do not agree with it, the determination or decision, you have the right to object. If a settlement cannot be reached at the objection stage, the next step is litigation at a local Tax Court level, then at the Federal Court of Appeal and ultimately the Supreme Court of Canada.
How can I ensure the next audit goes more smoothly?
Speak to your adviser before setting up a tax structure. It is much easier to structure the transaction properly at the beginning or even during the transaction than after the transaction is completed. Your adviser can also help to ensure that the transaction is properly implemented and maintained. Poor execution can wreck even the best tax structure.
How our Tax Controversy and Dispute Resolution (TCDR) team can help
PwC has a specialist team that helps private businesses in all areas of dispute avoidance, tax controversy and dispute resolution.
The Tax Controversy and Dispute Resolution (TCDR) network includes former CRA officials who can help you successfully manage the lifecycle of tax controversies, from pre-audit prevention to audit examination management and post-audit dispute resolution/settlement.
The TCDR network can help you:
- better understand your company's risks and exposures;
- develop sound policies and processes to help safeguard your organization against audits and disputes;
- implement consistent and defensible practices and policies; and
- manage your tax disputes, audits and examinations worldwide.
For more information about TCDR, please visit www.pwc.com/ca/tcdr.
This article appeared in Wealth and tax matters for individuals and private companies, 2012, Issue 2.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
Specific Questions relating to this article should be addressed directly to the author.