Being audited is an unpleasant experience; however, resolving a tax issue in the tax audit stage is one of the most timely and cost effective outcomes for the CRA. This protocol, or official procedure, has been introduced to clarify the relationship between CRA audit and CRA appeals and for referring relevant audit information provided at the objection stage back to CRA auditors for consideration in some circumstances.
The tax audit process and the notice of objection appeal are two distinct tax streams. Typically, a taxpayer will be audited and then assessed or reassessed. Once an assessment or reassessment has been issued, a taxpayer has 90 days to prepare and file a Notice of Objection. For more information please see our article on the tax objection process.
Once a valid tax objection has been received by the CRA, they are duty bound by subsection 165(3) of the Income Tax Act (the “Act”) to reconsider the assessment and either vacate, confirm, or vary the tax assessment or reassess.
If, during the notice of objection process, new or additional information is provided to the Appeals Officer by the tax objector or the objector’s Canadian tax lawyer, the CRA protocol will determine if the Appeals Officer must refer the new information back to Audit for consideration. Of particular importance is that the protocol in CRA publication RC4607 outlines the criteria for “Mandatory referrals”.
The Appeals Officer must refer the information back to the Audit Division if the information produced or provided during the objection process was explicitly requested at the audit stage and not provided. Only GST/HST Refund Integrity Program matters are exempt from this treatment. This program examines GST/HST credit returns, rebate claims, and select debit returns to ensure that unwarranted refunds are not issued.
Discretionary referrals apply to any new information produced or provided during the notice of objection process that was not specifically requested by tax auditors during the tax audit stage. In these cases, the Appeals Officer is not mandated to pass the information back to the Audit Division, but it is possible that the Appeals Officer will use their discretion to make the transfer back.
In light of this new protocol, both the Appeals Officer and the tax auditor have new roles and responsibilities to fulfill. In particular, the Appeals Officer is responsible for contacting the tax objector or their Toronto tax lawyer and advising them of any discussions held with the auditor, of any referrals made, and will provide copies of the records of the discussions held between the tax auditor and the Appeals Officer.
Also important is that that Appeals Officer has the final say in the objection matter. When a referral is made, it does not reset the audit. In fact, the Audit Division is explicitly barred from making adjustments to an assessment after information has been referred to them by Appeals. Once the referral is made, the new information is sent to the Audit Division for consideration and a recommendation is produced for the Appeals Officer. Next, the Appeals Officer will consider the recommendations of the Audit Division in order to make a decision on the tax assessment under objection.
To summarize briefly, any information that was requested at the tax audit phase, but is later produced at the objection phase will be referred back the Audit Division by the Appeals Officer. This is an instance where a mandatory referral is required. If new information is uncovered during the objection stage that wasn’t requested during the tax audit, the Appeals Officer has the discretion to refer the matter back to the Audit Division. A tax objector will be made aware of any communication between the Appeals Officer and the Audit Division. After a referral is made by the Appeals Officer, the Audit Division will assign an auditor. The Audit Division will make a recommendation to the Appeals Officer and the Appeals Officer will make a decision on the assessment or reassessment under objection.
As for time, the protocol stipulates that the Audit Division has 30 days to assign a tax auditor once a referral from Appeals is made. While Appeals referral work will be assigned on a priority basis, the only criterion regarding the timeline for completion of the review is that is must be “reasonable”. Further, the Appeals Division is only expected to follow up with the auditor once a month. During this referral process, interest will continue to accrue, compounded on a daily basis, on any amounts under objection.
Lastly, this protocol will be reviewed on an annual basis. It is entirely possible that we see an expansion in scope in future years but for now, only the following Compliance Program areas are affected:
- Small and Medium Enterprises Directorate (SMED)
- International and Large Business Directorate (ILBD)
- GST/HST Directorate (GST/HST)
- Offshore Compliance Division
- Scientific Research and Experimental Development Directorate (SRED).
Our office is very familiar with both the tax audit and tax appeals processes. Contact one of our top Canadian tax lawyers if your have been selected for tax audit, audited, or need to object to an income tax assessment. Having a consultation with our Toronto tax law firm in the early stages of a tax audit may save you time and money down the road as responding correctly to an auditor will decrease the likelihood that you will be caught up in these referrals.