Introduction – Auditor General's Report on CRA Tax Compliance Activities
On September 18, 2018, the Auditor General of Canada released its audit report on the Canada Revenue Agency's tax compliance efforts. In particular, the Auditor General examined whether the CRA consistently applied Canada's tax laws during compliance activities—like a CRA tax audit. The Auditor General also looked at how the Canada Revenue Agency measured, monitored, and reported its performance to the Canadian federal government.
Surprisingly—or unsurprisingly, for our Canadian tax lawyers, who regularly deal with the CRA—the Canada Revenue Agency fell short on both accounts. The CRA not only failed to consistently apply tax rules but also couldn't accurately gauge its own performance.
This article summarizes the Auditor General's findings and provides tax tips for dealing with the Canada Revenue Agency.
Canada Revenue Agency's Inconsistent Treatment of Taxpayers
The Auditor General's first finding was that the Canada Revenue Agency extended favorable treatment to some taxpayers but not others. Specifically, the Canada Revenue Agency burdened some taxpayers with:
- less time to provide requested information or respond to a proposal;
- higher standards for penalty-and-interest relief;
- longer and more involved tax audits; and
- delayed reassessments resulting in additional interest.
Yet the CRA provided other taxpayers with:
- more time to provide requested information or respond to a proposal;
- unprompted penalty-and-interest relief; and
- delayed assessments resulting in extra time before payments were due.
Notably, the Auditor General discerned that the CRA's favorable treatment tended to fall upon large international businesses and taxpayers with offshore assets or transactions. For example, paragraph 7.39 of the Auditor General's report observes that these taxpayers received unprompted penalty-and-interest relief more often:
- ... for small and medium-sized enterprises, international and large businesses, and taxpayers with offshore transactions, the Agency's compliance activity was more likely an audit. In those cases, the Agency required its auditors to consider offering relief without taxpayer requests.
Likewise, paragraphs 7.31 to 7.33 describe the Canada Revenue Agency's tendency to apply stringent response deadlines to employees while granting seemingly unlimited extensions for large corporate taxpayers and taxpayers with offshore assets or transactions:
- Most taxpayers are individuals with Canadian employment income. We found that the Agency requested information from these taxpayers more quickly, and gave less time to respond, than it did with other taxpayers, such as international and large businesses, and taxpayers with offshore transactions.
- For example, if the Agency asked an individual to provide a receipt to support a claimed expense and the taxpayer did not provide the receipt within 90 days, the Agency would automatically disallow the expense as an eligible income tax deduction. The Agency would assess the taxpayer's income tax return on the basis of the information it had available and would notify the taxpayer of the taxes due.
- For other taxpayers, such as those with offshore transactions, we found that the time frame to provide information was sometimes extended for months or even years. ... Sometimes, the Agency did not obtain information at all, and the file was closed without any taxes assessed.
The Auditor General attributed these inconsistencies to a number of sources, including the judgement of the CRA tax auditor or agent, the region were the taxpayer's file was reassessed, and the type of taxpayer—i.e., individual, small business, or large corporation.
As a result of its findings, the Auditor General provided the Canada Revenue Agency with a number of recommendations, such as:
- setting consistent time limits for audit workloads and, when those time limits expire, enforcing the Income Tax Act's provisions compelling a taxpayer by court order to produce information;
- considering proactive relief for taxpayers in all types of compliance activities; and
- developing a formal tracking process to monitor the time to process an assessment.
In response, the Canada Revenue Agency has promised that by March 2020 it will—depending on the recommendation—either implement the recommendation, review its procedures, or create an action plan.
Canada Revenue Agency's Failure to Gauge its Own Performance
The Auditor General's second finding was that the CRA couldn't accurately measure—and thus didn't accurately report—its performance. In particular, it found that the Canada Revenue Agency:
- couldn't clearly explain how it established annual revenue goals;
- closed most tax audits and assessed additional taxes by March 31st—just in time to report its annual performance;
- overstated the revenue it generated by failing to account for taxes that were still under dispute and uncollectable or tax debts that were written off; and
- neglected to accurately track the relationship between the amount of budget spending it required to generate additional revenue.
These findings prompted the Auditor General to recommend that the Canada Revenue Agency clearly document how it sets additional-revenue targets, accurately measure the additional revenue generated from budgetary funding, and refine its performance indicators to report on actual collected tax revenues.
The Canada Revenue Agency again responded by promising that by March 2020 it will either implement the recommendation, review its procedures, or create an action plan.
Tax Tips – Dealing with the Canada Revenue Agency
Our experienced Canadian tax lawyers don't find the Auditor General's report surprising. The Income Tax Act grants the CRA expansive tax audit and compliance powers. And courts respect these powers. So, our Canadian tax law firm often deals with CRA tax auditors, appeals officers, and collectors who unfortunately appear ignorant of tax-law principles or administrative-law procedural requirements.
By reviewing the Canada Revenue Agency's Taxpayer Bill of Rights, you can learn about the CRA's purported commitments to taxpayers. As a result, you take the first step toward guarding yourself against a lazy or aggressive CRA employee.
But unless you already understand Canada's tax-law system or know about the administrative-law procedural safeguards to which a CRA agent's decision must conform, you likely won't realize that the Canada Revenue Agency treated you unfairly. Moreover, if you're the subject of a CRA tax audit, you won't find much legal justification for simply ignoring requests for information.
You're better off seeking the advice of one of our experienced Canadian tax lawyers, who can advise you on the rights that you do indeed have and ensure that the information that you provide to CRA is both accurate and relevant. Our expert Canadian tax lawyers can carefully plan and prepare your response to the Canada Revenue Agency. A properly prepared response not only notifies the CRA about the relevant law—thereby increasing the odds of a favorable decision—but also lays the groundwork for an appeal to the Tax Court of Canada should the CRA's decision be contrary to tax rules or a judicial-review application to the Federal Court should the CRA's decision exhibit bias or unfairness.
Furthermore, solicitor-client privilege protects the discussions that you have with a tax lawyer when you receive legal advice. Your communications with an accountant remain unprotected. That is, the Canada Revenue Agency can compel your accountant to reveal the details of your file. So, if you seek tax advice, but want to keep that information away from the CRA, you should approach a Canadian tax lawyer first. If you then require an accountant, the tax lawyer can retain the accountant on your behalf and thus extend the solicitor-client privilege.