Canada Revenue Agency Toronto Centre Tax Services Office Describes Current Audit Priorities and Policies

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At today’s Canada Revenue Agency Toronto Centre Tax Professionals Group Breakfast Seminar (November 14, 2012), the CRA provided an update on current issues and audit concerns.

The CRA was represented by Sal Tringali, Regional Technical Advisor of Aggressive Tax Planning, and James McNamara, Manager of International Taxation and Aggressive Tax Planning Audit Division from the Toronto Centre Tax Services Office. The discussion was moderated by Jacques Bernier (Baker McKenzie LLP) and Rachel Gervais (BDO Canada LLP).

The CRA’s current audit priorities are:

GST/HST

  1. Recapture input tax credit
  2. ITC allocation % – mixed supplies
  3. Financial services
  4. Imported supplies
  5. Reinsurance/loading
  6. Loyalty reward points
  7. VDP – Related parties

Income Tax

  1. Artificial capital losses
  2. Loss trading
  3. Surplus strips
  4. Offshore bank accounts held by individuals
  5. Donation arrangements
  6. International transactions
  7. S. 85 rollovers
  8. RRSP appropriations
  9. Tax-free savings accounts (TFSA)

Additionally, the CRA made the following comments:

  • The CRA’s access to/requests for accountants’ working papers remains a “hot topic”. Generally speaking, the CRA will first ask the taxpayer for information/documents, after which the CRA may request information/documents from the taxpayer’s accountants. The CRA’s objective is to perform high-quality audits, and access to complete information is required to do so.
  • The CRA reminded taxpayers of its recent announcement that the CRA will not assess a taxpayer’s return where the taxpayer has claimed a charitable donation and the alleged gift is made as part of a donation arrangement. The delay in assessing the return could be two years or more (see Jamie Golombek’s recent article on the subject).
  • The CRA is considering a variety of provisions that may be applied where the taxpayer has used a structure to divert business income to RRSPs through trusts and partnership interests held by shareholders or key employees. (See also the CRA’s announcement at the Canadian Tax Foundation’s 2012 Ontario Tax Conference, at which the CRA stated that it may apply s. 56(2) to the actions of a trustee.)
  • The CRA has appealed the Tax Court’s decision in Guindon v. The Queen, and the CRA’s position is that it will be successful at the Federal Court of Appeal. In light of the Tax Court’s decision, the CRA is currently considering its options in respect of the  assessment of third party penalties.
  • The CRA has considered the application of third party penalties in 185 cases. In 71 of those cases the penalty was applied, resulting in the imposition of $79 million of penalties. In 50 cases the penalty was not applied, and 64 cases  are ongoing.
  • The CRA will continue to revoke e-file privileges where a tax preparer is subject to a penalty, even where a penalty against a single tax preparer may result in the revocation for  his or her entire  firm.
  • The CRA will follow the Supreme Court’s guidance in GlaxoSmithKline v. The Queen and intends to follow the new OECD guidelines on transfer pricing and the hierarchy of pricing methods. The CRA does not expect to release any formal communication to the public on this issue, but Information Circular IC 87-2R “International Transfer Pricing” may be updated to reflect this position.

UPDATE: After the seminar, the CRA informed us that it intends to follow the guidance in the recently updated OECD Guidelines and will be issuing a Transfer Pricing Memoranda (TPM) on the matter to the public. This TPM will reflect a recently released internal Communique on the same subject and will be made available in the near future.

  • The CRA clarified that Tax Earned By Audit (“TEBA”) remains a metric for measuring ”tax at risk”, but it is not used to measure the performance of an auditor. Rather, the CRA measures the performance of auditors based on six major elements: (i) planning the audit, (ii) conducting the audit, (iii) applying the appropriate legislation/policy, (iv) the end product of the audit, (v) professionalism in the audit, and (vi) timeliness of completion of the audit.
  • The CRA plans to convene face-to-face meetings with approximately 160 large businesses (i.e., annual sales over $250 million) as part of the CRA’s large business audit project. The CRA will continue to risk-assess all large businesses/entities annually.
  • The CRA intends to clear a backlog of approximately 1,300 audit files so that it may assess the most recent taxation year and the immediately preceding taxation year for most businesses by 2015-16.
  • The CRA reiterated that issues that arise during the audit process should be raised with the auditor, after which it may be appropriate to involve the auditor’s team leader. If the issue cannot be resolved at that level, it would be appropriate to raise the issue with the auditor’s manager or the assistant director of audit at the particular TSO.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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