Audit Agreements

In February 2019, the Canada Revenue Agency (CRA) published Audit Communique AD-19-01 “Audit Agreement and Waiver of Objection Rights.”[1]  The purpose of the document is to provide guidance on negotiating an audit agreement with taxpayers and obtaining a waiver of objection rights.

 

Audit Agreements

 

According to the document an audit agreement is “an agreement between the CRA and a taxpayer where the parties set out the terms under which one or more audit issues will be assessed based on a common understanding and interpretation of the facts, audit policy and applicable law at that time.”  Any such agreement will not prevent the CRA from assessing or auditing the taxpayer for other taxation years and / or for other issues not considered under the audit agreement.

 

In the CRA’s view, for an audit agreement to be binding, the taxpayer must:

 

  • Disclose all material facts in elections, returns, applications and other submissions as applicable, related to the issue(s) dealt within the audit agreement;

 

  • Waive their right to object to the assessment of the issue(s) and provide a signed copy of the waiver of objection rights to the CRA; and

 

  • In some cases, agree to pay the resulting taxes, penalties and interest owing as a result of the agreed upon assessment within the timeframes specified in the audit agreement.

 

Application Criteria

 

Auditors are not able to contravene provisions of the Income Tax Act[2] or the Excise Tax Act[3] in negotiating and finalizing an audit agreement.  Auditors must assess taxes based on the facts and in accordance with relevant legislation and CRA’s policies.  As a result, audit agreements are usually well suited for subjective audit issues (ie, those which cannot be easily verified by calculations or observations and, generally, include issues that are established as a result of opinions, etc.).  The CRA’s release provides a list of issues which may lend themselves to audit agreement (eg, reasonableness of expenses, employed vs. self-employed, residency issues, etc.).

 

Taxpayer relief requests are to be dealt with on their own merit separately and on the basis of the taxpayer relief provisions (insert link to relief tax teaser).  If a taxpayer requests relief during negotiations for an audit agreement, neither the request nor the outcome of that request should be a factor in the amounts to be assessed pursuant to the agreement.

 

Audit File Resolution Committee

 

CRA headquarters (HQ) established an “Audit File Resolution Committee,” which includes senior representatives from different CRA branches, the department of justice and various tax services office.  The committee is meant to consider audit agreement proposals to ensure fairness and consistency.

 

Conclusion

 

An audit agreement is another tool available to taxpayers to resolve disputes with the CRA.  During an audit, taxpayers and their representatives should consider whether any of the issues identified could be addressed through an audit agreement. Audit agreements may be able to reduce the tax liability of a proposed reassessment and avoid future costs to settle the issue.

 

[1]See https://www.canada.ca/en/revenue-agency/services/tax/technical-information/audit-waiver-objection-rights.html (accessed on July 22, 2019).

[2] RSC, 1985, c. 1 (5th Supp.).

[3] RSC, 1985, c. E-15.