In 2015, the federal government committed to providing the Canada Revenue Agency (CRA) with additional audit resources. The CRA is expecting $118.2 million for underground economy audits, $25.3 million for offshore tax evasion and aggressive tax avoidance and $58.2 million for avoidance by large, complex entities. The CRA’s audit activity will increase as a result of the increase in resources.
The Typical Audit
In most cases, after a taxpayer has filed a tax return, the CRA will select that return (and, possibly, an earlier return) for audit. The audit will begin with a phone call and/or letter. An auditor will often contact a taxpayer to discuss the audit scope and a date for the provision of records to assist with the audit. A taxpayer should insist that the CRA identify the years (and/or periods) it wishes to audit and the records it wishes to review in writing.
CRA auditors have wide powers to request documents for an audit. Recently, while conducting audits of small business owners, it has been the CRA’s practice to demand financial information (ie, bank records) for all household members of the business owner. After receiving the CRA’s audit letter, the taxpayer (or their representative) should contact the auditor and attempt to narrow the document request.
As the years are identified and the documents are provided, the CRA auditor might insist on an in-person interview with the taxpayer. The Income Tax Act requires that the taxpayer “answer all proper questions relating to the administration and enforcement” of the Act. However, the Income Tax Act does not give the CRA the authority to demand an in-person interview. Taxpayers should insist on written interviews to limit the ability of the auditor to ask questions beyond the scope of the audit. In the recent decision of Minister of National Revenue v Cameco Corporation, the CRA sought to compel 25 individuals to attend interviews as part of an audit of Cameco. Cameco refused the request for oral interviews, proposing, instead, written interviews. The CRA sought a compliance order. The Federal Court found for Cameco, holding that Income Tax Act provision which grants the CRA the authority to conduct an audit is not so “wide as to compel an indeterminate number of people for oral interviews” and “does not provide the Minister with an unlimited right to conduct oral interviews.”
The Audit Proposal Letter
Usually, after completing the review of the taxpayer’s records and reviewing the answers to interview questions (if any), the auditor will send a proposal letter. The auditor will usually allow 30 days for a reply, though this can usually be extended without issue. If the taxpayer disagrees with the auditor’s conclusions, the taxpayer should write a written response to the CRA auditor explaining their disagreement and providing support (factual or legal) for the disagreement (if any).
After the taxpayer responds to the proposal, the auditor will consider the submissions and either makes changes or conclude the audit and the CRA will issue reassessments. The auditor should provide their audit report and working papers with the proposal letter.
Reassessment
Unless a taxpayer’s returns receive a clean bill of health (usually, an unlikely result), the CRA will issue reassessments consistent with the auditor’s conclusions. If, at that time, the taxpayer continues to disagree with the audit results, she/he may file an objection and participate in the CRA’s internal appeal process.
Conclusion
If you are the subject of a CRA audit or you believe you may become the focus of a CRA audit, please contact one of our tax lawyers for a consultation.