Release date: January, 28, 2010
Guest: Rick Biscaro
Running time: 8:07 minutes
Rick Biscaro, former senior tax advisor in our Canadian National Tax Services group, offers his insights for when an auditor arrives at your company to assess your tax situation.
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You're listening to another episode of PwC's Tax Tracks at www.pwc.com/ca/taxtracks. This series looks at the most pressing technical and management issues affecting today's busiest tax directors.
Gerry Lewandowski: With us today is Rick Biscaro, a former member of PwC’s Canadian National Tax Services group in Toronto, a former director, CRA Income Tax Rulings Directorate, and an original member of the CRA's General Anti-Avoidance Rule (or GAAR) Committee. With more than 30 years’ experience with the CRA, Rick has the knowledge and insight necessary to really understand how to effectively deal with the Agency. In today’s podcast, Rick will share with us some of his thoughts on the tax audit and assessment process.
Thanks for joining us, Rick.
Rick Biscaro: Thank you. It is my pleasure to be here.
Gerry: Rick, let’s start from the beginning of the audit process. If I am a tax director on a large case file company and my audit is starting up in a month, what should I be doing now to prepare for the audit?
Rick: Well, the first step in preparation would be to set up a plan to manage the conduct of the audit and in this respect you would choose facilities for the tax auditor to place a bin, make sure he has telephone, and all this kind of stuff, a building pass if necessary. Ideally, you would want to assign someone to deal with all the audit queries, document gathering, and act as a liaison person between the tax auditor and the employees.
Next step would be to decide on a strategy for dealing with sensitive document requests. First, you must determine just what would be a sensitive document and then you may want to engage senior management review or approval before you release the document and the other issue would be to determine whether or not if you have a privileged document.
Gerry: Now, when providing documents to the auditor, which documents is a tax director compelled to provide to the auditor and which, if any, documents can a tax director claim privilege in respect of?
Rick: Well, the taxpayer must provide all its books and records to the auditor. And by that I mean all documents that are relevant to the administration and enforcement of the Income Tax Act. Now, this includes documents of another person that relate or may relate to information that is or should be in the taxpayer’s books and records. In the case of privileged documents, the taxpayer initially should discuss the issue with legal counsel, but generally, when you are talking about a privileged document, it is a communication between solicitor and client and that would have to have been prepared for purposes of obtaining legal advice from a lawyer.
Gerry: So Rick, assuming the auditor is onsite, any suggestions on how a tax director should be managing this process to ensure that they have the most productive experience with CRA?
Rick: Penalties for non-payment of taxes can be as high as double the value of the original assessment, plus interest.
When the tax auditor arrives, the first step is to sit down with him and discuss the tax audit: the timing of the audit; how long it is going to take; what records and information he needs to begin the audit; what areas he will focus on; any specific issues that he has in mind for immediate attention; determining the process for requesting and receiving information; agree on follow-up discussion meetings with respect to audit process and issues identified.
And what is also important, is to monitor the interaction between your employees and CRA. Make sure the questions are handled quickly, issues resolved quickly and that the auditor understands – and this is important – understands the taxpayer’s business.
Gerry: Now, what should a tax director be telling staff about how to deal with the CRA staff? Are there important tips on making things go smoothly?
Rick: There are things that can be done. I think what is most important here is that the taxpayer and its staff, and its staff, be open, transparent, courteous and deal professionally with the tax auditor. The staff, the employees should not feel intimidated by the auditor, nor should they be fearful of the taxman. Information should be provided as requested – subject, of course, to your sensitive document review strategy.
And one thing that I think should be stressed here is that the taxpayer, the employee, should not allow their daily business to be unduly interrupted by the auditor’s queries, so appoint someone to liaise with the auditor.
Gerry: In the event a tax director has an auditor who takes a position on a particular matter that the tax director thought is very unreasonable from your own experience, what do you think the tax director can or should do in such circumstances?
Rick: Well, on the assumption that you haven’t met already with the auditor to discuss the issue, do so. Meet with him, and then submit your position to the auditor. If he doesn’t move off his unreasonable position, engage his supervisor, and/or the assistant director of enforcement within the local TSO. If there is no change, then you escalate to head office. You go to his audit function or to the Rulings Directorate.
Gerry: Now, let’s move to the next stage. The audit is complete. The tax director has now received a proposed assessment from CRA. What are the tax director’s options at this point?
Rick: Well, first option would be to meet to discuss the proposal and clarify any gray areas. We have to ensure here that there is agreement on the facts, and that everyone understands the documents supporting the facts. Submit a formal written response. If there is no movement off the position that the auditor has in the proposal after that, then you escalate it to CRA headquarters.
In this process, it is very important to evaluate both the taxpayer's and the CRA’s positions. You should agree on CRA winners if they are evident and challenge CRA losers if those are evident and negotiate gray areas.
Gerry: So Rick, are you telling us that the auditors are open to negotiate on some matters in the proposed assessment? If so, how can a tax director best use this to his or her advantage?
Rick: Yes, auditors are mandated to negotiate settlements within the parameters of the Income Tax Act. The CRA understands the cost associated with notice of objection and notice of appeals. Litigation can be very costly and auditors will settle to avoid such costs where appropriate. You must identify the gray zones – issues where the CRA has proposed an assessment and the courts have decided cases on the facts. By that, I mean there is no clear-cut trend in the courts favoring one side or the other and both sides have good arguments to support their position.
Gerry: SWell, Rick, I would like to take this opportunity to thank you for your insights into the audit and assessment process. As mentioned earlier, Rick is part of PwC’s Canadian National Tax Services group, or CNTS. Additional information can be found at www.pwc.com/ca/cnts. Our Canadian National Tax Services Group (CNTS) provides services to companies on:
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Through interviews with prominent PwC tax subject matter professionals, Tax Tracks is an audio podcast series that is designed to bring succinct commentary on tax technical, policy and administrative issues that provides busy tax directors information they require.