"What if" series - Dealing with “sticky” situations with the CRA - part 2

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Episode 49: "What if" series - Dealing with “sticky” situations with the CRA - part 2

Release date: July 3, 2012
Running time: 9:11 minutes

In this episode of Tax Tracks, we continue our discussion about further hypothetical situations taxpayers may find themselves in with the CRA.

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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.

"What if" series - Dealing with “sticky” situations with the CRA - part 2

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: I’m Gerry Lewandowski and today we are going to continue our “What if...” podcast subseries that explores various hypothetical situations our listeners may find themselves in with the CRA. You may also wish to listen to our earlier “What if...” episode #47 with Rick Biscaro. Our PwC staff members that have joined us from CRA are uniquely positioned to comment and provide insight on where taxpayers stand, their rights and suggested responses to the CRA.

Here with us today is Sharon Gulliver a PwC senior tax advisor with our Tax Controversy and Dispute Resolution team. As many of our listeners will be familiar, Sharon has spent more than 35 years at CRA – including 22 years addressing tax avoidance and aggressive tax planning.

Welcome Sharon.

Sharon: Thank you Gerry.

Gerry: OK, Sharon, let’s get started. “What if...” a taxpayer’s corporate tax return is under audit and approaching statute barred status. If the auditor requests them to file a waiver, should they?

Sharon: The short answer Gerry is “no”. It’s strictly against CRA policy for an auditor to request a waiver for the purposes of extending the time to do an audit. Therefore, the taxpayer should refuse under such circumstances and refer to the CRA waiver policy which is addressed in Chapter 11 of the CRA Audit Manual (that’s available on Tax Net Pro – the manual itself). Where a proposal letter has been issued and a return is going statute barred, the taxpayer should decide the merits of filing a waiver to allow additional time for representations versus filing a Notice of Objection. This would depend on: the issue(s), who at CRA has been involved already, the amount at issue, etc.  However, if it is decided to provide a waiver, the wording on the waiver should be carefully worded to restrict any future reassessments to the positions and amounts as proposed.  Always remember the principle that a waiver should only be for the taxpayer’s benefit - not CRA’s!

Gerry: Now, “What if...”  a number of adjustments are to be made to a taxpayer’s large corporate return and the taxpayer intends to proceed with a Notice of Objection, but also wishes to use discretionary deductions to offset the taxes owing. The use of the discretionary deductions will allow the taxpayer to avoid having to pay 50% of tax otherwise owing in order to file a Notice of Objection.

Sharon: Well, it’s CRA’s policy to allow the use of discretionary deductions to offset audit adjustments. However, if a taxpayer intends to file a Notice of Objection, it is necessary to ensure that the discretionary deductions taken do not completely offset the audit adjustments as a Notice of Objection cannot be filed to a Nil Notice of reassessment. Therefore, the discretionary deductions taken should leave a nominal amount of taxable income to enable the filing of the Notice of Objection to the audit adjustments.

Gerry:  Sharon, “What if...”  there is an ongoing CRA audit and, in addition to information and documents requested from the taxpayer, the CRA also sends a letter to the taxpayer’s accounting firm requesting information from its records related to that taxpayer? Must the accounting firm provide the information?

Sharon: Well, in June of 2010, the CRA issued its policy titled “Acquiring Information from Taxpayers, Registrants and Third Parties” which is available on the CRA website.  It provides that, and I quote, “Information from third parties will be sought when the taxpayer cannot or will not provide this information, when it is needed by officials to determine the CRA’s position on an issue and in accordance with the scope of the review. For example, since accountants’ and auditors’ working papers relate to a taxpayer’s books and records, they may be necessary, although not routinely required, in the determination of a taxpayer’s liabilities and entitlements.” 

So Gerry, this means that the CRA auditor should not be requesting information, including working papers, from a third party unless the taxpayer has been unable or refuses to provide that information. Therefore, there should not be a simultaneous request for information to the taxpayer and their accounting firm. This policy should be referred to with respect to such requests from the CRA.

Gerry:  Are there any guidelines that the CRA has to abide by when requesting information?  

Sharon: Well, referring to the same policy statement that was issued by the CRA, that policy states that CRA Officials must consider five key principles when evaluating the need to request information from a taxpayer, a registrant or a third party. They include: Legislative Authorities, Intent, Relevance, Transparency and Impartiality. The interpretation of these key principles is explained in the Policy Document and I recommend that taxpayers and third parties review this document should they have any concerns related to the type and timing of information requested by CRA auditors during the audit process.

Gerry:  Now “What if...” a taxpayer believes an auditor is failing to apply the law in a fair manner? Is there any recourse short of waiting for a reassessment and filing an appeal? Are there any steps taxpayers can undertake to bring performance issues to the attention of CRA management other than by filing a formal service complaint and following up with the Taxpayers’ Ombudsman?

Sharon: Well, this exact issue was addressed by the TEI, the Tax Executive Institute, with CRA at its annual discussions in December of 2010. And the response from CRA headquarters wasAll employees at the CRA have a duty to follow four guiding principles (Integrity, Professionalism, Respect and Co-operation) when conducting their daily activities”. And they promote that as a taxpayer, you should expect that these four values will be adhered to when dealing with tax auditors. And if the situation ever arises when a taxpayer feels that an auditor or a Large File Case Manager has not followed one of these principles or values, then a meeting should be requested with their Managers to voice concerns. And if you’re still not satisfied after discussing the issue with the Manager, you can request a meeting with the Assistant Director of Audit at the local Tax Services Office. CRA Headquarters says there the concerns will be addressed in a “fair and impartial manner.”

Gerry: So it sounds like the taxpayer does have some recourse and direction if they feel they are being treated unfairly.

Sharon: Absolutely, Gerry. I would also note that CRA tax avoidance auditors and international auditors each have Regional Advisors assigned to their respective regions to assist them with their issues during the audit process. There are 5 Regions: the Atlantic, Quebec, Ontario, Prairie and Pacific. In fact, we’ve just had Bill Nakano, one of these CRA Regional Technical Advisors join us at PwC. Bill focused on Tax Avoidance and Aggressive Tax Planning while at CRA and is a valuable addition to our PwC Tax Controversy and Dispute Resolution team.

In addition to the regional tax advisors, there’s also a tax litigator from each Justice Region has been assigned to assist with large business, domestic and international audit issues during the course of an audit. Auditors should be encouraged to consult with these valuable resources to obtain input on controversial issues.

Gerry: Thank you for joining us today Sharon. There are several “sticky” situations that taxpayers can find themselves in with the CRA and it sounds like often times there are actions they can take or, of course they can contact yourself or any of your colleagues in the PwC Tax Controversy and Dispute Resolution team.

Sharon: That’s correct Gerry. Our website address is www.pwc.com/ca/tcdr.

Thank you for tuning into Tax Tracks at www.pwc.com/ca/taxtracks.

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