From: AlanBaggett@volcanomail.com   
      
   Top Ten Canada Revenue Agency Audit Flags : CRA SOTW   
      
   Last Updated: December 4 2013   
   Article by Stevan Novoselac and John Sorensen    
   Gowling Lafleur Henderson LLP   
      
      
   Taxpayers often ask why the CRA commenced an audit or whether taking a   
   particular step might target them for a future audit. These are reasonable   
   concerns, since the CRA's approach to audit selection is generally not random,   
   but rather based on risk    
   assessment.    
      
   Research comparing the effectiveness of random versus targeted audits was   
   conducted under the CRA's Small and Medium Enterprises Research Audit Program   
   (formerly the Core Audit Program), which utilized random auditing.1 According   
   to the 2010-2011 CRA    
   Report, in that year random auditing detected significant non-compliance in   
   only 12.2% of audits, while targeted auditing based on risk assessment   
   detected significant non-compliance in 46.7% of cases. Therefore, targeted   
   auditing based on risk    
   assessment has become the CRA's preferred approach. In the 2012-13 year, the   
   CRA commenced fewer audits than in the prior year, in part because of a   
   strategic decision to focus resources on auditing high-risk taxpayers.2 This   
   resulted in the CRA    
   exceeding two of its important performance indicators, adjusting a higher   
   percentage of tax returns audited (79%, well above the CRA's target of 75%)   
   and generating a higher fiscal impact per auditor ($423,000 per full-time   
   equivalent, well above the CRA'   
   s target of $350,000).3   
      
   Going forward the CRA may pursue audits even more aggressively: Budget 2013   
   stated that the CRA would make significant changes to its compliance programs   
   to target high-risk areas of tax non-compliance, with the objective of raising   
   additional revenues    
   of up to $550 million per year by 2014–15.4   
      
   Here is a summary of ten common audit triggers or risks for getting or staying   
   on the CRA's "radar".   
      
   1. Inconsistencies between third party information and taxpayer's filing   
   position: The CRA's "matching" program compares information from third   
   parties, employers, financial institutions and other sources with taxpayer's   
   filing positions to confirm    
   filing accuracy. The CRA's ability to match this information has significantly   
   improved in recent years, enhancing this type of risk assessment.   
      
   2. Employer compliance: The CRA continues to aggressively pursue a range of   
   issues pertaining to employer compliance, including the timely remittance of   
   source deductions, the status of workers as either independent contractors or   
   employees, taxable    
   benefits and relocation costs.    
      
   Enquiries often arise when an independent contractor seeks employment   
   insurance benefits, triggering a CRA ruling on the worker's status. While an   
   enquiry pertaining to a single worker would not trigger significant financial   
   exposure, it can lead to    
   rulings for similarly categorized workers and result in significant   
   assessments for premiums under the Employment Insurance Act and the Canada   
   Pension Plan. Payroll audits may also include enquiries into taxable benefits   
   received by workers, including    
   personal use of employer assets, allowances, free parking, interest-free or   
   low-interest loans, stock options, incentives/gifts/prizes, relocation   
   expenses, retiring allowances, termination payments and tuition fee   
   assistance. Payroll audits may also    
   reveal the presence of non-resident workers in Canada temporarily. Beware the   
   disgruntled former independent contractor.   
      
   3. Not complying with CRA requests for information: This is not only damaging   
   to a taxpayer's position for a year being audited, it also likely flags the   
   taxpayer for future audit enquiries. The CRA appears to be downloading greater   
   responsibility to    
   taxpayers in the course of audits, by making more comprehensive demands for   
   documents and information to be supplied to the CRA, rather than scheduling   
   time for field audits at a taxpayer's place of business. Supplying information   
   to the CRA should be    
   carefully managed, to ensure that the CRA's requirements are fulfilled without   
   over-disclosing information, including protecting documents and information   
   that would be subject to privilege.   
      
   Similarly, if there were issues with a previous audit, the taxpayer would be   
   more likely to be "on the radar" and subject to future audits.   
      
      
   4. Requests to amend income tax or GST/HST returns: While amendments to   
   returns or account closures may be necessary or desirable, these steps may   
   attract audit scrutiny. Certain tax strategies that the CRA may challenge   
   involve re-filing returns for    
   past taxation years to take advantage of significant loss-carrybacks which may   
   not be supportable.   
      
   5. Unusual or notable changes in deductions or credits: The CRA compiles   
   information about deductions and credits claimed by taxpayers over multiple   
   years and significant changes from one year to another may attract CRA   
   enquiries. Taxpayers with a viable    
   explanation for significant changes need not worry. However, taxpayers who   
   become involved in aggressive tax strategies may be flagged for audit.   
      
   This criterion for risk assessment considers the year-to-year consistency of a   
   range of deductions including management fees, interest on debt to   
   non-residents and amounts paid in respect of intellectual property that has   
   been "offshored". Disallowance    
   of management fees and interest payments may give risk to the severe result of   
   double taxation, by which the amount is taxable in the hands of the recipient,   
   but non-deductible to the payor.   
      
   Contemporaneous and comprehensive documentation supporting these types of   
   payments is essential to establish their underlying business purpose and   
   commercial reasonableness, particularly for transactions between related   
   parties or closely held groups of    
   entities.   
      
      
   6. Participating in aggressive or high risk tax strategies: The CRA has   
   dedicated audit resources to detecting and reassessing a number of issues,   
   including: artificial capital losses; loss trading transactions; surplus   
   stripping; offshore investment    
   accounts; donation arrangements; withholding tax; section 85 rollover   
   transactions; permanent establishment/residency issues; interest   
   deductibility; RRSP appropriations; and tax free savings accounts.   
      
      
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