David Soknacki’s number came up, as he likes to put it, three years ago when an auditor from Revenue Canada called to say she planned to spend two weeks camped out at Ecom Food Industries Corp., the ingredients and flavour business he founded in 1986. Instead of dispatching the auditor to an unheated corner of the warehouse, Soknacki invited her to set up in an office and let her do her thing. She gratefully acknowledged the gesture, and said it was unusual, but added the bit of goodwill didn’t do much to blunt her search for unreported dollars.
“We do a lot of exporting,” he says. “She challenged a trip overseas that I went on.” Soknacki had to produce notes from the trip, as well as evidence his wife, who accompanied him, also attended meetings and participated sufficiently to justify the claimed expenses.
But when the auditor turned to his life insurance premiums, which he claims as a business expense, Soknacki balked. After he set up Ecom, his bankers refused to advance loans unless he had enough life insurance to cover the loans. The bank is listed as the beneficiary.
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“I wasn’t cross, but I gave some push back.” The auditor wouldn’t budge, and he ended up remitting the taxes and penalties on the life insurance.
For entrepreneurs like Soknacki, a visit from Revenue Canada is almost inevitable, and, by all appearances, increasingly likely. The agency is clamping down on business owners, especially in cash-driven sectors like construction and food service. And the ongoing aftermath of the 2008 credit crisis has prompted officials to go after wealthy investors who avoid taxes by hiding assets in off -shore accounts in low-tax jurisdictions with opaque banking laws.
But Revenue Canada’s so-called Related Party Initiative, announced earlier this year, is the enforcement campaign that’s really put wealthy business owners on high alert. According to the government, RPI is targeting people with at least $50 million in net assets who also own or control family companies with 30 or more subsidiaries or, as they call them, “entities.”
The decision to closely scrutinize such conglomerates arose when Revenue Canada identified compliance concerns in selected private firms with $20 million to $250 million in revenues. The companies in question also had complicated corporate structures composed of nested subsidiaries, off-shore trusts, and partnerships. Several other countries, including the U.S., Great Britain, and Germany, have embarked on similar collection campaigns.
The result could be a rapidly widening net of enforcement activity as Revenue Canada’s auditors work their way through these far-flung corporate food chains.
“Depending on how high-net-worth individuals have structured their holdings and operations, it is possible some of the entities would include incorporated small or medium sized businesses,” says Revenue Canada spokesperson Nicole Eva Pigeon. “These businesses would be considered in the course of the risk assessment process and may be subject to audit under the RPI.” The audits, she adds, are integrated and focus on all the related companies simultaneously.
So if you have some kind of corporate link to one of the family empires targeted by the RPI, expect a visit someday soon.
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Tax solutions that work
While Revenue Canada’s campaign is clearly meant to put the fear of God into business owners determined to hide income, don’t get too spooked. There are still many legitimate ways to reduce tax exposure, and the key is to follow the rules and keep a meticulous paper trail. Here are some of the most promising, but commonly overlooked, ways to shelter income:
Scientific Research and Experimental Development (SR&ED) Tax Credits
Many manufacturing and even agricultural firms leave cash on the table by neglecting to claim SR&EDs for process or design improvements, even minor ones and those that don’t involve patents or other intellectual property.
