How to manage tax disputes with CRA

It’s increasingly risky for clients to play the audit lottery, says David Muha, partner, Deloitte Tax Law LLP in Toronto. That’s because CRA is paying more attention than ever before.

So Muha suggests planning for an audit long before it even happens.

“If you’ve implemented a transaction that has some tax elements in it, be careful about elements with tax risks,” says Muha at an Ontario Bar Association conference on February 3. “Prepare your documents as if you could be audited. Put together a summary of the transaction.”

Read: CRA’s objection deadline too short?

And he suggests treating the auditor with respect. “Do not go in guns blazing.”

Also, CRA may ask for additional information. Typical audit queries fall under section 231.1 of the Income Tax Act. “But if you see 231.2 [requirements to provide information and documents], you need to assume the auditor is not happy with what they’ve received and they’re going to up the ante,” says Muha. Again, the key is to be prepared.

If a client has already been assessed and isn’t happy with the outcome, you can help her file a notice of objection. The deadline to file is 90 days. Muha says draft the notice of objection keeping CRA’s perspective in mind. “Start from the beginning and clarify the facts.”

Read: When CRA auditors are wrong

If you’re helping a client with an assessment, you file a notice of objection and during that time there’s another assessment, it invalidates all of the work you’ve done, he warns. “Remind [clients] they need to send you everything for that year [and keep you updated].”

And the process can be a long one since there’s a backlog in CRA appeals. “[It] can take anywhere from three months to 14 years to be assigned to an appeals officer. [There have] been instances where it’s been three or four years before we hear anything.”

Read: Filing notices of objection

If discussion with appeals don’t produce a resolution, the next step is Tax Court. Again, clients have 90 days to launch an appeal.

Muha notes taxpayers can bypass the appeals process if CRA does not respond to a notice of objection within 90 days. So on day 91, the client can go straight to court. “And in general, you get a better result from Tax Court than with appeals.”

Why? There are timelines built into the rules of Tax Court, so the client has a better chance of the dispute being handled quicker. Further, Muha notes there are greater opportunities for settlement.

Number of voluntary disclosures increase

Michael Friedman, co-chair, Tax Group at McMillan LLP notes CRA recently stated in its annual report that there has been a significant increase in the number of voluntary disclosures. The Agency attributes the increase to several factors, including the heightened efforts of CRA to share data with foreign tax administrators, the agency’s enhanced audit activities, and the use of advanced risk profiling algorithms.

Friedman provides the following statistics over the past year.

• More than $1.3 billion of unreported income was voluntarily disclosed under the VDP – a 65% year-over-year increase in the amount of unreported income disclosed under the program.
• $780 million of the unreported income disclosed under the VDP was attributable to offshore holdings – a 157% increase in such disclosures over the previous year.
• 19,134 voluntary disclosures were made under the VDP, representing a 21% increase in disclosures over the prior year.

CRA adds that it levied gross interest and penalties of almost $4.8 billion over the past year, says Friedman. Further, CRA waived federal interest and penalties of almost $275 million under various statutory programs, including the VDP.