The CRA’s New Audit Powers
In the new Budget 2021, there are changes to Canada’s taxation regime regarding the expansion of the authority of Canada Revenue Agency (CRA) auditors during the audit process. In theory, increasing the scope and degree of the powers of auditors will enhance the capabilities of auditors to collect the information they require to make fully thought out decisions. However, in practice, these new additions to the auditor’s arsenal may create unintended consequences for taxpayers who do not understand the gravity of hastily answering seemingly innocuous questions.
Following our previous blog entry that covered “Budget 2021” in broad strokes, this article will examine in greater detail the implications of the new CRA audit powers and what it could mean for the Canadian taxpayer.
What are the Existing Powers of CRA Auditors
Participating in the CRA audit process can be a significant inconvenience to a Canadian taxpayer. An audit is essentially the process by which a CRA agent reviews the records of a taxpayer for a specified period and asks clarifying questions to the taxpayers to determine the legitimacy of said taxpayer’s CRA filings.
The audit process can take years to complete, and auditors have many tools to review and evaluate the reported filings of taxpayers. Typically, auditors will send “queries” or questionnaires that request answers to pointed questions regarding certain aspects of returns for which the CRA requires further clarification. A taxpayer’s answers to those questions can bear significant weight on the scope and outcome of the audit. For example, the answers to audit queries will often open the door for the auditor to request documentation related to the taxpayer’s answers. The answers and documentation provided by taxpayers during the course of an audit could result in significant changes to the amount of taxes payable by the taxpayer for the period covered by the audit.
The audit query process forms the basis of the auditor’s decision-making process. Presently, auditors only have the authority to request certain responses from taxpayers. However, the proposed changes to auditor powers under Budget 2021 could expand this authority to require certain responses from taxpayers instead.
What New Powers would Auditors have under Budget 2021?
As alluded to above, the newly proclaimed rules under Budget 2021 would allow for auditors to have greater authority with respect to the types of answers they receive from taxpayers and from whom they may require answers.
As of now, taxpayers are not bound to answer audit queries under a specific method or form, but this may be changing very soon. The new powers vested in auditors would allow for auditors to require taxpayers to answer CRA queries and to govern the form of the answer (for example, mandating that the taxpayer respond orally or in writing).
The consequence of these additional powers would be the potential for auditors to request for oral or written answers from specific agents of a taxpayer. In the corporate context, for example, an auditor may request oral answers from not only from the directing minds of the corporation, but also from employees.
Additionally, it is likely that the audit division will be receiving an increase to their bottom line, which could increase the number of audits conducted and/or impact the types of taxpayers subject to audit.
What are the Implications of these New Audit Powers?
The implications for Canadian taxpayers stemming from the new powers proposed by Budget 2021 will primarily affect the correspondence between auditors and taxpayers at critical stages of the audit process. This will profoundly change the level of preparedness necessary for taxpayers who are under audit, as any answer that has the potential to mischaracterize or elicit a misapprehension of nefarious conduct on the part of the taxpayer could result in a significant change to the taxpayer’s taxes payable for the audit period.
Additionally, forcing taxpayers to answer questions orally will create stress and a high level of frustration for taxpayers. Many people do not know the answers to these questions offhand, and normally respond in writing because it gives them time to gather their thoughts and provide a detailed response. CRA auditors will compel taxpayers to respond to their questions orally, and by doing so, they will try to get taxpayers to say or admit things that they may not understand which will have an extremely negative effect on their audit. The CRA will hold what was said against the taxpayer through the audit stage, the objection stage, and all the way through Tax Court. A few wrong words might mean the difference between settling an audit with no issues, and having to fight for years.
Many tax professionals are now recommending that if a taxpayer has the means to involve a third party tax professional (such as a tax lawyer or accountant) during the audit stage of the CRA appeals process to do so. Providing unreviewed answers to the CRA that fail to properly represent the taxpayer’s rights and interests could turn an unpleasant experience into a fiscal nightmare. For the most part, the potential danger of an audit to a taxpayer’s bottom line can be mitigated (if not remedied entirely) by the interposition of a tax professional.
If you would like to know more about how a lawyer can assist you through the audit process in general, contact a tax professional at R&A Tax Law today! We are here to help!
**Disclaimer
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.
James Pendergast