According to a recent report released by the Auditor General, the Canada Revenue Agency (CRA) is not treating all taxpayers equally in audits and other compliance activities.
Inconsistent Compliance Activity
With respect to consistency in the CRA’s actions in audits and other reviews, the report noted, overall:
We found that the Canada Revenue Agency did not consistently apply tax rules when it audited or reviewed taxpayers’ files, even though the Taxpayer Bill of Rights includes the right to have the law applied consistently.
The reasons provided for these inconsistencies were many, and included:
- Judgment of Agency staff conducting compliance activities;
- The region where a file was being assessed;
- The type of taxpayer (i.e. small business, large corporation, etc.)
Specific Examples of Discrepancies
The report’s findings were grouped into several categories, as follows.
Inconsistent Time Given to Respond to Requests for Information
The time that the CRA gave taxpayers to respond to its requests for information was inconsistent and depended on how the agency categorized the taxpayer.
Most taxpayers are individuals with employment income- the CRA requested information from those taxpayers more quickly and gave them less time to respond than it did with large businesses or taxpayers with offshore transactions.
For example, in some cases individuals were prohibited from claiming certain expenses if they could not provide a receipt for those expenses within 90 days, while individuals with offshore accounts were given a longer period of time to provide the same documentation (some were given months or even years).
The report went on to note that the longer it took the CRA to enforce compliance, the less likely it would be that the Agency would collect taxes owing. This was especially true for any taxpayers with offshore assets, who may have had enough time to liquidate assets or transfer funds
Inconsistent Offering of Proactive Relief to Taxpayers
The CRA offered to waive interest and penalties for taxpayers in some compliance activities but not others.
For instance, the CRA’s compliance activity over individuals typically involved a review of their income and a request for receipts and other documentation to support the figures in their tax returns. These taxpayers were generally not offered relief from interest and penalties, even if it was the CRA which had caused any delays which may have resulted in penalties/interest.
In contrast, for small and medium-sized enterprises, international and large businesses, and taxpayers with offshore transactions, the CRA most likely conducted an audit and required auditors to consider offering relief (often without any such relief being necessarily requested by these taxpayers).
In addition, the CRA did not define the period of time considered to be an “undue delay”, leaving it to the discretion of auditors to determine. This too may have resulted in inconsistent application of relief, in violation of the Taxpayer Bill of Rights.
Inconsistent Waiving of Penalties and Interest
The CRA inconsistently waived or cancelled interest and penalties. For instance, in some cases, the auditors waived interest and penalties for the time it took them to obtain information from taxpayers’ banks. Other auditors would charge interest and penalties for the same period as they considered it to be the taxpayer’s fault for not providing the information.
In some of these cases, taxpayers had been asked for information that went back further than the 6-year window for keeping relevant records required by the Income Tax Act, requiring a taxpayer to find records that they had not been obligated to keep, and charging them interest for any delay that such a search may have caused.
Different Audit Completion Times Across Canada
Significant differences were found in the amount of time it took various CRA regional offices across Canada to complete audits. For example, under the offshore and aggressive tax planning compliance program audited taxpayers waited for 541 days in one region of Canada versus 323 days in another region for an audit to be completed.
Delays in completing an audit cost both the CRA and the taxpayer time and money.
Untimely and Incomplete Processing of Results of Compliance Activities
Once the CRA conducted compliance activities, it did not always calculate and adjust taxes owing on a timely basis. For instance, one regional office took an average of 41 weeks to process adjustment requests, whereas another regional office only took 12 weeks to do so.
Compliance activities for the Voluntary Disclosures Program were also not timely or complete, and, in some cases, the CRA did not follow up with taxpayers who had used the Voluntary Disclosure Program to ensure that they continued to comply.
The report made several recommendations for the CRA including, among other things:
- Clarifying CRA guidance and procedures to determine whether the CRA or the taxpayer is responsible for delays in completing compliance activities;
- Certifying that eligibility criteria are fully met before approving applications for all relief programs in order to ensure consistency;
- Determining the reasons for any regional variations and implementing a plan to reduce those differences;
- Developing a formal tracking process to monitor the time it takes to process assessments;
- Taking necessary steps to improve timeliness and complete files;
- Implementing a plan to follow up with taxpayers who have used the Voluntary Disclosures Program to verify their future compliance.
If you have questions about the Auditor General’s report or about CRA audits more broadly, contact the highly skilled and knowledgeable tax lawyers at Duncan, Linton LLP.
We have served our community for more than 150 years. Our lawyers are dedicated to building strong and lasting relationships with our clients and helping them navigate their most challenging legal and tax issues. We are the oldest independent law firm based in Waterloo Region and one of the oldest law firms in all of Ontario.
We help entrepreneurs, small business owners, professionals, and others to plan for the future and ensure their finances are protected. Call us at (519) 886-3340 or contact us online to speak to a member of our Tax Group.