15 Stages Of A Canada Revenue Agency GST/HST Audit

If you have never been audited before, you probably have no idea what to expect.  Most audits follow the same 15 stages (more or less).  On the taxpayer's side of things, each stage is stressful.

  1. CRA Selection Process:  The taxpayer usually has no involvement in this process.  It all happens behind the scenes and the taxpayer can only guess why their name was selected. Sometimes the taxpayer is randomly selected.  Sometimes the taxpayer is selected as a result of the industry segment in which they operate.  Sometimes the taxpayer is selected because of something in a filing with the CRA.  Sometimes the taxpayer is selected because of a tip made to the CRA.
  2. The Audit Letter: The taxpayer receives a letter from the CRA notifying them that they are to be audited. Normally, the taxpayer is asked to contact the CRA auditor.  However, sometimes the auditor just shows up at the business premises.
  3. The CRA letter requesting certain documents:  Usually the CRA auditor will send to the taxpayer a letter indicating what documents need to be provided before the initial meeting at the taxpayer's premises or what documents must be available for the first day of the audit.
  4. Initial Meeting:  If the audit occurs at the taxpayer's premises, the auditor will have a meeting at the start of the audit.  The auditor explains what is expected during the audit.  The taxpayer should also communicate to the auditor what is expected.  The taxpayer may indicate that the auditor must deal with a specific person so that the entire organization does not end up working for the auditor.
  5. Fieldwork:  The on-site audit is the fieldwork stage.  The fieldwork can take place over a few days or over a lengthy period of time.
  6. Office work: Usually the auditor will take information back to the CRA offices and work on the audit from the CRA premises.
  7. Follow-up questions: It is common for the CRA auditor to contact the taxpayer after the fieldwork stage of the audit. Sometimes additional documents are requested.  Sometimes additional questions are asked.
  8. Preliminary Report: The CRA auditor will prepare a proposal and send it to the taxpayer for comment.  Usually a proposed assessment number is provided to the taxpayer.
  9. Response Letter: The taxpayer has an opportunity to change the minds of the CRA.  This is the best opportunity to stop an incorrect assessment from being issued.
  10. Notice of Re-assessment: The CRA auditor sends to the taxpayer the Notice of Reassessment setting out how much is being assessed.
  11. CRA Collections: As of the date of the Notice of Re-assessment, a debt is due to Her Majesty.  CRA Collections may start collection activities immediately after the Notice of Re-Assessment is issued.
  12. Notice of Objection: If a taxpayer disagrees with a Notice of Re-Assessment, the taxpayer can file a Notice of Objection.
  13. Objection: The taxpayer will communicate with a CRA Appeals Officer and the re-assessment will either be confirmed, amended to reversed.
  14. Notice of Appeal: Assuming that not all the issues are addressed in the objection stage, a taxpayer may file an appeal with the Tax Court of Canada.
  15. Day in Tax Court: A taxpayer will have their day(s) in the Tax Court of Canada if the appeal is not settled.  A Tax Court judge will listen to the parties and render a judgement.

For more information, please contact Cyndee Todgham Cherniak at 416-307-4168 or at cyndee@lexsage.com.  We have many useful articles about tax audits under Free Information - Sales Tax, Harmonized Sales Tax (HST) and Goods and Services Tax (GST) Articles.

How To Find Out What Is In The Canada Revenue Agency's Files About Your Audit

Wouldn't you like to know what is in the Canada Revenue Agency's ("CRA") files concerning your GST/HST audit? This information is very valuable in finding out where the CRA made a mistake or what is the basis for the misunderstanding about your taxes.  We recommend obtaining this information as soon as possible after an assessment is issued AND after an appeals officer makes a decision to confirm an assessment.  The information in your audit file may help you prepare a notice of objection or notice of appeal.  The information in your CRA files may also be very useful during an examination for discovery. During the examination for discovery, your lawyer may use the information to catch the auditor or appeals officer (the usual deponents for the CRA) in a misstatement.  The examination for discovery process sometimes leads to settlements. Most importantly, the information in the auditors own files may be used to contradict assumptions made in making the assessment.

You may obtain information in your CRA files by filing an Access to Information and Privacy (ATIP) request.  The ATIP requester must complete a Form RC378.  Where you may need the assistance of a tax lawyer is to ensure you are asking for the correct information.  If you have no idea for what to ask (e.g., the T2020 form completed by the CRA officer each time she/he spoke to you or a representative or someone in the CRA), you may miss requesting useful information.  This is the most common problem is not knowing what would be in the CRA's audit file.

The filing fee is only $CDN 5.00.

The CRA posts limited information on the Canada Revenue Agency web-site about making an ATIP request - see How to access information at the CRA.

The next problem that arises is that the CRA may withhold information.  There is the right of appeal should the CRA withhold certain information. This will be the subject of a subsequent blog post.

Based on our experience, the ATIP process often results in information being provided that an auditor will not often send to the taxpayer.  For example, if the auditor obtained an appraisal from the CRA, Real Property Appraisal Division, the auditor is often told not to give that document to the taxpayer.  The ATIP process usually results in the release of the appraisal.  Similar,y the auditor often will not share internal emails.  The ATIP process usually results in the release of the internal emails.  At the end of an audit, the auditor prepares a memo for the team leader/supervisor.  The ATIP process usually results in the release of the Auditor's file memo(s).

Based on our experience, it is important to file an ATIP request.  It is a small price to pay to possibly win the tax argument.  It is a small price to pay to potentially save the expense of a hearing at the Tax Court of Canada and years of fighting the tax dispute.  Finally, wouldn't you like to know what the auditor wrote in your file?

If you require assistance, please contact Cyndee Todgham Cherniak at 416-307-4168 or cyndee@lexsage.com.  We offer flat rates to file ATIP requests.

Top 10 HST Predictions for 2014

I would like to start of 2014 with my top 10 predictions for 2014 having to do with HST.

1. Fraudsters and scammers will use the Canada Revenue Agency name in vain more frequently in 2014 to take advantage of trusting Canadians.  We are hearing about this more often and I predict it will get worse because people are giving their information (and money) to people who call and say they are from the CRA. Canadians should be careful and ask for documentation.  It is sometimes obvious when documentation is in connection with a fraud/scam.  The CRA's telephone number is 1-800-959-5525 - call them and ask questions if you are ever unsure.

2. There will be more news of CRA employees engaging in inappropriate behaviour.  I am sorry to say this. The news stories of CRA employees inappropriately accessing taxpayer information, inappropriately accessing outside information and accepting bribes for lower assessments will increase in 2014.  The reporters are looking for these stories and oversight of CRA employees has areas for improvement.

3. GST/HST compliance will be an important topic for discussion in 2014. When the GST rate was 5%, a number of businesses did not put the effort into compliance. Now that the HST rates are much higher, companies will put money into reducing the risk of a large unexpected assessment.

4. The dollar numbers in Notices of (Re)Assessments will increase in 2014.  Ontario harmonized in 2010.  Quebec has harmonized.  Nova Scotia increased its HST rate to 15%.  The assessments in 2014 will cover the broader scopes and the higher rates.  Mistakes will be found.  This will lead to large assessments.

5. CRA auditors will become more aggressive in denying input tax credits where the business does not have documentary evidence to support the input tax credits.

6. The CRA will cite subsection 170(2) of the Excise Tax Act more often in 2014.  Subsection 170(2) places limits on registrants in participating provinces claiming input tax credits where the expense is not reasonable the circumstances having regard to the nature of the commercial activities of the registrant.

7. The CRA will continue to deny new housing rebates claimed by individuals and give as a reason that the individual did not live in the residence as a principal residence.  This trend started in 2013 and will continue in 2014. These assessments will not be based on audits per se.

8. Restaurants will be audited in 2014.  The CRA is on the lookout for the use of zapper technology.  The CRA auditors now have legislation to impose significant fines if they find zapper technology has been used.

9. CRA collections officers will be pursuing old assessments and will be active in collecting monies owed to the Government.  A number of persons have outstanding assessments of GST/HST.  This is low hanging fruit for government revenues.

10. The financial services rules will continue to be difficult and complex. The HST legislation will not be fixed in 2014.

Motion Denied - Justice Was Not Delayed

On August 30, 2010, the Ontario Court of Appeal denied a motion brought by the Minister of Revenue for an extension of time to file an appeal in respect of a judicial review of a retail sales tax writ that was quashed by the Ontario Divisional Court.  A copy of the decision in The Minister of Revenue v. Robert Carter is available in The HST Library.

This is an important case. Robert Carter brought a judicial review (in Robert Carter v. Minister of Revenue) of writ issued by the Minister pursuant to paragraph 37(1)(b) of the Retail Sales Tax Act (Ontario). The Ontario Divisional Court quashed the writ on the basis that the Minister did not follow the process set out in Rules 60.07(2) and 60.07.1(1) of the Rules of Civil Procedure, which required the Minister to seek leave of the Court to issue the writ (due to the fact the alleged assessments were issued thirteen years earlier).  This Minister did not file leave to appeal within the 30 day time limit.  The Minister brought a motion to the Ontario Court of Appeal seeking an extension of time to file leave to appeal.  Mr. Carter opposed the motion on two grounds:

(i) the Minister did not meet the test for an extension of time; and

(ii) the Minister had not paid Mr. Carter the cost previously awarded by the Divisional Court.

The Court of Appeal agreed with Mr. Carter.

The overarching principle that is applied by the Court in such cases is "whether the 'justice of the case' required that an extension be given".  The Court of Appeal has consistently applied four factors in exercising its discretion:

1)  Whether the Appellant formed an intention to appeal within the relevant period;

2) The length of the delay and the explanation for the delay;

3) Any prejudice to the respondent; and

4) The merits of the appeal.

The Court of Appeal ultimately decided these questions in favour of Robert Carter, the respondent.  The Court was satisfied that Mr. carter demonstrated prejudice and the Minister did not show that he has a meritorious appeal.

There are many quotable statements in the decision:

  • The Ministry of Revenue wields considerable power and discretion that can affect the lives of residents in Ontario in profound ways. Insofar as the Ministry's bureaucracy is unable to comply with the Rules of Civil Procedure in doing so, it seems to me that the answer to this problem is for the Ministry to review its internal decision making processes, not for this Court to make accommodations for the Ministry that are not available to other litigants.
  • Aside from indemnifying the winning party, costs are also used as a tool to encourage settlement, deter frivolous actions and defences, and discourage unnecessary steps in the litigation process. And, because they offset some of the outlays incurred by the winner, they make litigation more accessible to litigants who seek to vindicate a legally sound position.
  • Certiori is a broad and flexible remedy. Generally speaking, it is available in most situations where a government decision has an effect on an individual's rights or legitimate expectations.  On its face, s. 37(1)(b) gives the Minister  degree of discretion in the choice of enforcement measures.  This choice will have a serious effect of the rights and obligations of individuals subject to an assessment.  I am not persuaded that this exercise of executive discretion is sheltered from judicial review simply because it can be described as routine.
  • I believe the Minister overstates its case by arguing that the Divisional Court is placing a de facto limitation period on tax collection.  The court' decision simply holds that the Minister requires leave to use one of its remedies - the warrant - where it waits six years to do so.

I will comment further on some of these points in other postings on this blog.

I must admit that I am pleased with this result for my client. I will keep readers posted on whether the Minister files an appeal to the Supreme Court of Canada.