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.

One Of The Common Objection Mistakes - Missing The Deadline

There have been many times that a potential client contacts me (or any tax lawyer) to discuss filing a notice of objection to challenge a notice of assessment from the Canada Revenue Agency ("CRA"). The potential client seems to have a good legal position.  Then, I ask for the notice of assessment date and --- yikes --- it is more than 3 months ago. 

The deadline to file a GST/HST notice of assessment is 90 days from the date on the notice of assessment.  Three months is a short amount of time that seems to tick by quickly.  Some of that time passes while the notice of assessment is in the mail.  Some of the time is spent looking for a tax lawyer.  Unfortunately, some of the time is spent avoiding the issue of a GST/HST assessment.

If a taxpayer misses the 90 day deadline, is there any chance to still file a notice of objection?  The answer is that it depends..  Section 303 of the Excise Tax Act gives taxpayers an opportunity to apply to the Minister for an extension of time to file a notice of objection within one year of the expiration of the 90 days deadline.  In the application for an extension of time, the taxpayer must:

1) demonstrate that within the 90 day deadline for the notice of objection the taxpayer was unable to act or give instructions to a representative to file a notice of objection OR the taxpayer had a bona fide intention to object; and

2) give good reasons why the Minister should grant the application for an extension of time.

It is not a sure thing that the Minister will grant an extension of time to file a notice of objection.  We have been successful in receiving an extension of time when a client did not receive the notice of assessment, where the client asked for information from the auditor and was waiting for the information, where the client continues to discuss the audit file with the auditor or a supervisor after the date of the notice of assessment (and the T2020 report has recorded this contact), and when the client has communicated with the CRA about a desire to object.

It is important to note that while a telephone call does not constitute a notice of objection, telephone calls can evidence a desire to object.  That being said, if the notice of assessment was issued in 2013 and you contact a lawyer in 2016, the 90 days plus 1 year period for seeking an extension of time will have expired. In this scenario, there is no opportunity to file a notice of objection late.

If the Minister rejects an extension of time request, the taxpayer may appeal to the Tax Court of Canada to have the extension of time reconsidered (see section 304 of the Excise Tax Act). The Tax Court of Canada may dismiss the request or grant the request. The taxpayer must be able to present the Tax Cort of Canada with evidence that they intended to object to the assessment and that it would be just and equitable to grant the extension of time to file the notice of objection.  The Tax Court will not be moved by arguments that the taxpayer forgot about the deadline.

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.

What are the Typical Steps in a Tax Court of Canada Appeal?

Most Canadians know about the Tax Court of Canada, but are not aware of the typical steps in a GST/HST appeal proceeding before the Tax Court of Canada. The following is a list of the typical steps in an appeal under the general procedure rules (which is different than an informal procedure appeal - but similar):

1. The Notice of Appeal: The taxpayer (called the Appellant in the appeal) commences an appeal by filing with the Tax Court of Canada a Notice of Appeal and paying the applicable filing fee.  The Tax Court of Canada Rules sets out what must be in a Notice of Appeal.

2. Service of the Notice of Appeal: The Appellant files the Notice of Appeal with the Tax Court of Canada and provides 2 copies of the Notice of Appeal.  If the Appellant would like a stamped copy, they provide three copies.  The Tax Court of Canada serves the Department of Justice (the Department of Justice provides lawyers to Crown Agencies, such as the Canada Revenue Agency and defends the appeal).

3. The Reply: The Department of Justice must file with the Tax Court of Canada the Canada Revenue Agency's reply within 60 days after service of the Notice of Appeal and serve it on the Appellant within 5 days after the 60 day deadline. The Reply must set out information required by the Tax Court of Canada Rules.  Generally speaking, the Reply sets out which facts in the Notice of Appeal that the CRA admits, which facts in the Notice of Appeal that the CRA denies, which facts in the Notice of Appeal that the CRA claims no knowledge and the CRA's facts and assumptions that for the basis of the assessment.

4. The Answer: The Appellant has 30 days after service of the Reply to file with the Tax Court of Canada the Answer.  It is not mandatory to file an Answer. The Answer identifies new facts that must be provided in light of the Reply by the CRA.  The Answer must set out the information required by the Tax Court of Canada Rules.  Generally speaking, the Answer sets out which facts in the Reply that the Appellant admits, which facts in the Reply that the Appellant denies, which facts in the Reply that the Appellant claims no knowledge and additional relevant facts that will be put forth by the Appellant in the proceedings.  If an Appellant does not file an Answer, then he/she/it is deemed to deny all the allegations of fact put forward in the Reply.

5. List of Documents: Both the Appellant and the CRA file and serve a list of relevant documents within 30 days of the close of pleadings. In practice, the exchange of lists of documents may take longer.  The list of documents is a list and not the documents themselves.  Both the Appellant and the Respondent prepare a list of all relevant documents known to the party at the time which may be used in the proceedings as evidence by the party.  Either side may later ask for the production of any document listed. In practice, the Appellant will review the Respondent's List of Documents and ask for the production of documents that are not contained on the Appellant's List of Documents.  The same holds true for the Respondent.

6. Examinations for Discovery: Both the Appellant and the Respondent (the CRA) are entitled to ask questions to discover the what testimony may be provided in the case 9and to attempt to narrow the issues to be decided in the case).  Often the Department of Justice asks to examine the Appellant (if an individual) or the key personnel (if the Appellant is a business entity). Sometimes accountants and advisors are examined. The Appellant may examine the auditor, the CRA's appraiser, an appeals officer or another relevant person. A court reporter records the examination if it is in oral form.  Sometimes the examination may proceed by way of written questions.  The testimony is given under oath.  There is no timeline for the examinations for discovery.

7. Undertakings: During the examination for discovery, a party may not be able to answer a question or a document may be discussed that has not been exchanged.  The examiner will ask for an undertaking for the answer to be provided in writing or a document be provided. A list of Undertakings is exchanged shortly after the examination for discoveries.

8. Motions and Questions Presented to the Court: Sometimes examinations for discovery may be frustrated by refusals to answer questions and legal issues arising. When problems arise in the process, they are generally dealt with my a motion to the Tax Court.

9. Hearing Date Application: The Appellant and the Respondent jointly apply for a hearing date to be set after the examination for discoveries and the satisfaction of undertakings has occurred. The parties must indicate the number of days that will be required for the hearing,  In practice, the parties discuss lists of witnesses and a litigation plan is created by the Appellant's counsel. Calculating the number of days required for a hearing is not a science, but the litigation plan helps.

10. Pre-hearing Conference and Pre-Hearing Conference Brief:  After the hearing date has been set, the Tax Court of Canada may set a pre-hearing conference date (or the parties may apply to the Tax Court for a pre-hearing conference).  A judge will preside over the pre-hearing conference, but that judge will not ultimately hear the case. The purpose of the pre-hearing conference is to narrow the issues.Often the pre-hearing conference judge will give a first impression of the evidence and this may lead to a settlement because the weaknesses of the case are discussed. The Appellant provides a short Pre-Hearing Conference Brief in connection with the pre-hearing conference setting out the issues, the Appellant's theory of the case and propositions of law to be relied upon at the hearing. Where the parties have requested more than three days for the hearing, the Court may discuss the scheduling of the hearing in order to reduce the number of days needed for the proceeding.

11. Hearing:  This is the big event.  The witnesses testify and the arguments are presented. The Appellant and the Respondent will be required to file documents and books of authorities and detailed arguments prior to the hearing. During this time, settlement discussions may occur.

In addition to the above steps, there may be motions (e.g., the Department of Justice may ask the Court  to strike parts of the Appellant's proceedings, the Appellant may ask the Court  to strike parts of the Respondent's proceedings, either may bring jurisdictional questions to to the court, either may bring a motion to compel production of certain documents, etc) and request examinations of non-parties. Litigation may take many twists and turns.

If You Use Zapper Software, You May Shocked By New GST/HST AMPs

The March 21, 2013 Federal Budget in Canada announced new administrative monetary penalties (AMPs) and criminal offences under the Excise Tax Act (Canada) for:

(1) the use of  Electronic Suppression of Sales (ESS) software;

(2) the possession or acquisition of ESS software; and/or

(3) the manufacture, development, sale, possession for sale, offer for sale or otherwise making available ESS software.

ESS software is also known as "zapper" software because it hides sales transactions, thereby allowing vendors to under-state sales and evade payment of GST/HST and income taxes. This has been a hot audit topic for a number of years and the Department of Finance is giving the Canada Revenue Agency (CRA) new tools to rid Canada of zapper software.

The AMPS penalties will shock the vendors who use ESS software or possess or acquire ESS software.  Vendors who use ESS software may be assessed an AMPs penalty in the amount of $5,000 for the first infraction and $50,000 on any subsequent infraction.  Vendors who possess or acquire ESS software may be assessed an AMPs penalty in the amount of $5,000 for the first infraction and $50,000 on any subsequent infraction.  These two AMPs penalties go hand-in-hand because a vendor who acquires or possesses ESS software is also likely to use it.  Both AMPs penalties can be imposed against the same vendor.  Also, if the CRA issues a first level AMPs penalty, it will also require the ESS software to be removed from the computer.  If ESS software is subsequently discovered in a new audit, it is likely second level AMPs will be imposed.  It may be possible that the CRA will interpret the AMPs penalties on a per transaction basis because the penalties may be imposed on a per infraction basis.

Businesses that manufacture, develop, sell, possess for sale, offer for sale or otherwise make available ESS software for sale will receive higher voltage AMPs.  The AMPS penalty for a first infraction is $10,000 and $100,000 for any subsequent infraction.  This AMPs penalty aims to end the supply of ESS software in Canada.

There is a limited due diligence defense available for vendors who acquire and possess ESS software and businesses that manufacture, develop, sell, possess for sale, offer for sale or otherwise make available ESS software for sale.  The due diligence defence will generally require a person to show that exercised the degree of care, diligence and skill to prevent the contravention with respect to ESS software that a reasonably prudent person would have used in comparable circumstances.  There may be cases where the person has attempted to ensure that they do not have ESS software and it has been installed on their computers. There may be a bug in a computer program that disrupts the sales records, but it was not intended.

In addition to the AMPs penalties, businesses that manufacture, develop, sell, possess for sale, offer for sale or otherwise make available ESS software for sale may also be subject to criminal sanctions.  The potential fines are as low as $10,000 (in addition to the AMPs penalties) and as high as $1,000,000 and/or imprisonment of up to 5 years or both.

These new AMPs penalties and criminal sanctions will take effect January 1, 2014.  Given the time before implementation, it may be prudent to spend money on an IT check-up (it will likely cost less than a first level AMP).

British Columbia Ministry of Finance Releases FIN 492 Certificate of Exemption - Production Machinery and Equipment

On March 20, 2013, the British Columbia Ministry of Finance released form FIN 492 "Certificate of Exemption - Production Machinery and Equipment". Either my computer download capabilities are a not working properly or there is a problem with the form (or it is my eyes after too much reading of PST legislation).

The Certificate of Exemption is a purchase exemption certificate.  Businesses that may purchase exempt manufacturing and production machinery and equipment use this form when seeking a point of sale exemption or a blanket exemption and the vendor keeps the form on file. This purchase exemption certificate is different than the FIN 490 - Certificate of Exemption - General, which is to be used by businesses to purchase goods that are exempt for the purposes of resale or incorporation into goods for resale (or any other reason except it is production machinery and equipment).  I am not sure why there is the need for two separate forms (and why a few more potential boxes to check cannot be added to one form).  The two separate forms may give rise to confusion and assessment risk for vendors for having the wrong form completed.

Documentation of exempt of exempt transactions used to be a hot audit topic under the old PST regimes in British Columbia and Ontario.  Auditors would ask for the documentation and the vendor under audit would look or seek forms from their buyers/customers.  In many cases, it was not possible to satisfy the auditor and the vendor was assessed a penalty for failure to collect PST.  I recommend that businesses keep a folder of the forms for buyers to complete (please note that individual names are scrutinized as opposed to business names and forms without a PST number of the buyer are also scrutinzed by auditors).  I recommend that all completed forms be scanned and saved in computerized records - this was an electronic folder can be used as a back-up (do not throw out the completed forms because an auditor may demand the original).

While Notices of Objection May Be A "DIY" Procedure, You Must Follow The Law

The Excise Tax Act (Canada) has been drafted to allow taxpayers who have been assessed GST/HST to file a notice of objection.  There is nothing in Section 301 of the Excise Tax Act that requires a taxpayer to hire a professional to assist with the filing of a notice of objection.  For this reason, I call it a "Do-It-Yourself" procedure.

However, there have been times when the taxpayer does not follow the instructions in the legislation (usually because the taxpayer did not obtain a copy of the legislative provisions, did not know where to obtain  the legislative provisions or did not understand the legislative provisions). When a taxpayer does not file a notice of objection in the prescribed form and providing the required information, the Tax Court may not be able to help the taxpayer overturn the assessment.

I can help with showing you where to find the prescribed form.  Use a GST Form 189 to file a Notice of Objection. Check to see if the form has been updated (I can post a form, but after my post the document can change).

I can help you find the instructions. GST Memorandum 31 "Objections and Appeals" contains useful information.

Subsection 301(1) of the Excise Tax Act requires:

Any person who has been assessed and who objects to the assessment may, within ninety days after the day notice of the assessment is sent to the person, file with the Minister a notice of objection in the prescribed form and manner setting out the reasons for the objection and all relevant facts.

What this means is that a taxpayer has 90 days to file the notice of objection.  Please put this date in your calendar and circle it is red.  Also, put a reminder in your calendar a few weeks before the deadline to make sure you have the notice of objection on the front burner and under control.

The law requires that the taxpayer set out the reasons for the objection and all relevant facts.  You cannot merely send a letter stating that you object to the CRA's assessment.

If the taxpayer is a "specified person", the amount of information and detail required by subsection 301(1.1) of the Excise Tax Act is greater.

In a number of cases, the Tax Court has determined that taxpayers have not filed a valid notice of objection.  One of those cases was an income tax case - 870 Holdings Ltd. v Her Majesty the Queen, .  In this case the taxpayer wrote a letter to the CRA requesting more time to provide requested information.  This letter did not constitute a notice of objection. The Federal Court of Appeal agreed - 2003 FCA 460.

In Suganthi Natarajan v. Her Majesty the Queen, the Tax Court also determined it court not hear an appeal because a valid notice of objection.

The notice of objection is am important document in the tax dispute settlement process.  it is the first step in resolving a disagreement with the CRA. The taxpayer files it with the tax authorities and eventually either the taxpayer of the Crown provides a copy to the Tax Court of Canada.  While the Tax Court of Canada understands that the "DIY" appellant may not be perfect in all that they write, the judge needs to see that the taxpayer took the appropriate steps.  It the document is well written, it may leave a positive impression.

At LexSage, we would be please to assist.  Please call 416-307-4168.

The CRA Must Prove That A Notice Of Assessment Was Sent

It is a basic concept - The Canada Revenue Agency (CRA)  (on behalf of the Minister) must send a taxpayer a notice of assessment for the assessment to be valid and, therefore, cause a tax debt to be owed to the Crown.  In the recent case of Siow v. The Queen, the Tax Court of Canada found as a fact the CRA had not issued a notice of assessment to the corporation within the 4 year limitation period. 

The facts of this case are not unique.  The CRA is going through past records and collections officers are charged with the task of collecting recorded tax debts.  Due to the passage of time, records on the part of the CRA and the taxpayer are not available.  In the Siow case, the CRA could not produce a notice of assessment for the Tax Court of Canada.  Due to the fact that no notice of assessment could be produced, the Tax Court had no option but to conclude that a notice of assessment had not been issued with respect to the original debt against the corporation.  The Court wrote:

The Respondent, on the other hand, produced no evidence or copies of any of the three Notices of Assessment it refers to in its Reply above, let alone any evidence of their mailing or even electronic summaries of the assessments to show they had even been issued.

The Court later stated:

In the case at hand, the Minister pleaded in his assumptions that in fact three assessments were sent and cannot produce even one, let alone prove any of them were mailed.

The CRA tried to use circumstantial evidence to show that an assessment had been issued.  The CRA filed with the Court a letter from the CRA to the corporation's accountants concerning the alleged assessments.  The Court could not rely on the letter from the CRA as proof of the assessments.  The Court stated:

There was no dispute that a Notice of Assessment is deemed to have been sent when mailed, not received. However, I have some difficulty with the Respondent’s arguments that the Court should accept that the Notices of Assessment were issued simply because of the cursory wording of [...a letter] or because the Appellant and his accountant held discussions with the CRA.

The CRA had asked the Court of blindly accept that the CRA had mailed the notices of assessments to the corporation.  However, the Court could not and stated:

I find the Respondent’s suggestion that the passage of time would make it difficult to prove the Notices of Assessment were mailed to be unacceptable considering the ease with which the Act allows a Minister to submit evidence of such procedure by affidavit evidence ‑ without the official in charge of mailing even attending to testify.

The Court found in favour of the appellant (on this point) because the CRA had not met its burden of showing that the notices of assessment had been issued and sent to the corporation.  Usually, the burden of proof in a tax case is with the appellant. However, where an allegation of fact is challenged by an assessed taxpayer, the burden can shift to the CRA.  The Court held:

I find that the Minister has not satisfied its onus of proving any of the three assessments were mailed and hence, four years have, regardless of which quarterly return is in issue, expired from the date such returns have been filed and the Minister is statute barred from assessing the Corporation for any of the reporting periods within the Assessment Period.

The Court ultimately found in favour of the CRA with respect to the director's liability provisions.  This will be discussed in tomorrow's post.