Saturday, October 6, 2007

Current Trends in Audit Procedures

There are different sources for determining current and expected trends in the Canada Revenue Agency’s (the “CRA’s”) audit procedures in respect of taxpayers. One of these sources is the annual report published by the Auditor General of Canada. In this case, the CRA is the one being audited: the Auditor General examines CRA’s practices and points out the CRA’s foibles, failures and successes.

While many taxpayers will relish the poetic justice of the CRA being audited, the Auditor General usually ends up recommending that the CRA tighten specific procedures when auditing taxpayers. So any mud that gets in the eye of the CRA inevitably finds its way into the eyes of taxpayers. For example, the CRA Voluntary Disclosure (tax amnesty) Program has changed as a result of remarks made the by Auditor General. The program is now much narrower in its focus.

Each year, the Auditor General turns her attention on a different part of the CRA. In 2005, it was the CRA’s Audit Division. In 2006, it was the collection of unpaid taxes. Most recently, the Auditor General examined the way in which the CRA reviews international transactions. While the CRA always receives good marks in certain areas, the attention inevitably focuses on the shortcomings identified by the Auditor General.

Based on the comments in the most recent Auditor General reports, we can expect to see the following trends in audits over the next few years.

  1. Increased use of third party information to verify personal income levels. 
  2. More audits of Canadian trusts. 
  3. Increased scrutiny of transactions involving non-residents.
  4. Greater focus on international transactions.
  5. A revamping of the collections program to ensure a higher level of collection.
In any dispute with the CRA, the onus of proof is always on the taxpayer. Accordingly, it is best to anticipate audits when setting up structures and implementing transactions. In order to be able to show an auditor that all was done property and in accordance with the law, it is important to ensure that transactions are properly thought out, properly implemented and properly documented. For example, trust distributions should be supported by a written trustee resolution. Dividend declarations should be supported by a director resolution.

It will be interesting to see how the CRA adopts the Auditor General’s comments in the coming years and what impact this will have on taxpayers. No doubt, the impact will mean more scrutiny and not less.

-- Devinder K. Sidhu

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The above article provides general commentary of an educational nature. It does not constitute advice for any specific person or any specific set of circumstances. Because circumstances vary, readers should consult professional advisers in order to obtain advice that is applicable to their specific circumstances.