Overview
Although often an audit is taxpayer specific, there are times that a taxpayer is informed that they are being audited as part of a CRA project. If your audit is part of a CRA project ,(a “Project”), in general terms it usually means that your tax planning (let’s call it a “Tax Strategy”) has been identified by the agency as being (i) undertaken by multiple taxpayers; and (ii) outside the spirit of Canadian tax law such that it should be challenged. Due to the strategy’s prevalence and questionable nature (In CRA’s eyes at least) the CRA will undertake to develop a coordinated plan for addressing it.
Once a Tax Strategy is identified, CRA will commonly send an internal communication to the relevant auditors to be on the lookout for it. The communication will explain the way the Tax Strategy works (i.e. the typical steps that taxpayers are taking to implement the strategy) in order for auditors to easily identify it. It will also explain why CRA thinks it should be challenged. In addition there will be an effort to streamline the individual audits that are part of the Project. First, CRA will produce sample forms and letters that can be issued by auditors as part of the audit process. For example the Agency will try to put together standard questions to be used as part of query letters and precedents for proposal letters.
CRA will also try to reduce as much red tape as possible in advance of the audit. In a typical, “non-Project” audit, each step requires multiple levels of approval. The auditor you deal with will have a manager or chief who overlooks their work to determine if further steps can or should be taken. That manager has someone on top of them who needs to provide approvals. In addition, certain assessing positions require approval from other departments, groups or committees. For example, applying the General Anti-Avoidance Rule (affectionately referred to as the “GAAR”) requires the approval of the GAAR Committee, a process that can be very lengthy. In contrast, with Projects, the majority of checks that an auditor would normally need to go through to move audits forward have been completed in advance.
Being audited as part of a Project has pros and cons:
- One clear con is that if you’ve been found to be part of one, your likelihood of reassessment increases as the CRA has already determined your planning should be challenged. Further, the speed at which you receive that reassessment is also likely increased given that much of the machinery is already in place to move the audit towards a reassessment.
- A clear pro is that you will be in good company. Projects can uncover hundreds to thousands of taxpayers who have undertaken the Tax Strategy. So there should be a lot of resources going into challenging CRA’s position. This means there will be lots of smart tax practitioners involved in the fight, raising the chances that good arguments will be made to justify the Tax Strategy as appropriate tax-planning for the purpose of the Income Tax Act.