The agency’s HNW audit program is comprehensive and costly for clients, tax practitioners say.
As governments around the world continue to target aggressive tax avoidance and tax evasion, pressure on the wealthy to provide transparency about their finances increases. Canada is no exception: tax practitioners here say that the Canada Revenue Agency’s (CRA) audit program of high net-worth (HNW) individuals requires Canadians to provide extensive details about their tax and financial affairs.
“[The CRA is auditing] partnerships, joint ventures, any foreign affiliate – it’s like a laundry list of information that [the agency] is asking for,” says Deborah Graystone, private client service practice leader in Canada and leader of BDO Americas Private Client Service Practice with BDO Canada LLP in Vancouver.
Says Peter Weissman, partner with Cadesky and Associates LLP in Toronto: “It is a very intrusive and expensive process.”
The CRA’s Related Party Audit Program (RPAP) seeks to address non-compliance among wealthy individuals and families who control them, as well as these taxpayers’ associated entities. “The CRA approach is to audit the entire group vs auditing a single taxpayer,” the CRA stated in an email to Investment Executive in response to questions about the RPAP.
In recent years, the CRA has broadened the reach of the program (which, until April, was known as the Related Party Initiative), including removal of the requirement that an HNW individual have 25 or more related-party entities to fall under the program’s ambit.
The CRA states that there are 600 individual audits currently in progress under the RPAP, and that during the period of April 2014 to September 2019, more than 900 audits had been completed. Furthermore, the CRA has identified more than 1,100 HNW groups qualifying for audit under the RPAP.
Tax practitioners interviewed for this article say that in their experience, several CRA auditors – not just one – will be assigned to an individual RPAP file. After the CRA received additional resources as part of the 2016 federal budget, the agency states, it added 17 RPAP audit teams, for a total of more than 30 teams.
“If the CRA, historically, has always just looked at one auditor at one entity at a time, that would be very difficult to assess compliance overall,” says Curtis Davis, consultant in tax, retirement and estate planning services, retail markets, with Manulife Investment Management in Toronto. “Hence the more team-based or holistic approach that [the CRA] is taking.”
The CRA also is increasingly using data, leveraging internal as well as third-party sources, to identify and analyze RPAP groups, the agency states: “The CRA’s use of advanced data analysis techniques to mine the business intelligence [the CRA] has at its disposal has allowed the CRA to more precisely target non-compliance in a timely manner.”
The roots of the RPAP go back to the mid-aughts, when the CRA launched a pilot project to audit HNW individuals. However, the program became official and picked up momentum only after the global financial crisis of 2008-09 and the publication of a report by the OECD about the risk that tax avoidance and tax evasion posed to government revenue around the globe.
Over the past decade, the scrutiny on HNW individuals in Canada has increased, particularly after events such as the release of the so-called Panama Papers, which contained details of more than 200,000 offshore accounts.
The federal government has signed several agreements and treaties with other countries to exchange financial information about each other’s tax residents. In March 2018, the CRA changed the rules governing the voluntary disclosure program, making the agency much less forgiving if it deems a taxpayer’s non-compliance to be intentional.
“In virtually all of these cases, the CRA can make that claim [that the non-compliance was intentional],” says Robin MacKnight, partner with Wilson Vukelich LLP in Markham, Ont. “Whether it’s true or not, they can certainly make it.”
HNW clients who are the subject of an RPAP audit may well feel overwhelmed, but should seek out tax advice rather than try to deal with the CRA directly.
“My preference is for the CRA to come and interview the [tax] advisor first,” Graystone says. If the client does choose to meet with the CRA, the advisor should be present, she suggests.
Weissman agrees: “When someone is nervous, they talk a lot. They may have nothing to hide, but if they say something in the wrong way, the CRA may start chasing [down a path].”
Both Graystone and Weissman stress the importance of co-operating with the CRA. They recommend asking the agency to provide a list of questions, in writing, related to the audit. These steps may narrow the scope of the audit, reducing costs and hassle for your client.
“See what they’re really looking for, see if we can start with the bigger entities first, and then, if [the CRA] has other questions, we can expand [the client’s responses],” Graystone says.
Depending on circumstances, seeking legal advice for your client’s protection may be necessary, Weissman says: “When I do think something has not been done properly, I will sometimes get a lawyer involved to get solicitor/client privilege.”
In fact, engaging the services of a lawyer can help to make sure that your clients aren’t sending information to the CRA inappropriately, Graystone says: “More complex [financial] transactions are often subject to solicitor/client privilege, and then we definitely want to work with legal counsel to navigate that information request.”
Graystone says that dealing with an RPAP audit can take years, with information and questions going back and forth between the taxpayer and the CRA.
Weissman says that while advice and legal costs can vary depending on the structure of a client’s financial affairs, an RPAP audit could “easily cost between $75,000 and $100,000 before you get through the process, and that is before you need to appeal or go to court.”
However, with governments around the world trying to address the issue of income inequality – during Canada’s recent federal election campaign, several parties’ platforms addressed affordability – sympathy for the plight of HNW Canadians may be hard to find, Weissman says: “There isn’t any, and I get that.”
Weissman does point out to clients – facetiously, he says – that the cost of advisory fees in regard to a CRA audit are tax-deductible.
By: Rudy Mezzetta | Source : Investment Executive | November 1, 2019
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