Principal Issues: 1. Can the CRA provide comments on its audit methods for individuals and shareholders, as well as when and for what reason bank and credit card statements are requested in the course of tax audits? 2.What procedures are in place for individuals to contest information requests in the context of indirect audits?
Position: General comments provided.
FEDERAL TAX ROUNDTABLE OCTOBER 7, 2020
APFF CONFERENCE 2020
2. Alternative methods of verification and presence of evidence
Subsection 152(7) provides that the CRA is not bound by a return or information supplied by a taxpayer. The CRA may therefore otherwise determine the tax payable by a taxpayer.
This opens the door to indirect or alternative methods of verification.
In Dezura v. Minister of National Revenue (footnote 1), the Exchequer Court made the following point:
While the Minister’s power under section 47 is not expressly limited, it is not unlimited in the sense that he may do as he pleases. It is quite clear, I think, that the power must be exercised within the Act and subject to it.
[…]
If the taxpayer makes no return or gives incorrect information either in his return or otherwise he can have no just cause for complaint on the ground that the Minister has determined the amount of tax he ought to pay provided he has a right of appeal therefrom and is given an opportunity of showing that the amount determined by the Minister is incorrect in fact. Nor need the taxpayer who has made a true return have any fear of the Minister’s power if he has a right of appeal.
In recent audits of individuals or corporations, we have found that auditors occasionally request bank and credit card statements of individuals or corporation shareholders.
The taxpayer who refuses to provide the information and the taxpayer’s financial institution could then receive a peremptory request. In addition, a note indicating that there has been a lack of cooperation on the part of the taxpayer could be inserted in the audit file.
There is nothing in the Income Tax Act that requires an individual to keep track of their bank accounts and credit card statements. The analysis of those statements may generate significant discrepancies in the reconciliation of multiple deposits that may arise from various sources that are not taxable income, but rather the movement of funds by the taxpayer between the taxpayer’s bank accounts and/or those of family members, an insurance reimbursement, the sale of an item on Kijiji, the reimbursement of an expense, etc.
Requiring explanations from the taxpayer regarding the movement of the taxpayer’s funds is an excessively heavy burden.
Questions to the CRA
a) Can the CRA clarify its approach to auditing individuals and shareholders and where and why bank and credit card statements are required?
b) Can the CRA indicate what resources are in place for the individual to challenge a request for information in indirect examinations?
CRA response to question 2(a)
In response to concerns raised about requests for personal banking information in the course of our audits, the CRA would like to take this opportunity to clarify its powers and obligations.
When selecting small businesses for audit, the CRA seeks assurance that all income is reported on their tax returns. In this type of business, internal controls can sometimes be weak and segregation of duties may be lacking. The use of indirect reviews in those situations is a generally accepted means of obtaining assurance that all income is reported.
Indirect reviews undertaken by the CRA include bank deposit analyses, approximate net worth calculations, and source and application of funds analyses. In order to conduct these reviews and effectively assess whether all income is reported, CRA auditors must obtain complete financial information from the individual or corporate taxpayers whose businesses are being audited.
In the case of a sole proprietorship or a corporation with one or few shareholders, there may be a commingling of business and personal funds. Therefore, when conducting indirect reviews, auditors also request personal financial information from other individuals including the spouse or common-law partner of the sole proprietor, shareholder or any person who contributes financially to the household income and expenses or lives in the same residence as the sole proprietor or shareholder.
The authority to request the personal bank statements of the shareholder and other persons named above is set out in, inter alia, subsection 231.1(1). That provision allows the CRA to inspect, audit or examine the books and records of other persons to the extent that information in those books or records could relate to information that is or should be in the books or records of the taxpayer who is the subject of the inspection, audit or examination.
All personal information of the taxpayer and these other persons is requested at the beginning of the audit, allowing the auditors to confirm at the outset that income from business operations through the bank accounts of the owner, shareholder or their family members is attributed to the business and reported.
Please note that the privacy and confidentiality of taxpayer information is protected and administered under the strict confidentiality provisions of section 241 and that the CRA is also obligated to protect personal information under the provisions of the Privacy Act. Rest assured that the CRA respects these obligations in the use of all information it obtains from taxpayers in the course of its audits.
For more information on the CRA's policy on obtaining information from taxpayers, please refer to AD-19-02R Obtaining Information for Audit Purposes available online at:
CRA response to question 2(b)
As noted in the answer to question (a), the CRA may generally inspect, audit or examine the books and records of a taxpayer or any other person to the extent that the information contained therein may be relevant to information that is or should be contained in the books or records of the taxpayer concerned. That practice is based on the reasonableness of the request for information and not on clear indicators of unreported income.
Subsections 231.1(1) and 231.2(1), under which the CRA generally requests information from taxpayers or third parties, have similar wording. Indeed, subsection 231.1(1) begins with "[a]n authorized person may" and subsection 231.2(1) states that "the Minister may". Those words imply the exercise of discretion by the Minister of National Revenue in the administration of the Income Tax Act.
Under the fourth right of the Taxpayer Bill of Rights (https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/rc17/taxpayer-bill-rights-guide-understanding-your-rights-a-taxpayer.html), a taxpayer may, inter alia, request that the CRA conduct a formal review of a decision made pursuant to the discretionary authority provided in subsections 231.1(1) and 231.2(1). If the taxpayer disagrees with the formal review decision, the taxpayer may seek judicial review before the appropriate court.
Jean-Bernard Dion
(514) 283-1718
October 7, 2020
2020-085214
Response prepared in collaboration with:
Kendall Miller, Medium Business Audit Division
Compliance Programs Branch
FOOTNOTES
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 [1947] C.T.C. 375
PROTECTED B