The harmonization of the GST in Ontario and British Columbia brought about significant changes in the way the Canada Revenue Agency (CRA) administers the GST/HST. In its efforts to reduce the compliance burden of audit activities on businesses, the CRA discontinued the use of combined audits for businesses with annual sales of less than $4 million (which covered both income tax and GST/HST), and moved toward having dedicated GST/HST auditors. Moving forward, businesses will be subject either to an income tax audit or a GST/HST audit.
Pre-assessment reviews
The biggest change is the expanded and increased use of pre-assessment reviews. Pre-assessment reviews occur when GST/HST returns are subject to an impartial electronic review to identify potential errors or indications of non-compliance prior to assessment.
Businesses receive a letter from the CRA asking them to explain what their revenue sources are, to provide a listing of the input tax credits claimed, and to provide copies of invoices for the five largest input tax credits. Such requests usually require a response within 14 business days. Often, the returns identified through this pre-assessment review process are referred for further review, and in some cases audits, prior to assessments.
Once the pre-assessment process is complete, a notice of assessment is issued to the registrant either confirming the return is assessed as filed or identifying the adjustments made to the taxes paid/refunded. In Ontario, the recapture of input tax credits has been an area of particular concern. Businesses with significant refunds that are out of the ordinary are likely to be reviewed.
Audits
What causes a GST/HST audit? Most audits result from an assessment of risk of non-compliance. The CRA has a complex computer system that allows it to select returns to be audited by sorting them into various groups. There are four common ways the CRA selects files for audit:
- Computer-generated lists - The CRA often compares selected financial information for current and previous years of taxpayers engaged in similar businesses or occupations, in order to select specific returns for audit.
- Audit projects - The CRA often tests the compliance of a particular group of taxpayers, particularly if there is reason to believe that there is significant non-compliance within a group.
- Leads - Leads for audits often are the result of other audits or investigations, as well as information from outside sources.
- Secondary files - A business may be selected for audit if it is associated with another file that is being reviewed for audit, since the CRA often finds it convenient to look at all the records at the same time.
Should the CRA find errors in your GST/HST returns, you need not necessarily be concerned that it will result in a full income tax audit. Non-compliance in one tax area does not necessarily mean there is non-compliance in the other.
What to expect from an audit
CRA audits typically begin with an audit proposal letter setting out the scope of the audit, the period being audited, the timing of the audit, and what information the auditor will need in order to perform the review. Depending on the complexity of your computer system, the CRA often sends an information technology officer out to obtain the data electronically in advance of the audit so the audit can be conducted more efficiently.
The audit process itself begins with a meeting at your premises between the auditor and someone from the organization. This is usually the business owner and/or an internal accounting representative. We recommend also including your external accountant. The auditor often will ask many questions regarding the business in an effort to understand how income is earned and what types of expenses are incurred, and to assist in identifying potential risk areas for non-compliance.
The audited organization has the responsibility to keep adequate books and records, and to make those books and records, and any supporting documents, available in both paper and electronic form.
The organization's representative must also be available to provide explanations to the auditor's questions. The days of thinking you could give an auditor a shoebox of receipts and let him or her sort through it no longer exist. Such an approach likely will result in a denial of your input tax credits and a negative audit result.
At this point in the process, the auditor will review your records and related documents, identify issues, and discuss those issues with you. The auditor will then prepare an audit proposal letter outlining any proposed adjustments and the rationale for them. You will then have 30 days to respond to the proposal with further details, additional supporting documentation, and your own proposals for resolving any outstanding issues.
After the 30 days, the Notice of Assessment or Notice of Reassessment will be issued to adjust your return. If you still disagree with your assessment or reassessment, you will have 90 days to file a notice of objection.
Payment
GST/HST is considered to be money held in trust, and so any assessment of tax is due when assessed. If the adjustment results in additional tax owing, there likely will be interest charges as well. In contrast to the corporate tax structure, GST/HST must be paid in full even while an appeal is underway. This requirement can create an onerous cash flow burden for an organization. It is thus important to deal with any issues in advance of the assessment being issued.
Pre-assessment reviews and audits can be stressful for any organization. They take time and resources away from the business focus and can result in costly adjustments. It is important to obtain tax advice whenever you deal with the CRA. Be sure to contact your Collins Barrow adviser for assistance in advance of an audit so we can help to minimize the negative tax consequences.
Rosa Maria Iuliano, CA, is a Tax Partner in the Ottawa office of Collins Barrow
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