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Mid-October 2020 BYB: TAXES Post-pandemic
INVESTMENT EXECUTIVE
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Canada Emergency Wage Subsidy audits draw ire
After the Canada Revenue Agency (CRA) resumed audits in May, it focused on those that are significant, near completion or time-sensitive. Now, the agency wants to widen the scope of its auditing as
it resumes full activity. The CRA also began the first phase of its Canada Emergency Wage Subsidy (CEWS) post-payment audit program.
Aaron Schechter, taxation partner at Crowe Soberman LLP in Toronto, says the initial audit requests regard- ing CEWS are “daunting.”
In September, Schechter posted on LinkedIn a copy of the CRA’s nine-page audit request template. The CRA docu- ment asks for details such as corporate minute books, organizational charts, two years of bank statements and em- ployment contracts. The document is dated Sept. 11 and requested a large volume of information to be submitted by Sept. 28.
“In certain circumstances, the pro- fessional fees [incurred in] respond- ing to the questionnaire may exceed the benefit the taxpayer received under the CEWS,” Schechter says.
Peter Weissman, partner at
Cadesky and Associates LLP in Toronto, agrees that CEWS audit re- quests are onerous for businesses. “[The audit document] is outrageously detailed, contains a number of items businesses were never told would be required and has some questions that ask for information that is seemingly not relevant,” he says.
In an email to Investment Executive, a CRA spokesperson states the audit template includes “a full list of poten- tial sources of information that may be relevant,” but that “auditors use their judgment and the list is tailored for each file.” Furthermore, the CRA is “seeking copies of information that should exist and would have been re- cently referenced in the preparation of the CEWS claim.”
The CRA also requires Canadian employers to provide additional in- formation for the 2020 tax year to “validate payments” made under the pandemic benefit programs, including the CEWS. Employers will be required to report employment and retroactive payments on T4 slips for defined per- iods under new information codes.
— KATIE KEIR; IE STAFF
tax audit hurdles
While the CRA has been flexible, tax professionals face challenges
l BY KATIE KEIR
it’s been a challenging year for
tax preparers working on audit cases.
In late March, the federal government put the Canada Revenue Agency’s (CRA) audit activities on pause, except in excep- tional circumstances. That halt was lifted in late May. At that time, the CRA stated in an email to Investment Executive that the agency was “slowly resuming” audit activities, with priority given to urgent
and high-dollar cases.
Since then, progress has been slow,
but there are signs that the CRA’s auditing activity is ramping up.
“It’s not that the CRA has been inaccessible, but there have been delays,” says Nicole Lynx, senior manager, tax con- troversy, at BDO Canada LLP in Toronto. Heading into September, Lynx still was waiting to hear back from many CRA auditors. She says she often had to initi- ate conversations with auditors as they adjusted to working from home.
By mid-September, Lynx says the CRA was more responsive. “Particularly, I have encountered an uptick in audits being cat- egorized as low-risk and closed without change, as well as appeals being resolved more expeditiously,” she says.
Usually, major CRA audits are con- ducted in person, with an auditor either visiting someone’s home or office, or requiring that the person being audited deliver documents to a CRA location. When documents were sent electronic- ally, the agency always requested that its
secure online tools be used because email is considered too risky.
Cyber-risk is the main reason for the CRA’s insistence on secure document transfer, Lynx says. “In order for the CRA to correspond over email or [by] cellphone, [the agency] requires verbal or written con- sent from the taxpayer acknowledging that such communications could be inter- cepted by a third party,” she says.
In September, CRA spokespeople stated that while email communication is available and staff have been trained in sending secure electronic communica- tions, the CRA still prefers to use its online services or regular mail for exchanging sensitive information.
Since the CRA updated its procedures, Lynx has been using the agency’s secure online client portals to upload simple let- ters and make requests.
Marc Lebrun, the CRA’s deputy assist- ant commissioner, added in a separate email that a small portion of the CRA’s workforce isn’t able to work remotely and “additional steps to navigate physical risks will be taken” if a taxpayer requires face- to-face meetings with an auditor.
The CRA states that it will adjust its processes “throughout the fall and win- ter,” adding that the agency is open to providing flexibility on deadlines for submitting supporting documentation. The agency also states that it will “mon- itor client service pressures, as well as emerging compliance risks, to confirm or adjust national start dates of our com- pliance programs.”
Peter Weissman, partner at Cadesky and Associates LLP in Toronto, isn’t opti- mistic about the road ahead. “The audit and appeal process was backlogged before Covid-19 came in — for a number of years,” he says. “But now, with all of the additional audit activity that’s going to go on with the [Canada Emergency Wage Subsidy], for
example, the CRA is going to have the same resources but a lot more to audit.”
Lebrun says the CRA has not hired extra employees so far. Instead, “existing resour- ces and expertise” are being deployed and trained in matters such as “legislation, pay- roll validation, audit techniques and sys- tems used to conduct reviews/audits.”
Weissman noted in late August that some of his clients with “pretty significant appeals on the go” had them put on hold earlier in the year. Communicating with auditors historically has been challenging under the best of circumstances, he says, with “very little back and forth.”
Lynx, whose clients typically are small and medium-sized businesses, says that when an audit is ongoing, a com- pany must set aside any funds it might owe to be applied to penalties and back taxes. Delaying progress on large audits
“Before, the court saw itself as more of an umpire who left it up to the parties to try to settle cases or get them to court. And over the past several years, I think the court’s focused increasingly on mov- ing matters along expeditiously,” says Novoselac. “I think the current steps that are being taken should be viewed in that broader perspective.”
To apply for the fast-track settlement procedure, the involved parties must file a joint written request with the TCC that meets several criteria. For example, the request must be no longer than 12 pages and outline the amount at issue, the disputed facts, key issues to be discussed during the settlement conference, any settlement offers made to date, the appeal’s current stage of discovery and the parties’ preferred venue for a settlement conference.
One advantage of a fast-track settlement is that parties whose hearings were can- celled during the lockdown can apply for a settlement conference and maintain their place in the hearing queue — even if they decide against the suggested settlement.
“[The fast-track settlement process] is a little different, but it is parallel to what existed before,” says Pooja Mihailovich, partner, taxation, with Toronto-based Osler Hoskin and Harcourt LLP. “[The TCC just] reduced the number of hoops you have to get through to get there.”
One hurdle to having a fast-track settlement conference is that both parties must agree to it; for a regular settlement
“essentially [ties] up capital that could be used in other areas of business,” Lynx says. Delayed processes also can lead to increased audit expenses as business owners try to keep track of relevant docu- mentation and transactions.
If your client is stressed about an audit, Weissman suggests pushing for updates from the CRA: “There’s sometimes been reluctance from an auditor to get involved in person-to-person dialogue, and docu- menting [your efforts] will help if you have to go to appeal.”
Lynx gives the CRA credit for being “very pro-taxpayer through all this,” but advises you and your clients to keep detailed notes during an audit. “The most difficult thing for someone working in tax controversy is when there’s limited documentation or you’re brought in too late in the audit pro- cess,” she says. IE
conference, only one party need apply. “The issue with the fast-track settle- ment is that it takes two hands to clap,” says Jehad Haymour, tax litigation part-
ner with Bennett Jones LLP in Calgary. Participants in TCC proceedings may need to hold their applause if they believe these moves signal a fully digital future. For hearings in which witnesses are required, proceedings must occur in court
— something some lawyers agree with. “If you do it remotely, you sterilize the process a little bit and perhaps take away from [the trial’s] effectiveness,” says Haymour. Part of telling a story in court is reacting to body language from the judge, the witnesses and the other side, he says. “These are nuances you get in the in- person hearing that you won’t necessarily
get in a remote hearing.”
As well, 60% of appeals heard by the
TCC involve appellants who represent themselves (or are represented by an agent other than a lawyer, in the case of an informal procedure). These appellants may not have easy access to the internet or feel comfortable in a virtual hearing. There also is something to be said for people hav- ing “their day in court,” argues Haymour.
Still, the move toward digitization and the continued encouragement for parties to reach settlements are part of the TCC’s modernization — and its preparation for future pandemics.
“I don’t think it can ever really be busi- ness as usual [again],” says Mihailovich. IE
Court catches up on back taxes
The Tax Court of Canada has implemented several tactics for clearing delayed cases, but don’t expect a fully virtual courtroom
l BY FIONA COLLIE
the tax court of canada (tcc) is
trying to pull itself out of a backlog of cases following the Covid-19 lockdown by digit- izing documents for written court proced- ures and fast-tracking settlement hearings, among other measures.
“The court is absolutely adamant about wanting to clear this backlog,” says Stevan Novoselac, partner and Canadian tax dis- pute resolution team leader with Gowling WLG (Canada) LLP in Toronto. “Or, as Chief Justice Rossiter put it: ‘to get back to business.’”
The TCC, like much of the country, went into lockdown in mid-March. The court was
not deemed an essential service and was not equipped to either work remotely or enforce social-distancing measures. As a result, the TCC cancelled approximately 1,000 hear- ings and lost about 200 sitting weeks.
The TCC reopened in July, but it faces many hurdles before it can be fully oper- ational. Measures to clear out the backlog include allowing motions and procedural issues to be handled in writing or during conference calls; opening court rooms in major cities only; digitizing files; and ordering scheduled hearings to take pre- cedence over planned vacations by court staff, justices and legal representatives.
The TCC also created a fast-track settle- ment program for “general procedure” appeals. Typically, all appeals are heard as a general procedure unless an appel- lant qualifies for or requests an informal procedure, which is available for cases in which the disputed taxes and penalties do not exceed $25,000 or the disputed loss is no more than $50,000.
The new program, part of a wider trend developing in the court, encourages par- ties to settle cases before they reach trial.