AUDIT WAIVERS: GENERALLY A BAD IDEA?
AGREEING TO WAIVING AN AUDIT LIMITATION PERIOD COMES WITH SEVERAL RISKS
Download a PDF copy of this Blog here.
When it comes to Tax Audits, most Tax Auditors — whether the federal Canada Revenue Agency (CRA) or its counterparts auditing for tobacco, fuel or other provincial compliance matters — are operating with one particular deadline in mind: a three or four-year limitation period governing what the Auditor can review and assess.
When Tax Audits are conducted late in that period, Tax Auditors will typically request Audit Waivers to provide themselves with additional time to complete their audits and issue assessments.
In this Tax Audits Series Report, we review what Audit Waivers are, how they operate, and why they can often be a very bad idea for the taxpayers and businesses agreeing to them.
The Mechanics of Audit Waivers
The limitations period under the the Excise Tax Act (ETA) is four years and under the Income Tax Act (ITA) it is three years for individuals and four years for most large businesses. Both Acts allow for waivers.
Under section 298(7) of the ETA, a registrant may waive the normal four-year reassessment deadline for a reporting period, thereby permitting the Minister to reassess further back into the past. Once filed, the waiver remains in effect until the registrant revokes it by filing a recovation notice in the prescribed form – although such a revocation takes effect six months after it is filed. During those six months, the Minister retains full authority to reassess the registrant in respect of the matters and timeline covered by the waiver.
The ITA operates similarly: under section 152(4), taxpayer may file a waiver in the prescribed form to indefinitely extend the normal reassessment period for a particular taxation year. As with the ETA, the taxpayer must then file a formal Notice of Revocation in order to revoke the waiver, which also takes effect six months after filing.
Because of the six-month delay between filing a revocation and its taking effect, some taxpayers issue a waiver but immediately file a revocation notice, in effect to limit their waiver to just six months.
The Implications of Audit Waivers
At its core, an Audit waiver effectively gives the Auditor licence to spend additional time reviewing the taxpayer’s affairs in search of non-compliance, and additional time to issue a reassessment. The financial risk to the taxpayer is obvious. Additionally, due to the strict filing requirements as well as the six-month delay between filing and legal validity of any waiver, Audit waivers tend to be difficult to revoke as a practical matter.
Because of these obvious downsides for a taxpayer, in many cases Auditors will threaten to issue estimated assessments if audit waivers are not provided. However, few taxpayers understand that estimated assessments are often a preferable option to providing an explicit audit waiver, as estimated assessments are frequently easier to challenge and overturn on objection or appeal.
Waiver, which extends the deadline to complete an Audit.
Taxpayers should engage Experienced Tax Counsel
before issuing any Audit waiver!
Takeaways
A favourite Tax Auditor tactic when getting close to a limitations period is to ask for an Audit Waiver. While a seemingly innocuous request, once issued, Audit Waivers are not easily undone, and can lead to a series of hardships over the period of the Audit Waiver.
Before GST registrants or other taxpayers issue Audit Waivers, they should seek legal advice from Experienced Tax Counsel.
For help with Tax Audit matters, please click here.
For an updated Index of our Tax Audits Series Reports, click here .