After suspending most audits for the early part of 2020 due to the COVID-19 pandemic, the Canada Revenue Agency (the “CRA”) has been slowly but steadily gearing up its audit activity through 2020 and the first half of 2021. This is expected to continue through the second half of 2022 as the CRA resumes a regular level of audit activity.
While the CRA always has a number of different audit priorities on the go simultaneously, Budget 2021 specifically announced an additional $304.1 million in funding for the CRA spread over five years for, among other things, GST/HST audits of large corporations.
This announcement seems, at least in part, designed to reverse the decline in new corporate audits which recently made headlines when it was reported that new large corporation audits dropped by over 30% from 2016/2017 (6,281 new audits) to 2019/2020 (4,257 new audits).
All of this is expected to result, at least in part, in the hiring/promotion of additional GST/HST auditors to staff the increase in GST/HST audits of large corporations.
What do Large Corporations Have to Worry About?
Given the complexity of the GST/HST, non-compliance can take a wide variety for forms. The vast majority of non-compliance is inadvertent and stems from well-intentioned people within the corporation who simply do not understand the intricacies of the GST/HST legislation.
Large corporations typically face a number of common GST/HST issues including:
- Input Tax Credit (“ITC”) Denials – This is considered low-hanging fruit for CRA Auditors. The CRA asks for a printout of your ITCs, picks a sample of transactions (some randomly, some based on things that stand out as potential issues) and then they ask for a supporting documentation. If the company doesn’t have 100% of the information required, the auditor will deny the ITCs for those transactions, and — alarmingly — may also deny a portion of all remaining ITCs in the period based on a calculated “error factor”. Given the high volume of transactions, even a small error factor can have a significant financial impact.
- Lack of Communication with Tax Advisors – Oftentimes transactions are run by different divisions within the corporation – marketing, finance, real estate, etc. but conducted without advice from the tax department (particularly true when it comes to GST/HST). Without this tax advice, corporations frequently run into issues where they conduct a transaction for some valid business reason, but it results in unintended tax consequences. It is important to keep your tax advisors “in the loop” when new transactions are proposed so that they can consider the potential tax implications and advise you accordingly. When the left hand does not know what the right hand is doing, assessments can be the ultimate result.
- Ultra-Aggressive Tax Positions – The CRA has never had as much access to high quality information on corporate taxpayers as it does now. It uses that information to create risk profiles that help it conduct targeted audits of high risk corporations. Recent changes to the Income Tax Act also require certain specified corporations (with at least $50 million in assets) provide the CRA with a report of their “uncertain tax positions” if they are reflected in the audited financial statements of the corporation or any related corporation. This will be a new source information available to the CRA which we anticipate they will use to initiate audits of large corporations and turn what they learn into broader audit priorities.
If the CRA commences an audit of your corporation, it is best to obtain legal representation as soon as possible to protect your rights during the audit when dealing with the CRA auditor. This is particularly important with large corporation audits which last substantially longer and can involve significantly more complex issues than audits of small and medium enterprises.