The Canada Revenue Agency has now published a set of answers to questions and concerns about the audit process presented to it by the Tax Executives Institute late last year (see our earlier blog post).
One of the highlights is the set of answers by the CRA to a series of questions about its new risk-based audit process. The questions and answers on that subject are as follows:
Question 12 – Risk-based Audit Process
In 2011 CRA announced it was instituting a risk-based approach to audits whereby CRA would meet with senior representatives of the taxpayer to:
- Explain the redefined risk-based approach to large business compliance and how the approach affects taxpayers;
- Share CRA's findings and observations noted during the taxpayer's risk assessment; and
- Understand how the taxpayer manages tax risk at its highest governance levels.
With the first round of meetings with taxpayers complete, TEI has the following questions in respect of the approach:
a) Would CRA share its general observations, findings, trends, or conclusions with respect to the state of tax-risk governance?
Response by CRA:
The Approach to Large Business Compliance is being phased in over a five-year period commencing in 2010-11. During this period, CRA officials conduct meetings with Large Business enterprises' senior executives to discuss tax compliance and risk of non-compliance associated with their business activities, governance regime, internal controls, and inherent and behavioral risk factors affecting their risk segmentation. At this point in time, it is still premature to draw general conclusions on the state of tax-risk governance. We have noted that there are taxpayers with no formal method of identifying and responding to corporate tax risk. These taxpayers are informed that this lack of tax risk governance, in the absence of other mitigating controls, will weigh negatively on their overall risk rating with the CRA.
b) In the interests of transparency, will CRA consider publishing a document outlining and discussing its review and risk-assessment process?
Response by CRA:
The CRA is of the view that the success of the Approach to Large Business Compliance is based on a well-informed, transparent tri-partite relationship. Providing further information on the risk assessment process in a published document would be in the best interests of all parties. As this initiative unfolds, the CRA will be in a better position to further communicate the risk-assessment process.
c) Has the first round of meetings with taxpayers led CRA to consider changes to its risk-assessment process and will it publicly announce the changes? Will affected taxpayers be apprised of changes to the scope of the risk-management approach that apply to their cases?
Response by CRA:
There have been no major changes in the risk assessment process. As expected, we are fine-tuning our risk assessment process and exploring ways to leverage technology in our drive to a more automated state and enhanced accuracy and efficiency.
d) Will CRA review the risk assessment with the affected taxpayer, including discussing the criteria and factors used to determine a taxpayer's risk rating? If a taxpayer disagrees with its risk-assessment rating, what steps can it take to address its concerns?
Response by CRA:
During the face-to-face meetings, the taxpayer is informed of their risk rating. At that time, they will be informed of why they have attained this rating and what can be done to reduce the rating in the future. It is, however, not a debating forum where taxpayers can "negotiate" a better rating.
e) Assuming a taxpayer's risk profile can change over time, will CRA revisit its risk-assessment ratings on a regular basis? If so, how often will the assessment be revised? Will CRA meet again with the taxpayer's senior executives to review the revised rating?
Response by CRA:
Each taxpayer is risk assessed on a yearly basis based on the latest available information. Currently, as for the meetings, CRA officials are meeting with each Large Business taxpayer and discussing their individual risk rating over the 5-year phase-in period. Once this round of meetings is completed, CRA will consider revisiting taxpayers to review their rating.
f) Can CRA provide any details about the factors affecting a taxpayer's risk rating?
Response by CRA:
The CRA's Approach to Large Business Compliance (ALBC) discloses the criteria used in risk evaluating all taxpayers. The large business population is being risk assessed using several techniques, such as:
- Undertaking a historical analysis of audit results and a corresponding analysis of behavioural patterns;
- Examining every large business taxpayer in their TSOs and assessing their risk based on analysis and local knowledge;
- Conducting issue-based risk assessment to determine whether taxpayers are participating in tax planning schemes;
Additionally, consideration is being given to a number of risk factors, such as:
- Audit history;
- Industry sector issues;
- Unusual and/or complex transactions;
- Corporate structure;
- Major acquisitions and disposals;
- International transactions;
- Corporate governance;
- Participation in aggressive tax planning; and
- Openness and transparency.
These factors will vary by taxpayer and the taxpayers will be advised as to the factors considered in their risk assessment when the ALBC approach is discussed, in the face to face meeting that the CRA will hold with them. All factors are considered collectively in arriving a global risk rating for the entity.
g) Will CRA inform other tax jurisdictions (provincial or foreign) of its findings in respect of a taxpayer's risk rating?
Response by CRA:
CRA has not shared any information related to any taxpayer's risk rating with any other tax jurisdiction. In the future, any request made by another tax jurisdiction will be reviewed by the CRA on a case by case basis, while respecting the Provision of Information laws outlined in section 241 of the Income Tax Act and the relevant international exchange of information protocols.
h) What guidance has been provided to the TSOs to ensure that the objectives of the new audit approach are applied consistently by all the TSOs?
Response by CRA:
Given the prominence of risk assessment and the impact of risk rating on the design and implementation of the Approach to Large Business Compliance, a national risk assessment calibration committee has been formed to supplement the regional calibration committees thus ensuring national and regional consistency.
In certain other responses, the CRA refers to its strategic plan entitled "Vision 2020″ (question 2) and issues around Scientific Research & Experimental Development (question 3). Both subjects will be discussed in detail at a breakfast seminar of the Toronto Centre CRA & Professionals Group at the Toronto Board of Trade to be held on Wednesday, February 6, 2013.
For more information, visit our Canadian Tax Litigation blog at www.canadiantaxlitigation.com
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