CRA steps up oversight of the wealthy

The CRA declines to say just how many audits have been carried out so far under the RPI, citing confidentiality issues, although the pool of potential targets for the program appears to be quite small. According to a study published in May 2009 by the Organization for Economic Co-operation and Development examining the issue of tax compliance among HNWIs, only about 550 taxpayers meet the CRA’s definition of HNWIs.

Yet, the push to focus on this very small group comes for a number of reasons. At the top of the list is the fact that governments need the revenue now more than ever — and the wealthy represent a large share of overall tax revenue. So, there’s plenty of bang for the buck in pursuing them.

Affairs of HNWIs highly complex

But also, as the OECD report points out, these taxpayers pose particular problems for tax authorities everywhere. Not only are their financial affairs often highly complex, HNWIs also are best positioned to undertake aggressive tax planning. And whether they pay their fair share or not affects the overall integrity of the tax system.

The CRA says the RPI aims to: understand how the wealthy are structuring their affairs; uncover the sort of compliance issues that are common in this segment of the population; and develop an approach to ensure compliance by these taxpayers (including possible legislative reforms and changes to the CRA’s audit program).

Indeed, untangling the complexity that often accompanies the financial affairs of the very wealthy is at the heart of these efforts. In the past, the various entities (such as corporations, trusts and foundations) that make up a wealthy individual’s finances would likely have been examined as discrete units.

But, under the RPI, these reviews are carried out on a holistic basis. This integrated approach gives the CRA a better chance to catch questionable transactions, or a series of abusive transactions, that may not have been evident at the individual level but become more apparent when looking at the big picture.

By focusing on wealthy individuals, particularly those with complex affairs, the resulting audits are naturally more involved than traditional examinations — and, the CRA says, they typically take longer to complete than traditional audits.

CRA committed to fair treatment

For these larger, more complicated reviews, the CRA is employing its senior auditors. The agency says this reflects its commitment to fair and equitable treatment for all taxpayers. But facing a more experienced auditor also may mean there’s a greater likelihood that a compliance problem will be spotted.

So, for taxpayers subject to such a review, not only are they facing a larger, more complicated, longer running audit than an ordinary case might bring — which represents a bigger chore for the taxpayer, as they will be required to produce information on the full scope of their financial affairs — they also are more likely to be contending with veteran auditors who are well equipped to root out anything that could be offside.

In any case, the effort remains a focus for the CRA, says spokesman Philippe Brideau: “Like many countries, Canada has serious concerns in this area.”

He notes that tax authorities in various countries also are looking at how they can co-operate more closely to root out and examine the affairs of HNWIs. Various countries that share these concerns are working more closely through international forums such as the OECD Forum on Tax Administration to tackle the issue.

“FTA commissioners plan to increase international co-operation by putting renewed focus on programs to recover lost revenue,” Brideau says, “and to ensure that complex arrangements no longer offer an avenue of escape from legitimate taxation.”

Indeed, in late September, the CRA met with a group of nine other tax jurisdictions to discuss the strategies the authorities are adopting to deal with HNWIs and to combat aggressive tax planning.  IE