The Canada Revenue Agency is targeting high net-worth Canadians in a wide-ranging auditing initiative. The tax authority is sending certain wealthy individuals lengthy questionnaires asking for detailed information regarding the nature of their financial holdings.
The CRA has launched the project, it says, to \u201cidentify and respond to high-risk compliance issues involving high net-worth individuals and their related economic entities.\u201d
The CRA is not acting alone. Its so-called \u201crelated party initiative\u201d is part of a co-ordinated effort by countries belonging to the Organization for Economic Co-operation and Development, to focus on the tax risk posed by wealthy individuals, many of whom have financial interests in a number of countries.
Starting this past autumn, certain high net-worth Canadians began receiving the 21-page questionnaires from the CRA that ask for information regarding their ownership or interest in various types of domestic and foreign economic entities, including unlisted companies, private trusts, partnerships and joint ventures, as well as bank accounts and investment accounts. Individuals have 30 days in which to respond.
As a followup to the questionnaire, some individuals also have received a Form T997, which asks for more information on certain aspects of the individual\u2019s holdings, including copies of board of directors\u2019 meeting minutes and correspondence between the individual and his or her accountants and lawyers.
The CRA says it is selecting for audit those high net-worth individuals and their related groups who have a net asset value of $50 million or more and who have interests in approximately 30 entities or more. The CRA also says it is not keeping track of how many audit letters it is sending out.
Tax experts suggest the CRA appears to be using a number of sources \u2014 not just its internal databases \u2014 to identify individuals for audit. These sources might include third-party databases, regulatory filings, reports in the financial media and information gleaned from the international exchange of tax information, among other sources.
\u201cNo one reports their wealth to the CRA \u2014 only their income,\u201d says Paul Lynch, leader of Toronto-based consultant KPMG LLP<\/b>\u2019s tax dispute, resolution and controversy practice. \u201cSo, [that] pretty much indicates to me [the CRA is] using Internet research and things like that to find individuals.\u201d
Tax experts advise individuals who are selected for audit, and others who receive the questionnaires, to seek legal advice.
\u201cIf a client gets one of these letters,\u201d says Tannis Dawson, senior specialist in the tax and estate planning department of Investors Group Inc. <\/b> in Winnipeg, \u201cthe first thing they should do is go to their tax advisor.\u201d@page_break@Tax experts suggest the intent behind some of the questions included in the CRA questionnaire could easily be misunderstood. Clients answering the questionnaire without first seeking advice may inadvertently put themselves in difficulty.
\u201cIt\u2019s really important that individuals seek professional advice to make sure they respond appropriately to the questions,\u201d says Jamie Golombek, managing director of tax and estate planning with Toronto-based Canadian Imperial Bank of Commerce<\/b>\u2019s private wealth-management division. \u201cIf you don\u2019t understand the questionnaire and you answer incorrectly, you could be fine at the end of the day, but it could delay the process and trigger additional audit activity.\u201d
Tax experts are also concerned that the CRA is asking some individuals to provide correspondence between themselves and their lawyers, which may be protected by solicitor\/client privilege.
\u201cIf the CRA demands specific information, there\u2019s a requirement to provide it,\u201d Golombek says. \u201cThe only exception is [information that] is protected by legal privilege, such as a tax-planning memo or a letter you\u2019ve exchanged with your law firm. If you just send that over to the CRA, you lose the privilege established \u2014 and that could send the CRA on a fishing trip specifically to look at your issue.\u201d
If a client consults legal counsel, Golombek adds, the lawyers would advise the client on \u201cwhich items are privileged and, therefore, can be left out of the submission to the CRA because of this privilege.\u201d
The CRA\u2019s audit initiative is a direct response to an OECD study, published in 2008, that examined the compliance risk the high net-worth segment poses to revenue agencies globally. Since the release of that study, a number of countries have launched auditing projects similar in style to this CRA initiative.
In recent years, governments around the world have sought ways to work together in a more co-ordinated fashion to address tax compliance issues raised by both corporations and high net-worth individuals who have interests in multiple tax jurisdictions.
These efforts include the signing of tax-information exchange agreements between countries and the increased sharing of best practices, among other developments.
Last fall, the OECD\u2019s forum on tax administration sanctioned the use of joint tax audits and issued guidelines for conducting them.
Unlike simultaneous audits, in which two or more countries conduct separate audits of the same taxpayer, joint audits see two or more countries audit the taxpayer with all governments working with the same information from the taxpayer.
This development is new and, so far, Canada hasn\u2019t entered into any joint tax-audit agreements. Tax specialists believe, however, such agreements may be coming here soon. Says Lynch: \u201cIt\u2019s becoming a smaller world.\u201d\t IE<\/p>\n","protected":false},"excerpt":{"rendered":"
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