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Businesses often respond to the initial communications from the Canada Revenue Agency ("CRA") without much thought. In the early stage of an Audit, the whole process can seem deceptively casual. Handling things this way can be a huge mistake. Knowing what one is – and is not – required to provide the CRA is often critical to how the Audit progress, especially for large businesses.
In this Tax Audits blog, we review some of the more common hazards for taxpayers during this preliminary, seemingly simple stage of the Audit, and illuminate why the information gathering process can be hugely consequential.
The Hazards of Over-Compliance
The CRA's initial communications will define the scope of the Audit (the years and issues under review) and request specific documents. Far too often, businesses provide much more than is requested – and regret it later. Experienced Tax Counsel would advise a business to:
- Be Precise : If the Auditor asks for "bank statements for 2023," provide exactly that. Do not volunteer other statements "just to be helpful."
- Never Dump Data : Avoid dumping everything on the Auditor and leaving it to them to find what is relevant – whether out of laziness or spite. This approach will generally annoy an Auditor, who will have many ways of showing their ultimate displeasure! Worse, this approach risks revealing errors or issues the Auditor never sought to investigate in the first place.
- Clarify Ambiguity : If a request is vague (e.g., "all correspondence"), ask for clarification in writing before responding. Narrowing the scope early prevents "fishing expeditions."
Overall, the ideal response is an organized, labeled package containing only what was requested.
There is No Accountant-Client Privilege
One of the most critical distinctions in an Audit is understanding which documents the CRA is legally entitled to see, and which documents are protected by Privilege.
All relevant advice from Accountants generally must be disclosed. In Canada, there is no "Accountant-Client Privilege". For example, the CRA is entitled to a business's tax planning memos, "Tax Accrual Working Papers", and risk assessments prepared by Accountants.
Solicitor-Client Privilege is Nearly Absolute
At the other end of the spectrum, the CRA cannot compel production of anything protected by Solicitor-Client Privilege, which belongs to the client and covers all communications with Counsel (i.e., a dues paying fully licensed lawyer) for the purpose of obtaining legal advice. Solicitor-Client Privilege is near-absolute and serves as a VERY powerful shield during an Audit.
Slightly more complicated is whether Privilege covers work done by Accountants at Counsel's request, in connection with the provision of legal advice. That sort of document may be protected by Privilege, but the law is nuanced and there is no easy answer. Experienced Tax Counsel can assist with this determination.
Takeaways
When the CRA comes knocking, cooperation is mandatory and strategy is critical. Sound organization, strict adherence to the CRA's specific requests, and appropriately invoking Privilege are key.
With the help of Experienced Tax Counsel, a business can find the sweet spot between non-compliance and over-compliance and protect itself from unfortunate mishaps and CRA overreach.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
