The Canada Revenue Agency is adopting a new approach to making sure large corporations are paying their share of taxes, changing the way it selects which firms to audit. The CRA’s more targeted approach to auditing this business segment will also affect individual taxpayers, particularly high net-worth individuals who have interests in trusts or partnerships.

“The new approach has been developed to respond to emerging compliance concerns identified by CRA in the large-business sector,” says Philippe Brideau, spokesman for the CRA. “The large-business population includes any entity for which the large-business team audit approach would be effective.”

Those entities would include trusts and partnerships, Brideau confirms.

According to a tax memo pub–lished in October by Pricewater-house Coopers LLP, the CRA’s previous approach had involved assigning large corporate files — those with gross income of more than $250 million — to a team of auditors, including international or tax-avoidance auditors. Smaller firms would be chosen on a case-by-case basis and assigned to a single auditor. Partnerships and trusts were not a focus and were rarely audited.


The CRA is saying it now will look at a variety of factors as part of its new risk-assessment model for corporations, trusts and partnerships. These factors include the taxpayer’s history of compliance; data gathered from internal databases; and information received from tax treaties, the CRA’s participation in international forums and from the CRA’s own research and detection.

“Under this new approach,” Brideau says, “large taxpayer groups will continuously be graded as having a high, medium or low risk of non-compliance.”

He adds that the low-risk group might experience limited audit coverage, while higher-risk groups will undergo more rigorous scrutiny.

Additional information will come from the relatively new taxpayer disclosure requirements for aggressive tax-planning arrangements and from reporting requirements on partnerships, which have been recently revised.

As part of the CRA’s new initiative, the agency will also take a closer look at high net-worth individuals, explains Nick Pantaleo, international tax services partner with Pricewaterhouse Coopers in Toronto: “The CRA is expanding its focus so that when it looks at a particular company, it’s not just focusing on the entity itself; but where the firm is owned by a series of trusts, or a partnership, it will also look at the nature of those entities.”@page_break@The CRA, in changing its approach, is trying to focus its auditing activities, making sure it best uses its resources and to get cases settled sooner, Pantaleo suggests. On the whole, he adds, this is a positive change for the agency and taxpayers alike.

“I applaud them for doing this. I think it’s the right approach to follow,” Pantaleo says. “Cases will be resolved more quickly if the CRA is able to focus on the ones that should be of the greatest concern to them.”

In recent years, the CRA has taken a more proactive approach in terms of compliance. That development mirrors global trends toward both better detection of non-compliance and enforcement.

“Governments are fighting huge deficits and doing the best they can to tighten up their tax system to make sure that people are compliant,” Pantaleo says. “Taxpayers are demanding that everyone pays their fair share.”

In the past, the CRA’s approach to auditing high net-worth individuals tended to be more disconnected, with the CRA looking at only one particular part of an individual’s holdings at a time, says Robin MacKnight, tax partner with Markham, Ont.-based Wilson Vukelich LLP. Now, MacKnight adds, the CRA will be looking at all of an individual’s holdings at once.


The CRA’s new focus will be bad news for those individuals who may not have kept up with their reporting requirements, or those who may have been “playing fast and loose” on the assumption that the CRA isn’t going to be looking everywhere. Says MacKnight: “The risk of the CRA finding these obscure little things is going to go up, which is exactly what the CRA is after.”

The new audit-selection approach is already being used by the CRA, but full implementation will take years — particularly as auditors are trained in the new regime and as taxpayers are contacted.

Taxpayers should be aware of the CRA’s new focus, Pantaleo says, and be prepared to defend their positions. Some taxpayers with investments in partnerships or trusts may choose to contact the CRA proactively to ensure they are onside.

Says Pantaleo: “If you’re a taxpayer with, say, a lot of partnerships and you want to try to head off being viewed as a high-risk taxpayer — because you feel you’re using partnerships under very normal business circumstances — you might consider talking to the CRA first, in order to establish a more open, transparent discussion.” IE