Dealing With CRA

There may have been a time when CRA auditors priority was enforcing tax law, that time seems to have passed. CRA systematically seems more focused on extorting funds from taxpayers. In one recent case, the taxpayer went to court on whether or not his truck was an “automobile” for the purposes of the deduction of CCA and personal use.  The court found only a $950 benefit for the entire taxation year.  In that case, the judge commented that the taxpayer “went to some effort and expense to have documents relevant to these appeals made available to the CRA auditor. Those documents were not reviewed by the auditor, though she was aware of their existence. Further, the auditor did not respond to requests for guidance on what additional documents would assist in the audit process, but instead went ahead with reassessments that were not founded on documents made available by the appellants” and that while CRAs conduct fell short of being “reprehensible, scandalous or outrageous” the standard required for an award of solicitor-client costs. “I do find, however, that the dispute resolution process was undermined through considered inaction. The CRA auditor’s responses to questioning by counsel for the appellants demonstrate that she made thoughtful decisions not to act and did so on the basis of instructions from, and prior positions taken by, her team leader.[1]

In a separate case, CRA persecuted a taxpayer to bolster its reassessment of her husband.  The judge noted that[2]An internal CRA document written in July 1997 noted that CRA officials had placed a “stall appeals inquiry” directive on Gardner’s tax appeal file… the CRA litigation officer responsible for her appeal sent the following memo to another CRA employee:  I personally feel that our case here is quite weak and the Appellant is correct in her assertion that the basis for the changes to her assessments were the changes made to her spouse’s (i.e. we cannot treat him as a factual resident of Canada without assessing her in exactly the same manner.)”

An under-experienced CRA auditor intentionally destroyed an accountants’ practice when she “knew or ought to have known that she was not capable of handling the investigation.   …Northey therefore knew or ought to have known that the fundamental basis for her investigation was unsupportable In spite of this, Northey proceeded, and Praulins allowed her to proceed, with a baseless investigation[3]” which included referrals to SI and interrogations of clients and staff !

In a multi-million dollar transfer pricing case, CRA ignored[4] correspondence from the IRS that required attention to give treaty relief and refused to inform the taxpayers of its existence.

In yet another case, CRA threatened not only gross negligence penalties but “various investigators used the threat of assessments in the amounts mentioned above to attempt to coerce Mr. Ereiser to plead guilty to criminal charges”.  The judge observedBecause the investigators would have agreed to reassess on the basis of lower income amounts if Mr. Ereiser had agreed to plead guilty, and because an investigator had agreed that the proposal letter had errors, the reassessments cannot have been based on any factual assumption by the Minister that Mr. Ereiser had unreported income in the amounts stated in the proposal letter[5].

The more we experience such behaviour from CRA – in one case, I was told by a CRA auditor, in front of his supervisor “we have more resources than you, we know your client better than you – and we are going to get him” – the more it sets anticipations of future behaviour. In that case, ultimately, at appeals, the taxpayer settled for about 5% of the amount determined by the auditor.

I am interesting in summarizing any such experiences to be able to “get a pulse” on the general experience we are having with CRA.  I welcome emails from any readers.

Before & After Dealing with CRA-

contributed by tax lawyer David J. Rotfleisch, CPA, JD;

Life goes more smoothly if you can anticipate CRA’s position and deal with it to minimize the issues being reassessed – the more issues being reassessed, the more expensive the objection will ultimately be.  Learning “on the job” is not efficient in this context – or necessarily good for your client.

When your client does get reassessed, or after you have objected, receives a Confirmation of an Assessment, you have only 90 days to file a Notice of Objection or an Appeal to Tax Court.  If you did object on time, and you missed points in your Objection, it may be too late to raise those points later. If you miss the Objection deadline, you have to apply to the Minister for a time extension, and it does not have to be granted.  If you miss the Tax Court appeal deadline, you have to apply to the Court for an extension.   They almost never grant it.

We have a file where the taxpayer, involved in a building trade, was audited for 2008 & 2009 business expenses.  The original bookkeeper had left the country and the new accountant’s only qualification was speaking the client’s native language.  He made incomplete submissions- filing a Notice of Objection for 2008, but not for 2009 and missing  HST  An Appeal to Tax Court for 2008, and Extension Applications and Objections for 2009 Income Tax and HST are now required.  This requires 3 different filings, each of which has to be separately prepared.  Tax Court may not agree to put the 2008 in abeyance pending the 2009 Objection, if the late filing application is accepted.  This is an expensive process that could have been avoided by proper legal advice and adherence to deadlines when CRA first reared its ugly head.  The earlier a tax litigation lawyer is involved the better.

This is an area where an ounce of precaution is worth pounds of cure.  You and your clients could benefit from having any submissions reviewed before supplying them to CRA – and especially having any Notices of Objection reviewed. When necessary, appealing to the Tax Court, can be a method of negotiating with a Justice lawyer who is often more reasonable than a CRA auditor.

We just settled one such file.  Audit and appeals disallowed all expenses, even though proper audit evidence was submitted.  We filed the Appeal to Tax Court, made a formal offer to settle, which put costs pressure on the Department of Justice, negotiated with the DOJ lawyer –all expenses allowed.

[1] Myrdan Investments Inc. et al v. The Queen (TCC) 2013 TCC 168

[2] Gardner, S. v. The Queen (ONCA) 2013 ONCA 42 at para 12

[3] Gordon, A.J. et al. v. The Queen (FC)  2013 FC 597 at paras 45 & 47

[4] Teletech Canada Inc. v. The Queen (FC) 2013 FC 572

[5] Ereiser v. R.,  2013 D.T.C. 5036 (Eng.), (Federal Court of Appeal) paras 5 & 10 similar to McCreight v. Canada (A.G.), 2013 ONCA 483

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