Lately, many accountants feel like their main area of practice is responding to information requests sent to our clients by the Canada Revenue Agency (“CRA”). Below, I update you on what I have been seeing in these requests, for both small business owners and individual taxpayers.
In 2015, many clients received letters from the CRA requesting support for their equipment (capital cost additions) for income tax purposes. Essentially, the CRA wanted back-up for asset purchases on which capital cost allowance (depreciation) was claimed. These requests were fairly benign and just required some information gathering.
This year, many of my clients have received a CRA information request letter asking for documentary back-up of professional fees claimed on their financial statements.
It appears that for 2016, professional fees are the flavour of year. From the CRA’s perspective, they are looking for personal professional expenses put through small business owner’s corporations. Examples of these types of expenses would be: legal bills for divorces, personal estate planning, and corporate expenses for reorganizations, that should either be all or partially allocated as Eligible Capital Expenditures.
Taxpayers and their accountants are finding these requests extremely time consuming to comply with. The information requested includes a general ledger print out of the expenses, copies of each invoice and where the invoice does not say paid, (invoices issued by professional very rarely are receipted – for example, when your lawyer issues you an invoice for updating your minutes, when you pay, they do not issue a paid receipt) and copies of bank statements to support payment.
Say you have been requested to provide this information for 2014 and 2015; you could be looking for 25-50 invoices if you have a lot of professional subcontractors or are billed monthly by your bookkeeper. You then need to either get each professional to issue a summary receipts letter noting all the invoices issued and paid or provide bank statement back-up (which most clients tend to do).
Once the documentation is provided, the CRA reviews the information (some clients have been contacted to provide additional information or facts) and in some cases issues a reassessment. However, the actual reassessments do not provide any detail as to which expenses have been denied and for what reason(s). Where clients were contacted by the CRA, they assume those expenses were the cause of the reassessment. In other cases, we have to call the CRA to find out what expense(s) were denied. These reassessments are a bit atypical of the CRA who usually provide greater detail in respect of changes made.
Non-corporate clients have been receiving several types of information requests. They include:
1. Interest deduction expense claims
2. Foreign tax credit claims
3. Matching income requests
Several clients have received an information letter request asking for details of their interest expense claims. The letters ask taxpayers for correspondence from the lending institution detailing the original amount of the loan, reasons for the loan, interest expense back-up and bank loan statements. Obtaining this information can be very frustrating, especially where you no longer deal with the lender/bank.
The reasoning behind these information requests is that the CRA is attempting to track the use of funds to a deductible use. i.e. if you took out an investment loan, they want to see the money went into your investment account to purchase marketable securities and was not used partially or wholly for your kitchen renovation.
These letters are looking for back-up for foreign taxes paid, where you have claimed a foreign tax credit for investment income or employment or business income earned in another country.
Where you have an investment account with a financial institution and receive a T3/T5 that has foreign income allocated to you and foreign tax withheld, this request is fairly innocuous, as you just essentially send in the T3s or T5s.
However, if you have earned employment income or business income in the United States or another country, you need to provide proof of payment of the taxes. This has become a huge issue for the US, since the IRS does not provide a notice of assessment similar to Canada that shows tax assessed and paid. Thus many people have had to make special requests to the IRS for this information and it is not easily obtained or provided, let alone requests for information from less sophisticated foreign countries. Lately, in the case of the U.S., the CRA is now allowing bank statements and cancelled cheques in lieu of the special request letter, where these documents can support the actual tax paid.
I have written many times about the matching program. Each fall the CRA compares tax slips in its data base to those reported on Canadian’s tax returns. Often slips are missed since they were lost in the mail or misplaced by the taxpayer and the matching program catches the missing slip and related income.
This year, we have started seeing three page print-outs requesting proof that the income was reported. Clients, who have received such requests, have been very concerned that somehow they (or their accountant) missed reporting thousands of dollars of tax slips. However, in most cases, all these slips have been reported, there is just one or two on the three page list that have been reported as perhaps a 50/50 split with a spouse or had an incorrect SIN number.
However, it takes hours to respond to these requests, slip by slip (especially since the financial institutions often summarize income from various sources on T5's, yet report source by source to the CRA. We thus need to reconcile these amounts).
We all accept that the CRA must ensure income tax compliance; however, I wonder if these requests can be streamlined in certain cases? I know some accountants who refuse to Efile and continue to still paper file, solely to reduce the amount of requests they have to deal with.
This is my last post for 2016 and I wish you and your family a Merry Christmas and/or Happy Holidays and a Happy New Year. May your 2017, be information request free :)
What Small Business Owners Need To Know
In 2015, many clients received letters from the CRA requesting support for their equipment (capital cost additions) for income tax purposes. Essentially, the CRA wanted back-up for asset purchases on which capital cost allowance (depreciation) was claimed. These requests were fairly benign and just required some information gathering.
This year, many of my clients have received a CRA information request letter asking for documentary back-up of professional fees claimed on their financial statements.
It appears that for 2016, professional fees are the flavour of year. From the CRA’s perspective, they are looking for personal professional expenses put through small business owner’s corporations. Examples of these types of expenses would be: legal bills for divorces, personal estate planning, and corporate expenses for reorganizations, that should either be all or partially allocated as Eligible Capital Expenditures.
Taxpayers and their accountants are finding these requests extremely time consuming to comply with. The information requested includes a general ledger print out of the expenses, copies of each invoice and where the invoice does not say paid, (invoices issued by professional very rarely are receipted – for example, when your lawyer issues you an invoice for updating your minutes, when you pay, they do not issue a paid receipt) and copies of bank statements to support payment.
Say you have been requested to provide this information for 2014 and 2015; you could be looking for 25-50 invoices if you have a lot of professional subcontractors or are billed monthly by your bookkeeper. You then need to either get each professional to issue a summary receipts letter noting all the invoices issued and paid or provide bank statement back-up (which most clients tend to do).
Once the documentation is provided, the CRA reviews the information (some clients have been contacted to provide additional information or facts) and in some cases issues a reassessment. However, the actual reassessments do not provide any detail as to which expenses have been denied and for what reason(s). Where clients were contacted by the CRA, they assume those expenses were the cause of the reassessment. In other cases, we have to call the CRA to find out what expense(s) were denied. These reassessments are a bit atypical of the CRA who usually provide greater detail in respect of changes made.
Individual Taxpayers
Non-corporate clients have been receiving several types of information requests. They include:
1. Interest deduction expense claims
2. Foreign tax credit claims
3. Matching income requests
Interest Expense Claims
Several clients have received an information letter request asking for details of their interest expense claims. The letters ask taxpayers for correspondence from the lending institution detailing the original amount of the loan, reasons for the loan, interest expense back-up and bank loan statements. Obtaining this information can be very frustrating, especially where you no longer deal with the lender/bank.
The reasoning behind these information requests is that the CRA is attempting to track the use of funds to a deductible use. i.e. if you took out an investment loan, they want to see the money went into your investment account to purchase marketable securities and was not used partially or wholly for your kitchen renovation.
Foreign Tax Credit Claims
These letters are looking for back-up for foreign taxes paid, where you have claimed a foreign tax credit for investment income or employment or business income earned in another country.
Where you have an investment account with a financial institution and receive a T3/T5 that has foreign income allocated to you and foreign tax withheld, this request is fairly innocuous, as you just essentially send in the T3s or T5s.
However, if you have earned employment income or business income in the United States or another country, you need to provide proof of payment of the taxes. This has become a huge issue for the US, since the IRS does not provide a notice of assessment similar to Canada that shows tax assessed and paid. Thus many people have had to make special requests to the IRS for this information and it is not easily obtained or provided, let alone requests for information from less sophisticated foreign countries. Lately, in the case of the U.S., the CRA is now allowing bank statements and cancelled cheques in lieu of the special request letter, where these documents can support the actual tax paid.
Matching Income Requests
I have written many times about the matching program. Each fall the CRA compares tax slips in its data base to those reported on Canadian’s tax returns. Often slips are missed since they were lost in the mail or misplaced by the taxpayer and the matching program catches the missing slip and related income.
This year, we have started seeing three page print-outs requesting proof that the income was reported. Clients, who have received such requests, have been very concerned that somehow they (or their accountant) missed reporting thousands of dollars of tax slips. However, in most cases, all these slips have been reported, there is just one or two on the three page list that have been reported as perhaps a 50/50 split with a spouse or had an incorrect SIN number.
However, it takes hours to respond to these requests, slip by slip (especially since the financial institutions often summarize income from various sources on T5's, yet report source by source to the CRA. We thus need to reconcile these amounts).
We all accept that the CRA must ensure income tax compliance; however, I wonder if these requests can be streamlined in certain cases? I know some accountants who refuse to Efile and continue to still paper file, solely to reduce the amount of requests they have to deal with.
This is my last post for 2016 and I wish you and your family a Merry Christmas and/or Happy Holidays and a Happy New Year. May your 2017, be information request free :)
This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation.
It is written by the author solely in their personal capacity and cannot be
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advice, and neither the author nor the firm with which the author is associated
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contained herein. Readers should always consult with their professional advisors in respect of their particular
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