CRA Information Requests – 2018 Update

In December 2016, I wrote a blog post titled CRA Information Requests - 2016 Update in which I discussed that corporate clients had been receiving information requests from the CRA to support their equipment (capital cost additions) and/or had received information requests to support professional fees that had been claimed.

On the personal side, I noted that taxpayers were receiving information requests to provide support for Interest deduction expense claims, foreign tax credit claims and matching income requests.

Today, I provide a quick update on what I am seeing.

Beware if You are Receiving or Paying Management Fees

Lately, I have seen the CRA issue information requests to support management fees paid. The requests appear to relate more specifically to intercompany management fees, but these requests can directly or indirectly lead to information about management fees paid to owner-managers.

As detailed in this guest post by Howard Kazdan last year on Management Fees, it is important to have proper support for the payment of these fees. This support is often lacking for both intercompany payments and payments to shareholders who consider themselves independent contractors.

It should be noted that management fees paid to owner-managers as independent contractors can be problematic in the first place, as detailed in this 2015 blog post.

The CRA information requests essentially ask for all the information Howard suggested you document or maintain in his blog post, including some of the following:

1. The name and Business or SIN# of the corporation or individual receiving the management or administration fees

2. If the fee was paid to a related party

3. Copy of the contract for services

4. Description of the services provided and log if available

5. Invoices for the services provided

I would suggest many corporations and shareholders have been lax in ensuring there is proper documentation and that the remuneration for the services is fair-market value. If you do not have your act in order, in respect of documenting the payment of management or administration services, I suggest you make this a high urgency task.

Individual Taxpayers

From an individual taxpayer perspective, we are still receiving information requests to provide support for interest deduction expense claims, foreign tax credit claims and income matching requests (technically a separate program). In addition, I have seen several requests to support alimony payments.

I have also seen information requests for individuals that are owner-managers of corporations and have claimed employment expense based on a T2200 form signed by their related company. If you want to read an excellent summary about deducting expenses as an employee, this tax bulletin by BDO Canada LLP titled “Deducting Expenses as an Employee”, is very exhaustive.

For those not aware, a T2200 form must be completed by employers for their employees to deduct employment expenses from their income. Many people receive these forms from their employers each tax season, so they can claim their auto expenses related to their job, however, other people use the form to claim a home office expense or various other employment expenses related to their job.

The CRA requests have been specifically for those individuals who are shareholders of the corporation issuing the T2200; we have not seen a general review of employment expenses for employees (although I do see these occasionally).

In reviewing corporate shareholders employment expenses (most notably auto and home office expenses) the CRA had been disallowing these expenses in many cases, based on a lower court case decision.

However, it is my understanding the CRA is considering reversing these re-assessments and will set forth new criteria for owner-managers in respect to claiming employment expenses going forward. If you have been re-assessed or are in the middle of objecting, speak to your accountant about this issue, there may be positive news forthcoming.

If you have claimed any of the expenses that are leading to the information requests I detail above, you may want to review your records to ensure you have your documentation readily available in case you receive an information request.

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 attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.

CRA Information Requests - 2016 Update

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.

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 attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.

Less is More When it Comes to the CRA

I am often asked by my readers in the comments section of my blog, if they should send in documents such as appraisals, invoices and interest expense statements to the Canada Revenue Agency ("CRA") to support a tax deduction, tax credit or cost base adjustment. They also ask should they write to the CRA and explain their situation. The answer in almost all situations is a resounding NO. I address this below.

As readers of my blog are aware, I answer almost all the questions I am asked. I attempt to answer the less complicated questions (although they are often couched in case I was not with provided all the facts) and I provide guidance in response to other questions. Unfortunately, I am not able to provide answers in the areas of corporate or personal income tax planning, because of (a) time constraints (b) without knowing all the facts and circumstances; I cannot attempt to properly answer a question with these limitations.

I however, do greatly appreciate my reader's comments, as they provide tangible evidence I have engaged them. A bonus for me is that the questions actually provide me with ideas and topics for future blog posts. The comments provide feedback on which posts have wide appeal or are at least controversial topics. For example: my post on Is Your Corporation a Personal Service Business? has 76 comments, my post on The Income Tax Implications of Purchasing a Rental Property has 65 comments and my post on CRA Audit – Will I Be Selected? has 50 comments. For certain other posts, like Is it Morbid or Realistic to Plan for an Inheritance, I just enjoy reading the comments I receive.

Anyways, back to the matter at hand. With E-filing, there are few hard documents the CRA requires to be filed initially. That is not to say the CRA will not follow up with an information request for copies of actual receipts to evidence expenses claimed such as child care and credits such as donations. For those that still paper file (starting in 2012, all accounting firms must now EFILE all returns), the receipts you submit essentially include any T-slips, RRSP contribution receipts, medical receipts and donations.

That is all you should provide the CRA. If you have back up support for stock transactions, real estate transactions, interest expense or what have you, you should not provide these documents to the CRA unless you are requested to do so. In many cases, even if the item is contentious, the reality is that it will not necessarily be selected for an audit follow up. So why ever volunteer such information?

In addition, people for some inexplicable reason have an urgent need to explain their actions to the CRA. I have had several cases where a new client who has engaged me to assist in a tax matter proudly shows me the 3 page letter full of reasons and excuses they sent to the CRA.

I would suggest that in most cases, these letters are browsed through by the CRA. Where your letter is read in detail, I would submit the CRA representative is only looking for facts contained therein and they have little or no interest in your story and excuses (save your story for an actual auditor assigned to your case or a fairness application) unless you are providing them their dose of daily entertainment. What in fact you have done in many cases is provide the CRA an audit trail for an item probably not even on their radar.

My advice is simple. Do not ever provide anything voluntarily, be it a document or a mea culpa letter. If you have an issue or need to correct something, engage an accountant, who will know how to finesse the item without providing more than is required. Remember, less is always more with the CRA.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

1000th Page Read- CRA Audit-Will I Be Selected

I started my blog in September 2010 figuring I needed to get with “social media” and because I like to write and usually have an opinion. My initial goals were to have someone other then my immediate family read the blog and maybe attract a corporate client or two over time.

This month two of my blogs registered over 1000 page reads which is a personal milestone. I know page reads are not unique reads (but that is all Blogger gives you) and for many bloggers 1,000 page reads may not mean much; but being slightly self indulgent, it means at least my objective of being read by more than my family is being achieved.

One of the reasons (beside the titillating subject matter) my blog CRA Audit-Will I Be Selected hit this milestone was the traffic directed to the blog by a notation by Ram Balakrishnan of the Canadian Capitalist in his weekly blog roundup.

I previously have had the opportunity to thank Larry MacDonald, Rob Carrick, Dianne Nice, Jim Yih and Michael James for their support of my blog, but by happenstance, I have not had that opportunity to thank Ram and wish to do so now.

As the Canadian Capitalist is amongst the most recognized financial blogs in Canada, it requires no introduction. However, I would like to note that besides Ram’s very practical and insightful blogs, you should read the comments and answers on the blog, as Ram’s answers are often as educational as the blog itself.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.