If you’re a high-net-worth individual, you may be selected for a detailed audit or review as the result of a recent Canada Revenue Agency project that is targeting the wealthiest of Canadians.
News of this project spread like wildfire in the private banking community this past week as the result of a recent KPMG tax news flash alerting clients about this new audit initiative.
CRA spokesman Philippe Brideau says this program is formally known as the “related party initiative” and is responsible for examining high-net-worth individuals. The main objective of the RPI is to “identify and respond to high-risk compliance issues involving high net worth individuals and their related economic entities.”
Individuals and their related groups who have a net asset value of about $50-million or more and who have related groups comprised of approximately 30 entities or more are being targeted.
The CRA’s initiative stems from a 2008 Organization for Economic Co-operation and Development (OECD) study whose purpose was to “examine the size and environment of the (high net worth) segment including the tax risks such taxpayers pose.”
As part of the audit process, the CRA is asking individuals to complete a T997 “audit query sheet” as well as a lengthy 20-page questionnaire. In reviewing copies of both obtained by the Financial Post, the CRA is asking for information about a variety of related economic entities, including partnerships, trusts, corporations, joint ventures and private foundations.
On the last page of the questionnaire, the taxpayer is asked to provide both organizational charts showing the relationships among all entities along with a complete set of financial statements for all years under review.
The T997 asks targeted individuals to provide a copy of their company’s board of director minutes, the corporate minute book, a listing of all legal and accounting firms used by the corporation, “including all correspondence files with them,” as well as all tax planning documents.
Ian Morris, a chartered accountant and tax lawyer with Toronto-based boutique tax law firm Morris & Morris LLP, has several clients who have been contacted and received the detailed questionnaire and are “completely freaked out.”
Mr. Morris is particularly irked by CRA’s request for tax planning correspondence and planning memoranda — items which may be protected by legal privilege.
According to Mr. Morris, when a taxpayer sees that the CRA is asking for everything, their typical reaction is to “send it all over.” This is generally not advisable without seeking legal advice first. “(The CRA) shouldn’t ask for things they don’t have a right to,” Mr. Morris says.
Another concern Mr. Morris has with the questionnaire is that some of the questions are difficult to fill out because they are so subjective. For example, the CRA asks whether the taxpayer under audit controls the affairs of a private trust. In their expanded definition of control, the CRA asks whether the trustee of the trust “is accustomed or is reasonably likely to act in accordance with your wishes or instructions.”
Mr. Morris is worried that answering this question could pose a real problem to an innocent beneficiary of a trust who may think the trustee will naturally listen to their wishes.
“This may lead to incorrect answers that may be against the taxpayer’s interest,” Mr. Morris says. While trustees can certainly take input from the beneficiary of a trust, they generally won’t abdicate their legal responsibility under the trust document. If it’s ultimately determined that a beneficiary controls the trust, this could lead to adverse tax consequences.
Taxpayers who have already received a CRA questionnaire should immediately consult their tax advisors for assistance in properly completing the forms. Others who haven’t been contacted but may have undeclared income in foreign jurisdictions should take advantage of the CRA’s voluntary disclosures program, which allows taxpayers to come forward, correct their tax information and pay only taxes owing plus interest, provided the CRA isn’t on to you first!