Audit Agreement and Waiver of Objection Rights Guidelines

Number: AD-19-01

Date: 2019-02-19

Issued by: Policy and Technical Working Group – International, Large Business and Investigations Branch (ILBIB) and Domestic Compliance Programs Branch (DCPB)

Sections affected: All audit program areas within the International, Large Business and Investigations Branch, and the Domestic Compliance Programs Branch

Subject: Audit Agreement and Waiver of Objection Rights Guidelines

The purpose of this communiqué is to provide guidance on negotiating an audit agreement with taxpayers and obtaining a Waiver of Objection Rights.

The audit agreement and waiver discussed in this communiqué differ from situations where an auditor has obtained written or oral taxpayer concurrence with issues identified in an audit. This may occur where the taxpayer discusses the CRA's proposed adjustment(s) with the auditor and concurs, for example the split between personal use and business use of an automobile or the deductibility of home office expenses. Each type of case resolution promotes timely finalization of an audit case and/or audit issue(s) and obtaining taxpayer concurrence should be documented in the audit file; however, obtaining audit concurrence does not restrict a taxpayer from later filing a notice of objection.  

This communiqué supersedes AD-05-02B, The Audit Agreement and Waiver of a Client's Right to Object and AD-99-07, Reassessments and Waivers. This communiqué clarifies previous directives, promotes consistency in its application, and provides information regarding the Audit File Resolution Committee, which began operating as a pilot project in fall 2017.

Audit Agreement and Waiver of Objection Rights

The CRA carries out a range of service, education, audit and enforcement activities to ensure compliance with tax laws, to maintain the integrity of Canada's self-assessment tax system efficiently and to protect the tax base^{Footnote 1}. The CRA makes every effort to ensure consistency and transparency in its compliance activities and in assessing similar fact-based issues across the country. As stated in the Taxpayer Bill of Rights, the CRA is committed to applying the law consistently so that taxpayers obtain what they are entitled to and pay the right amount.

An audit agreement is an agreement between the CRA and a taxpayer^{Footnote 2} where the parties set out the terms under which one or more audit issues will be assessed based on a common understanding and interpretation of the facts, audit policy and law applicable at that time. In appropriate cases, an audit agreement can provide an efficient resolution to tax issues without the need for costly objections or litigation. It does not prevent the Minister from assessing or auditing the taxpayer for other taxation years, and/or for other issues not considered under the audit agreement.

An audit agreement provides a method to achieve tax certainty and a more timely resolution to subjective audit issues. Timely resolution of audits contribute to consistency, predictability and fairness of the tax system, and provide greater tax certainty with respect to the application of the tax laws.

The Rosenberg decision^{Footnote 3}addresses the binding nature of an agreement reached between the CRA and a taxpayer provided that neither party breaks their commitment to the agreement, and provided that the fact pattern relied upon in reaching the agreement does not change.

For the audit agreement to be binding, the taxpayer must:

• disclose all material facts in elections, returns, applications, and other submissions as applicable, related to the issue(s) dealt within the audit agreement;
• waive their right to object to the assessment of the issue(s) and provide a signed copy of the Waiver of Objection Rights to the CRA; and
• in some instances, agree to pay the resulting taxes, penalties and interest owing as a result of the agreed upon assessment within the timeframes specified in the audit agreement.

The Waiver of Objection Rights (the waiver) is a condition to the validity of the audit agreement and must accompany or be included in each such agreement. The waiver is a statement voluntarily signed by a taxpayer, or an authorized representative^{Footnote 4}, to the effect that the taxpayer gives up both the right to object to, and to appeal, one or more issues identified in the audit agreement and set out in the waiver. More specifically, subsection 165(1.2) of the Income Tax Act (ITA) and subsection 301(1.6) of the Excise Tax Act (ETA) restrict a taxpayer from objecting to the assessment of an issue where the right of objection has been waived in writing. Further, subsection 169(2.2) of the ITA and subsection 306.1(2) of the ETA restrict a taxpayer from appealing the assessment of an issue where the right of objection or appeal has been waived in writing.^{Footnote 5} These rules are supported by the Smerchanski decision^{Footnote 6}, which upholds the proposition that the right to appeal an assessment is a private right that can be waived.

Application Criteria

Auditors cannot contravene provisions of the ITA or ETA in negotiating and finalizing an audit agreement. They must assess taxes on the basis of the facts as determined, in accordance with legislation and CRA policies. This means that audit agreements normally relate to subjective audit issues. Subjective audit issues are those that cannot be easily verified by calculations or observations and generally include issues that are established as a result of opinions, interpretation of facts, exercise of professional judgment, points of view and experiences. Examples of subjective audit issues, in the context of negotiating and executing an audit agreement, include:

Income tax issues:

• valuation of certain benefits, equity, services or property (e.g. market rate vs. bulk rate);
• business purpose;
• reasonableness of expenses;
• consideration for supply (e.g. determining fair market value);
• timing of an event (e.g. a change in use of property, when a hobby becomes a business, etc.);
• legitimate doubt or ambiguity regarding the interpretation of a legislative provision in relation to the particular facts where more than one view could be consistent with existing case law and CRA interpretive positions;
• employed vs. self-employed; or
• residency issues.

GST/HST issues:

• characterization of a supply for GST/HST purposes (e.g. exempt vs. zero-rated); or
• change in use (e.g. extent to which the percentage change of use impacts input tax credit eligibility).

Factors that may preclude an audit agreement:

• the taxpayer's reporting involved wilful neglect, gross negligence or fraud; or
• the taxpayer has a history of non-compliance with the CRA.

An auditor's integrity and professional judgment will guide the analytical thinking and decision making process undertaken in considering and negotiating an audit agreement and waiver Auditors must, at a minimum, obtain the written approval of their team leader, International and Large Business Case Manager, section manager, or the Assistant Director of Audit. Professional judgment should also be exercised in referring specific cases involving material or novel issues to regional or headquarter (HQ) senior management. Specific audit programs may also require review and approval of the audit agreement and waiver at the HQ level; refer to your functional HQ program area for further guidance.

As part of the analytical thinking and decision making process referred to earlier, auditors will recognize and reflect on how decisions are made, including the actions and perspectives of all parties involved in the process, and will be able to communicate the rationale for CRA decisions. Auditors should evaluate the accuracy and completeness of the taxpayer representations and take steps to ensure the taxpayer and their representative understand the terms and impacts of the agreement and waiver. This would include informing taxpayers who do not have representation that they are entitled to seek independent advice prior to signing the waiver. These factors encourage a reflective and comprehensive decision making process to achieve a fair outcome for both parties and contribute to quality audits. These considerations should be adequately documented in the audit file.

Discussions aimed at resolving an issue through an audit agreement may take place at any stage once the facts are understood and the potential assessing positions and quantum have been identified. Procedurally, the opportunity for an audit agreement arises when a taxpayer challenges an auditor's adjustment proposal. It is a taxpayer's representations and counter-positions that are then evaluated by CRA in determining whether the audit issue(s) could be appropriate for an audit agreement and waiver. Occasionally, a taxpayer may propose a resolution before CRA's proposal letter has been finalized; such taxpayer proposals should only be evaluated if the audit team is confident that the facts and issues are well understood.

The resolution of each issue should be based solely on the agreed facts. The agreement can address the application and quantum of interest and penalties provided the position in the agreement is well supported on the facts and is not inconsistent with existing CRA policies and the applicable law. In this regard, it is particularly important to ensure the taxpayer and their representative fully understand all the facts and repercussions related to both the audit agreement and the waiver to guard against allegations of coercion as discussed below.

Audit File Resolution Committee

HQ has established an Audit File Resolution Committee which includes senior representatives from the International, Large Business and Investigations Branch, the Domestic Compliance Programs Branch, the Legislative Policy and Regulatory Affairs Branch, the Department of Justice, as well as representatives from various Tax Services Offices (TSO). The mandate of the committee is to consider audit agreement proposals to ensure fairness and consistency, and where possible, to identify options that promote timely and efficient file resolution at the audit stage. The auditor(s)/audit team referring the file are invited to make submissions to the Committee in relation to the proposed audit agreement. HQ and TSOs shall refer files to the committee that are material, novel, unusual, or have implications in resolving other cases (e.g. a common issue that appears in many files nationally that should be resolved in a consistent fashion).

International Issues

In limited circumstances, it may be appropriate to use an audit agreement and waiver when dealing with international issues. Given that waivers do not extend treaty time limits and may not restrict a taxpayer's right to the mutual agreement procedure, they may not be of any assistance when dealing with cross-border transactions with a treaty country where the treaty provides a mutual agreement procedure to resolve disputes.

The relevant International Advisory Services Section Manager of the International Tax Division must be consulted in all cases where an audit agreement is being considered for a transfer pricing issue.

If an audit agreement is reached with the taxpayer, it must be on a principled basis. The basis for how resolution was reached must be thoroughly documented and appended to the audit agreement.

As a separate matter, where, as a result of a transfer pricing adjustment, a taxpayer wishes to repatriate the funds in order to obtain a refund of Part XIII tax, the taxpayer will be required to sign a waiver of their objection rights. Refer to ITD-03-03, Repatriation of funds by Non-Residents - Part XIII Assessments for guidance in the application of the repatriation policy.

File Documentation and Audit Agreement Process

The audit agreement and waiver must be fully documented, signed by both the taxpayer and the auditor and counter-signed by the team leader and section manager with a finalized copy containing all signatures provided to the taxpayer.  

It is important that the taxpayer agree to waive objection rights without the perception of any pressure having been exerted (e.g. implying the possibility of a penalty in lieu of signing). No agreement should be entered into where there is a real or perceived conflict of interest. If the taxpayer has legal representation, or if the taxpayer has provided a draft audit agreement and waiver document, then consideration should be given to involving CRA Legal Services unless the matter is routine. Auditors must ensure they are, and are seen to be, fair and equitable in reaching an audit agreement and waiver^{Footnote 7}. 

In order to help guard against the possibility of taxpayer allegations of coercion, auditors are advised to make notes of discussions with the taxpayer and/or representative. To help ensure that the taxpayer fully understands all the facts and the consequences related to both the audit agreement and the waiver, there must be a meeting with the taxpayer and any representative to discuss the following topics:

• rationale for the method to be used to assess each issue being resolved and the applicable ITA/ETA sections
• taxation years pertinent to each issue
• degree to which the taxpayer understands the rationale for the assessment of each issue being resolved
• taxpayer's rights of objection and appeal prior to waiving objection rights and the fact that objection and appeal rights will not be available after signing the waiver
• taxpayer's right to seek independent legal advice
• financial impact of waiving objection rights for each issue, without interest calculation;
• explanation that the agreement does not establish any general or administrative precedent applicable to any other taxpayers
• understanding that the agreement depends on the specific facts disclosed and that the CRA may consider the agreement invalid if significant and material new information comes to the attention of the CRA
• the audit agreement is considered binding upon the taxpayer and their legal representative (where applicable) provided the taxpayer:
  • signs and returns the waiver document and it has been signed freely and without duress;
  • fully disclosed all material facts in its returns (e.g., T1, T2, T3, etc.), elections and applications; and
  • fully disclosed all material facts related to the issues dealt with in the audit agreement.

At the meeting with the taxpayer and/or representative, the auditor must make it clear that positions that may be taken by either party in achieving or attempting to achieve audit agreement are designed to apply only to the current assessment, based on the facts and information pertinent to the situation, and are therefore not to be used to resolve subsequent actions. In other words, the terms of the audit agreement are not portable to any future audits or examinations of the taxpayer or others of similar audit issues.

Content of the Waiver

The waiver must clearly identify each issue along with the pertinent taxation period(s) in the same manner as in the audit agreement. The waiver must contain statements to the effect that:

• the taxpayer waives the right of objection relative to the assessment of the pertinent issue(s) in the applicable taxation period(s);
• the taxpayer acknowledges that the impact of the provisions of subsection 165(1.2) of the ITA or subsection 301(1.6) of the ETA, as the case may be have been explained and are understood to mean that no further recourse to any authority with respect to the assessment by the CRA of the waived issues is available upon signing the waiver^{Footnote 8};
• the taxpayer understands that additional tax, interest and penalty, as applicable, may result from the CRA's assessment of the issues that are the subject of the audit agreement and waiver; and
• the waiver is being signed voluntarily.

Administration Issues

The audit agreement and waiver template are available in the Integras template library.

The audit agreement and waiver should be retained in the taxpayer's Permanent Document file with a copy placed in the audit file. Refer to the applicable audit program's document storage procedures for interfiling a copy in taxpayer's physical Permanent Document file.

Reference to the audit agreement, the waiver, and to the particular issue(s) included therein must be made in the Taxpayer Agreement section of the audit report.

Audit agreements and waivers are subject to HQ monitoring and quality assurance processes.

Refer to the Integras/AIMS audit guides for coding instructions if an audit agreement and waiver have been executed.

Taxpayer Relief Provisions of the Income Tax Act and the Excise Tax Act

Taxpayer relief requests are to be dealt with on their own merit separately and solely on the basis of the taxpayer relief provisions^{Footnote 9}. Relief requests related to transfer pricing should be referred to the Transfer Pricing Review Committee.

Should the taxpayer ask for relief from penalties and interest during the process of reaching an audit agreement, neither the request nor the outcome of that request should be a factor in the calculation of the amounts to be assessed pursuant to the audit agreement.

Conclusion

Please direct any questions relating to this communiqué to your functional program contact at Headquarters.

Original signed by

 

Ted Gallivan
Assistant Commissioner
International, Large Business and Investigations Branch; and
Domestic Compliance Programs Branch

Circulate To:

Regional Directors of Programs
Assistant Directors Audit
Regional Program Advisors
Directors General, GST/HST Directorate, Small and Medium Enterprises Directorate, Scientific Research and Experimental Development Directorate, Criminal Investigations Directorate, Offshore and Aggressive Tax Planning Directorate, International and Large Business Directorate