Large Business Audit Manual
International, Large Business and Investigations Branch (ILBIB)
The original version of this manual is available electronically to Canada Revenue Agency (CRA) employees and has documents embedded in it. This version shows these documents as appendices.
The electronic version of this manual used by CRA employees has links to information in an intranet system called InfoZone. InfoZone is only accessible to CRA employees. You can ask for this information by making an access to information request.
This manual was last updated March 2016.
On April 1st, 2016 the Compliance Programs Branch assumed a two Branch structure consisting of the International, Large Business and Investigations Branch (ILBIB) and the Domestic Compliance Programs Branch (DCPB).
The Compliance Programs Branch (CPB) keeps current an Income Tax Audit Manual for its directorates. Presently, it can be accessed to through the Small and Medium Enterprises Directorate. The Income Tax Audit Manual was written specifically for audit staff involved in the audits of small and medium sized businesses.
This Large Business Audit Manual (LBAM) is written as a supplement to the CPB’s Manual. It has distinguishing features of the Large Business audit process and provides the audit teams with a guide through the stages of the audit process and its policies, procedures and quality standards.
This manual contains three chapters, annex and a section on best practices.
Chapters 1 (mandate) and 2 (program) put the work of the audit teams in context. Chapter 3, the most important one, is about the flow of operations. The “Best Practices” section is intended as an opening to improvement; audit teams will discover practices that could be of help.
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Hypertext links have been created for moving within the text. There are also links that give access to texts on Infozone. Once you have visited a reference, it is recommended to use the arrows in the tool bar to return to the text.
This manual is based on the manuals of the Laval and Toronto centre TSOs, and initiatives of other TSOs. It is also based on "Large business program policy and procedures guide Québec".
- 3.1 Responsibilities
- 3.2 Planning
- 3.3 Development of issues and general audit plan
- 3.4 Conducting the Audit
- 3.5 Communication of Results
- 3.6 Finalization
- 3.7 File assembly
Chapter 1 - Mandate
The ILBD mandate is to be the Agency's centre of expertise in the administration of large business, international tax and aggressive tax planning (ATP). The Directorate contributes to the Agency's overall mandate by ensuring Canada receives its fair share of taxes from international business and financial transactions. The ILBD provides functional leadership, policy development and program direction for international, ATP, large business and basic file auditors in Tax Services Offices and for servicing non-resident clients through the International Tax Services Office. The Directorate also performs the competent authority functions under Canada's tax treaties with respect to specific taxpayer requests.
1.3 Objectives of the large business audit program
The mandate of the LBAD aligns to the Agency’s mission, vision and values of contributing to the public trust in the fairness and integrity of Canada’s self assessment system of taxation.
The Division addresses non-compliance issues by large businesses and provides analytical services and guidance to all other programs within the International and Large Business Directorate (ILBD). The Division is responsible for analyzing large business audit results, developing and publishing strategic policies for large business, developing and maintaining partnerships with other tax authorities and providing guidance and support to staff engaged in the audit of large businesses.
1.4 Planning Guidelines
The Financial and Performance Management Division of the CPB publishes Program Business Plans for every audit program. For the International and Large Business Directorate these guidelines may include:
- Management agreement
- Message from the Director General
- Program overview
- Functional Program changes and impacts
- Program priorities and expectations
- Program monitoring
1.5 Quality Assurance
This is a link to the CRA’s internal reference system, where auditors can find information on Continuous Program Integrity Review (CPIR) and the quality standards for the Large Business Audit program including:
- Risk Assessment
- Audit Planning
- Audit Work Performed
- Legislation and Policies
- Audit Documentation
- Confidentiality and Security
- Time Management
- Data Integrity
Chapter 2 - Organization of Program 31
2.1 International and Large Business Directorate
This is a link to the CRA’s internal reference system, where auditors can find the most current information on the Directorate’s announcements, tools and resources, committees and working groups, divisions, topics, contacts and reference materials.
2.2 Large Business Audit Division
This is a link to the CRA’s internal reference system, where auditors can find the most current information on the Division’s sections and services, mandate, core compliance programs, communications, policy and legislation, international relationship management, contacts, ILBD reference material, income tax - Large Business (ILBD Topic), Ontario Aggressive International Tax Planning Initiative (Service Level Agreement II), approach to large business compliance, and CPB Memos.
2.3 Large File Case Managers
This is a link to the CRA's internal reference system, where auditors can find the most current list of managers across the country, by region and TSO.
Chapter 3 - Large Business Audit Process
The purpose of this chapter is twofold. Firstly, it explains the respective responsibilities for large business staff in the large business audit process. Secondly, it ensures effective service delivery that meets the objectives and quality standards of the large business program.
This chapter reviews all stages of the audit process performed in TSOs, highlighting the directives for quality delivery based on the large business program's mandate.
The Large File Case Manager (LFCM) of the large business program is responsible for managing operations that examine businesses with a view to discovering, identifying and dissuading the non-observance in high-risk sections. The LFCM uses a team approach to perform an audit. The audit team comprises a LFCM, one or more auditors assigned to the file and auditors from required specialized areas.
The LFCM actively participates in the audit of a large business file. As the leader, he/she must co-ordinate the work of all team members, regardless of which sector they belong to. He or she must ensure efficient use of available resources.
Specifically, the LFCM is responsible for developing the general audit plan as a team and ensuring its methodical implementation. He or she must also manage taxpayer relations and ensure that taxpayers understand the audit plan.
The Large File Section Manager (LFSM) or the Assistant Director of Audit (ADA) establishes the annual work plan of the section in regard to the objectives of the Large File Program that were specified and transmitted by the Regional offices.
It is also the LFSM's or the ADA’s responsibility to assign specific responsibilities to LFCMs and ensure they have the training and tools required to perform their tasks.
Overview of the Large Business audit process
The Large Business audit process is divided into two phases. The first phase ends in the creation of a list of audit issues filtered through a risk analysis, and preparation of a general audit plan. The second phase goes from the actual audit of issues selected to the file finalization.
Activities that have an impact on audit quality and effectiveness are grouped under six (6) headings:
- Development of issues and general audit plan
- Conducting the Audit
- Communication of Results
- File Assembly
The directives and procedures as well as any relevant references are explained under each heading.
3.2.1 Large Business Section’s work outline
The work outline of a TSOs Large Business Section is based on the production and results objectives established by the Region (see 1.4 Planning Guidelines). These objectives are aimed at the highest risk areas and may be established by a team made up of the Regional Program Advisor together with either the Large File Section Managers or the Assistant Directors of Audit in the region. The Large File Section Manager or the Assistant Director of Audit, jointly with the Large File Case Managers, will identify the files or audit issues that bear risk.
According to these objectives the LFSM or the ADA, with the LFCM, will prepare the work outline of their section using the D.I.D. approach (detect, identify, deter non-compliance in high risks areas) and will:
- Set production objectives and priorities;
- Establish a workforce and other necessary resources; and
- Prepare the work outline using the D.I.D. approach.
3.2.2 Team workload
At the beginning of each year and within the section’s work outline, LFCMs prepare their budgetary planning based on ongoing and new audits.
Prepare team's work outline for the year
- Identify files and taxation years to be audited.
- Assess amount of time to be spent per file within the section’s work outline.
- Consider constraints (e.g. taxpayer availability, statute-barred date, employee training, etc.).
For new audits:
- Contact the taxpayer to ensure that an audit is possible, to agree on a field audit date and an initial meeting date, to identify the person that the Electronic Commerce Audit Specialist (ECAS) can contact, and to determine how to obtain annual reports, detailed financial statements and contemporaneous documentation.
- Make a service request with an ECAS to receive taxpayer information in computerized format.
- Submit annual production budget to the section head.
3.2.3 Inter-divisional relations
In order to facilitate an integrated large business audit approach, Large File Case Managers will share their planning with the sections involved, such as the Electronic Commerce Audit Section, International Audit, Aggressive Tax Planning, and SR&ED as per AD-98-07 and AD-97-03.
AD-98-07 and AD-97-03 are examples of where there are links or hypertexts to the InfoZone but not links in this document. Details of any material presented in this document can be accessed through the Access to Information and Privacy Directorate.
Once an audit start date has been arranged and scheduled with the representative, the first step is to identify how electronic data could be transferred to us (existing systems, format, media used, etc.) and put a service request to the ECAS (pre-questionnaires to taxpayers, where applicable).
For International Tax Audit, it will often be necessary at this stage to issue the contemporaneous documentation request letter (issued by the international auditor), which should be submitted to the representative on a set date.
3.3 Development of issues and general audit plan
The objective of this stage is to draw up a list of specific audit issues after performing a review and strategic analysis of the available information. Some information is already available at the office and a review of this information can generate a more general list of possible audit issues. A strategic risk analysis should include a comparative analysis of the detailed trial balances and taxpayer's documents that support the T2s and their schedules. This task, usually performed at the taxpayer's location, makes it possible to select a list of specific audit issues generated through the risk assessment. The second stage of the audit process will be based on this list plus the general audit plan.
3.3.2 Opening the file
At the start of the audit process, the LFCM makes sure that the list of information sources is complete, that all required information is entered (screen 1 and Supp) and that he or she has the necessary information filed by the group's corporations (financial statements, trial balances, computerized records of detailed transactions, T2, T106, T1134, T1135, etc.). The manager must also arrange the audit team, including representatives from required specialized sections.
- Opening of Audit Information Management System (AIMS) screens,
- BFICS update,
- Service request to International Audit and Aggressive Tax Planning to include them in issues and general audit plan development,
- Gathering of financial and tax information filed by the taxpayer. Prepare a letter requesting required documentation either prior to or at the start of the field audit,
- Opening of AIMS screens according to the Ontario initiative,
- Corporate Tax Administration for Ontario: CTAO Project.
Requesting assistance from Ontario Region in respect of CT23 return.
|E1-S5||Consultation with specialized audit areas (SAA)|
AD 98-14R, Annex A
3.3.3 Review of information sources
The LFCM and auditors assigned to the file review both internal and external information that is available to them at the office, for both the primary and controlled files. This analysis will be continued at the taxpayer’s location with the information obtained from the latter (see 3.3.4).
- Review of the Agency’s programs and directives (Compass profile analyses, industry checklists, specific training courses, etc.)
- Review of permanent file and previous audit file,
- Review of public information sources (annual reports, organizational charts, Internet sites, data retrieval software, etc.),
- Review of taxpayer’s affairs and those of its industry,
- Review of taxpayer’s financial information,
- Review of taxpayer’s tax information.
This review marks the start of the standardized risk assessment process. To facilitate this approach, the audit team will use the Standardized Audit Risk Assessment Template (“SARAT”) developed for this purpose.
|E1-S1||Review of information|
|E1-S3||Risk Assessment: Selection of Control Files|
- Beforehand, send the representative a list of the books and records required (see Appendix 1), as well as desired turnaround dates that have been based on communiqué AD-98-29 Sample Audit Protocol - section 6, Books and records required (see Appendix 2)
- Inform the representative of the facilities required (offices, filing cabinet, premises security, and internet line). Set up dates to introduce the audit team (initial interview) and start field work
3.3.4 Meeting with taxpayer
The LFCM must set up a meeting with the taxpayer to focus on the audit work to be done and create effective work conditions for both parties. Depending on the circumstances, this meeting may be held prior to or at the start of the fieldwork.
On the agenda, introduce the team, take note of any developments and major transactions of the group since the last audit, agree on the conduct and administrative aspects of the audit with the taxpayer, and indicate that a list of specific audit issues will be submitted to the taxpayer at the end of the first audit phase.
- Ensure the team understands the taxpayer's needs, constraints and expectations,
- Confirm entities and years targeted in the audit,
- Define responsibility of the respective team members,
- Set an implementation schedule,
- Arrange some facilities for the team (office, telephone, filing cabinet, fax, remote access, etc.),
- Make sure required information is available at the planned time,
- Ask the taxpayer if they plan to submit requests for adjustments for the years audited,
3.3.5 Strategic file review
The audit team continues its review work at the taxpayer's location. It performs a more in-depth analysis of financial and tax data using the basic documentation requested at the start of the fieldwork.
An information review, carried out in the strategic framework of the risk analysis, brings out the key tax issues, given available resources and deadlines.
- Gather relevant information,
- Assess risk elements (AD-98-25),
- Select or reject potential audit issues (AD 98-14R).
Once this step is completed, we have a list of specific issues that will serve as a reference point for all staff involved in the audit and will be a key point for the general audit plan.
This work must be documented accordingly (AD 98-13).
To facilitate this task, a standardized risk assessment process model (SARAT) has been created. Using it promotes quality (see 3.3.3)
|E1-S2||Risk Assessment: Selection of Audit Issue|
|E1-S6||PIA Audit Plan|
3.3.6 Development of the general audit plan
A general audit plan must be prepared for any audit. This plan is an audit roadmap. It contains all of the information relevant to the proper conduct of the audit and was discussed previously with the taxpayer.
- Prepare the general audit plan jointly with auditors from the specialized audit areas according to usual procedures (Part A, which will be submitted to the taxpayer and Part B, a more detailed risk analysis)
- Define each team member’s responsibilities, including auditors from the specialized audit areas, asking questions at each audit phase of who does what, how, and when it must be reported. Establish and maintain at all time a cooperative environment among those who are involved in the audit. Risk analyses from specialized audit areas will also be reviewed and added to the general audit plan.
The topics identified in the audit plan must be numbered; this numbering could also be used to monitor the audit query sheets (T-997) - see Appendix 3
- Submit the audit plan (Parts A and B) for review and approval by the Manager, Large Business Audit, the Assistant Director, Audit or the designated replacement.
- Present the audit plan to the taxpayer with the audit team present and explain its content.
- Audit plan review (AD-98-10)
|E1-S7||General Audit Plan reviewed and approved|
3.4 Conducting the audit
The key elements in this process involve the orientation and control that the LFCM must constantly exercise on audits in order to complete the general audit plan and follow the quality standards for the conduct of operations.
A large business audit involves many stakeholders.
- Define the responsibility of each team member, including auditors from specialized areas. Asking questions at each audit phase on who does what, how and when it must be reported. Establish and maintain at all times a co-operative environment among those who are involved in the audit.
AD-97-03: The involvement of Specialized Audit Areas in the on-site identification of audit issues for the audit of corporations in the large file program
AD-98-07: Large File Case Managers and their relationship with specialized audit areas, including Revenue Collections
AD-98-16: Guidelines with respect to consultation for tax avoidance issues
The efficiency of an audit is based on obtaining information in a timely manner. Actions taken in that regard include the use of statutory compliance tools where appropriate.
An audit uses a set of measures, processes and techniques.
- Refer to directives and other instruction manuals regarding the conduct of review, analysis and research;
Here are elements that should always be considered for every large business audit:
- Provincial Income Allocation (PIA): because the Agency is mandated to protect the interests of the agreeing provinces, an audit of the provincial income allocation formula is mandatory for any compliance audit of income tax under our program and should, insofar as it is possible, be performed at the beginning of the tax audit (there may be delays where proposed adjustments are made to non-agreeing provinces). Bear in mind that the time spent on auditing this topic must be identified using specific code 156.
The provincial income allocation audit procedures can be found in AD-02-03R and a specific worksheet to complete an Ontario PIA - see Appendix 4.
- Requirements for information/Compliance Order: Please consult the official requirement guidelines available in the CRA Electronic Library, Section 10.8.0 of the Audit Manual (Operations Manual), which set out the criteria for serving the requirements and provides other helpful information. See Appendix 5 for the coding to enclose in screen 1 of the AIMS if you do issue a requirement.
The decision to issue these formal requirements will always be made as a team with all the personnel involved in the file and with the Large Business Audit manager. When the information is not given by the taxpayer a compliance order could also be considered.
All requirements for information must be approved pursuant to the Income Tax Act (Act) according to the Delegation of Ministerial powers, duties and functions.
We must identify the person in charge of financial services or an equivalent corporate executive before serving the taxpayer a Requirement for information. If the information or documents are not provided, we would serve that individual with a Compliance Order or with a Requirement for information.
|E3-S5||PIA issues addressed|
Large business auditing is complex work that is only possible through the sharing of knowledge and the integration of the specialized audit areas.
- Make sure that the specialized areas are consulted as soon as the auditor gets information that affects their field of jurisdiction.
- Where the team sees fit, forward requests for technical and legal assistance from appropriate areas (e.g. Industry Specialists, Justice, Headquarters, Technical Interpretations, Technical Applications).
|E2-S5||Referrals / Consultations|
See Appendix 6 for Coding for exchange of information.
Given the duration of any large business audit, plus the number of stakeholders and the scope of work complete, good documentation is essential. The quality of documentation is often indicative of the quality of the work performed.
- Follow audit conduct in its major events (e.g. log, T2020).
- Identify audit steps for a given issue.
- Organize documentary evidence of proposed adjustments (e.g. working papers, analysis reports, reference documents, correspondence, opinions, etc.). Each page of the working paper must be indexed.
|E6-S3||Log of action, Documentation|
|E2-S1||Audit Steps, procedures and techniques|
AD-98-13: Documentation on issue selection, audit steps, and issue disposition for large file audits
3.4.5 Periodic reviews
The LFCM is responsible for monitoring and following up on the conduct of the audit. This role includes:
- Making schedule adjustments;
- Reviewing quality control sheets of large file auditors;
- Assessing and approve work performed and in progress;
- Agreeing on items to drop and those to add;
- Reminding audit support areas of work agreed on and scheduled deadlines;
- If necessary, reviewing and amending the audit plan;
- Informing the taxpayer's representatives of audit progress and implementing call-back measures necessary to gather information required;
- Establishing the status of controls and follow-ups;
- Documenting the periodical reviews;
- Meeting regularly with the team members and the taxpayer's representatives.
|E2-S1||Audit Steps, procedures and techniques|
|E2-S2||Low potential files stopped|
|E2-S3||Taxpayer informed of audit progress|
|E2-S4||Monitoring Audit Progress|
|E5-S1||Security guidelines for confidentiality|
|E5-S2||Enough time to prepare|
|E6-S4||Undue Delays, Requirements|
AD-98-07: Large File case managers and their relationship with specialized audit areas, including Revenue Collections
3.4.6 Mid-term review
Halfway through the audit phase (phase II), there should be an independent assessment of the work completed and of the work yet to complete. Usually, the Large Business Section Manager or the Assistant Director of Audit is in charge of this review in the same way that he or she reviews and approves the general audit plan (see 3.3.6).
|E6-S5||Independent mid-point review conducted|
AD-00-05: Mid-Point Review of Large File Audit Plans
3.5 Communication of results
While communication plays an important role throughout the audit, it is of utmost importance when it comes time to communicate the audit results to a taxpayer, especially when discussing points at issue or when responding to the taxpayer's submissions. Clarity, precision and relevance are key factors to effectiveness. The LFCM should prepare and lead these communications including the ones from specialty audit sections.
The objective is to arrive at a well-documented final proposal based on the ITA. There may be an agreement reached and documented when an audit issue relates to the interpretation of the facts as opposed to the interpretation of the law. It is important to explain the difference between an audit agreement and a waiver of a taxpayer’s right to object. The following procedures issued by the Appeals Division should be reviewed and applied to a waiver procedure.
AD-05-02B: The Audit Agreement and Waiver of a Client’s Right to Object
- Identify the time and manner in which to communicate the points at issue and proposed adjustments.
- Indicate the basis of our position (facts, sections of the ITA, technical opinions, policies, etc.) to ensure that our position is understood.
|E3-S1||Audit results technically correct|
|E3-S2||Audit policy and procedures|
|E5-S3||Explanation for adjustments|
Even with the best conditions and communication, it is possible that taxpayers will want to make representations following the communication of results. Therefore, you must:
- Study the taxpayer's submissions and respond appropriately in a timely manner.
- As applicable, seek the support of qualified areas (Justice, Technical Interpretation, etc.).
- Alert Headquarters to the discovery of weaknesses or anomalies in the ITA or policies and suggest possible corrective action. (Forward this information to the Large Business and Program Integration Division, International and Large Business Directorate)
- Structure meetings to discuss points at issue in such a way that the parties have the attention and time required to explain their positions and disagreements.
- Use the Audit Agreement and Waiver of a Client's Right to Object, as required (see section 4.4)
- Determine whether relief provisions are applicable to reach an agreement, according to IC07-1 Taxpayer Relief Provisions
- Structure meetings to discuss points at issue in such a way that the parties have the attention and time required to explain their positions and disagreements.
- Use the Audit Agreement and Waiver of a Client's Right to Object, as required.
|E3-S4||Audit Agreement and Objection Waiver|
AD-05-02B: The Audit Agreement and Waiver of a Client's Right to Object
- Determine whether fairness provisions are applicable.
|E5-S5||Taxpayer Relief Provision|
3.5.4 Final proposal
One of the last steps in communicating with the taxpayer will be to communicate all of the proposed adjustments for all of the large business audit areas (domestic, international, aggressive tax planning, etc.). For each, you must:
- Give the taxpayer (or mail) a letter informing them that the audit is complete, and include the final proposed adjustments.
- Obtain a written response from the taxpayer indicating their position and their elections concerning discretionary deductions and loss carryovers, as applicable.
- Advise the manager of the Large Business Audit Section, in HQ, when there are material or controversial adjustments.
|E4-S9||Final letter sent to Taxpayer|
3.5.5 Post-audit meeting
At the end of an audit, it is customary and appropriate that the audit team and the taxpayer hold an assessment meeting. Everyone who was involved may, at that time, report strengths and weaknesses and make suggestions to improve efficiency for the benefit of both parties.
The most important thing at this stage is to properly document all audit results and to issue reassessments, as applicable. The LFCM and LFSM or ADA must exercise certain controls and give approval. Below are the key components of this process.
To finalize a large file business audit, it is important to take the following steps.
- Draft the required reports: T20 report, penalty report, capital gains vs. income report, fairness report, provincial income allocation report, etc.
- Obtain the T-20 reports from the specialized areas involved and ensure closure of their screens.
- Prepare the assessment documents and any documentation required internally (T7W-C, T99A, coding, conciliation).
- Send the file to the AIMS co-ordinator, who forwards the documentation to the Taxation Centre.
- Check reassessment status in CORTAX and follow up with the Taxation Centre to ensure that reassessment notices were sent prior to the statute-barred date.
- Review the complexity rating and send it to Head Office. Update the BFICS database.
|E4-S1||BFICS and Complexity Rating|
|E4-S6||PIAAR clear & complete|
|E4-S8||Sign-off / Approvals|
3.6.2 Audit reports
The preparation of reports is a very important step in the audit finalization process. These reports are a means of communication, and they should therefore be clear, complete and concise. These reports provide a summary of the work performed and any resulting assessment actions.
In most cases, the reports should satisfy the users’ needs without requiring them to examine the detailed working papers.
The auditors report (T20) should use the standard template (section A to J) and include at the beginning of Section E, “Explanation of all changes”, and a summary of the adjustments by fiscal year. See section 11.6.1 of the CPB Audit Manual for more details pertaining to the T20.
|E4-S3||Audit reports clear and concise|
3.6.3 Preparation of forms for issuance of reassessments
- Prepare T7W-Cs and T2 schedules in collaboration with the taxpayer. Here is a copy of the Audit Manual procedures for special cases (amalgamations, wind-ups, etc.), see Appendix 7.
Since a nil reassessment cannot be subject to an objection and given that a year already under objection requires special mention on the T7W-C, see Appendix 8 for some additional explanations to consider for these particular cases.
- Prepare the other forms required for the reassessments. The T99A is also very important. See Appendix 9 for an excerpt from the Income Tax Audit Manual about this form.
3.6.4 Recording of results
Screen 5, coding and reconciliation of changes
AIMS Screen 1, 5, E, L, etc.
AD-98-17: Instructions for Processing Real Time Audits
3.6.5 File Review
It is up to the audit team to perform a quality review of the closure and reassessment documentation. In fact, many Large File Sections have developed a checklist to make this task easier.
3.6.6 Document Flow
- In a folder on top of the file submitted to the AIMS co-ordinator, the documents should be arranged as follows:
- For the taxpayer: - T7W-C and revised T2 schedules
- For Headquarters:
T7W-C and schedules
T20 and other reports
Coding and explanations
- For non-participating provinces:
T7W-C and schedules, T20 report
- Priority assessment:
The signed T287 form must always be attached to a priority reassessment. According to the procedures, these files will be assessed only when the adjustment to the taxable income exceeds $10,000 or if tax adjustment exceeds $3,000. In addition, two copies of form T287 must arrive at the AIMS work section thirty (30) days before the statute-barred date (stapled to the front of the file), as the taxation centre must receive the form between 7 to 10 working days before the file is sent. See Appendix 10 for an excerpt from the Income Tax Audit Manual, which deals with priority reassessments. Note that we can now also send the reassessments documents beforehand to taxation centre officers, via the Entrust e-mail system or via protected fax.
- Provincial Income Allocation Report
All PIA audit packages (both change and no change files) should be mailed, via internal mail, to the designated PIA Specialist for the TSO.
The list of designated specialists is located at the following address:
Communiqués - Addendum to Communiqué AD-02-03R2
- BFICS update
Send to International and Large Business Directorate, Large Business Program Section, 344 Slater Street, 6th Floor, Ottawa, Ontario, K1A 0L5, attention: Manager.
3.6.7 Quality control
A checklist is a good tool to assist in quality control
3.7 File assembly
3.7.1 Documentation functions
An audit creates many documents that have different values and functions. All files generate two types of documentation: specific and general.
- Specific documentation provides an understanding and explanation of what occurred in an audit cycle for various purposes (appeals, courts, next audit cycle, review of program). Logically, this information belongs to a first group called "Audit file" (see 3.7.2).
- General information provides details on the corporate group as such (organization and operations) and on its tax matters. This information goes beyond the current audit cycle. According to procedure, this group is found in the file called "Permanent file". (see 3.7.3) For practical reasons, some elements of the audit file also appear in the permanent file. It should be noted that the relevant information continues to be created daily and the permanent file—with all of its appropriate subdivisions—is the appropriate location to collect this information.
|E4-S7||Permanent file well organized|
3.7.2 Audit file
We need to recognize that various practices exist, depending on the TSO. In Large Business, there are two main ways to set up an audit file, both of which are acceptable. It is left up to each TSO to adopt a preservation structure that is conducive to future consultation and work.
- Method one: consolidate into one single file (called "Closure file") any information that is relevant to an audit cycle.
- Method two: Divide documentation into T2s and a separate file (called "Working paper file").
Method one: into one single file
Closure files structure:
(Tabs A-F are bound into one or more volumes; Tab G is in a separate volume)
|A||Entries||Screen 1, screen 5, screen L, coding sheets, T99A, CORTAX print-outs, etc.|
|B||Assessment details||T7WC, revised T2 schedules, etc.|
|C||Scope and audit report(s)||T20 report, provincial allocation report, penalty report and other reports, Protocol or General Audit Plan, etc.|
|D||Correspondence||Final letter, draft reassessment(s), taxpayer's approval, taxpayer's requests, waiver, T997, requests for rulings and responses, T2020, etc.|
|E||Changes||Working papers explaining all change items (amounts, position, research, analyses, responses to submissions, audit steps, procedures and techniques, etc.)|
|F||Other issues (according to T20)||Working papers on a selection of audited items with no change.|
|G||Phase 1 documentation
(re: risk analysis)
|All documentation used to prepare the list of issues and the general audit plan (see 3.2 & 3.3), including the Standardized Audit Risk Assessment Template (SARAT).|
Method two: in the T2s and in a working paper file
Bound in the T2s:
- CORTAX print-outs based on the most recent reassessment.
- Screens (5, 1, SUPP) and coding sheets.
- T7WC and revised T2 schedules.
- T99A and other required forms.
- Memorandum to the Taxation Centre (loss identification notice, T67AM T67BM).
- Reports: T20, Part XIII, provincial income allocation, fairness, penalty, etc.
- Reports/memos from specialized audit areas.
- Referrals to Head Office, Justice Department and other areas.
- Correspondence in chronological order (with index, if applicable).
- T2020 or log.
- Index to trace documentation on adjustments, which is kept in the working paper file or in the permanent file.
Working paper file:
Any documentation that the audit team deems fit to keep (plus the Standardized Audit Risk Assessment Template) with respect to explaining work completed during the entire audit process as well as adjustments made. In this respect, several TSOs have set their own guidelines or procedures.
3.7.3 Permanent file
We should not mix up the permanent files that are stored at the TSO and the permanent documents envelopes (PDE) that originate from the Tax Center (TC). In a PDE, there are specifically elections made by the taxpayer and few key documents from audit.
According to the Compliance Programs Branch’s Audit Manual (AM), audit documents and other relevant information including permanent documents are stored at the Tax Center (TC). These documents are either attached to the T2 Return (T2) or placed in the Permanent Document Envelope (PDE).
However, the AM further states that because of the size and complexity of the operations of the large business taxpayer and because of the greater frequency of audit, it is preferable to maintain in the TSO a Permanent Audit File.
The permanent file stored at the TSO contains general information on a group's corporate organization, operations and major transactions, financial structure and accounting system. It retains the documentation that reveals the corporation's tax history, past audit results, and taxpayer's tax elections that may have future repercussions. It is also where one accumulates all information or data that may be used in a future audit.
For the time being, there is no mandatory permanent file structure. The list of categories below is given for illustration purposes though it generally corresponds to the one found in the TSOs. Each office is encouraged to complete it based on its needs.
|History and organization||BFICS, organizational charts, annual reports, prospectuses, press clippings, list of information sources (Internet addresses; based on AD 98-08), etc.|
|Tax policies||Corporate policies (relocation, employee benefits, pension plan, etc.), technical opinions issued by our departments (interpretation, application, etc.), responses from the Agency during “round tables” (CTF, APFF, TEI, etc.).|
|Audit reports||Past audit reports: T20 reports (with T7W-C and revised schedules), reports for assessment under Part XIII, etc.|
|Tax follow-ups||Adjusted cost base (ACB) adjustments, T2S (3), calculation of at-risk amounts, elections, etc.|
|Contractual documents||Purchase of real estate, long-term contracts relating to operations, joint ventures, etc.|
|Books and records||Chart of accounts, accounting system (structure, particulars), account aggregation (trial balances/[FS]), etc.|
|Next audit||Relevant analyses for the next audit, audit issues identified for the next cycle, comparative analysis of financial and tax information from last audit (on CD).|
3.7.4 File update
The files of the Large Business Program are specific files. The audit team is the most qualified to update these files as they are the most familiar with the content of the files. The LFCM is responsible for updating the files. In view of this, it is not justified to use retention or disposal rules for each piece of documentation.
- Audit files update
At the end of each audit, the audit team determines which documents should be kept in the audit file (closure file or working paper file) or in the permanent file or in both files.
At the end of each audit cycle, the LFCM determines whether the audit files from previous audit cycles should be retained. He must take into consideration the right of appeal of the taxpayers.
- Permanent file update (stored at the TSO)
At the end of each audit, the audit team selects documentation that will be stored in the permanent file categories (see 3.7.3). Also, the team reviews the content of each category in the permanent file to identify the documents to be removed that are no longer relevant.
During the year, the LFCM will use the permanent file categories to keep the incoming information that he judges relevant.
- Permanent Document Envelope update (stored at the TC)
The current practice is to place in the PDE that is being returned to the TC a copy of T7W-C and revised T2 schedules along with a copy of the audit reports (T20, PIAR, etc.) indicating a retention period in excess of 5 years (cat. I).
3.7.5 File Location
Audit files and permanent files should be securely stored in the TSO in locked filing cabinets or room accessible only to the Large Business staff.
The Large Business Section Manager or the Assistant Director of Audit is responsible of these files.
3.7.6 Electronic Format
When documentation (worksheets or others) is kept on electronic media (CDs, diskettes), these CDs and diskettes should be stored in the « Next audit » category of the permanent file or in another suitable and secure place.
The following illustrates the different components of the audit process - Phase I:
Standardized Audit Process - Phase 1
- CRA’s directives and programs
- Previous audit files
- Tax payer’s filed documents, financial Information and business or industry characteristics
- Public data sources
|1) Identify potential risks and potential audit issues||1) SARAT(note) - IRG|
|2) Assess audit risks and audit approach||2) SARAT - PIRA I|
|3) Risk assess potential audit issues (selection/rejection, risk level)||3) SARAT - PIRA II|
|General audit plan||SARAT - Audit plan|
The document SARAT in this ANNEX means the Large File standardized audit risk assessment template.
The following table list quality assurance standards (QAS) to consult:
|Draft Standard (S) - Detailed||Standard short|
|E1 - S1
The information gathering process includes the consideration of various sources pursuant to, but not limited to, AD98-25 Appendix A-2, AD98-14R Part B, and AD98-08.
|Review of Information|
|E1 - S2
A strategic analysis and risk assessment process was conducted for the selection of issues in accordance with AD98-25 Appendix A-1 and AD98-14R Appendix B.
Selection of Audit Issue
|E1 - S3
Control files were considered during the risk assessment process in accordance with AD98-25 and AD98-14R.
Selection of Control Files
|E1 - S4
The reasons for the selection and rejection of significant issues were documented in accordance with SARAT, AD98-13 and AD98-14R.
|E1 - S5
Specialized audit areas (SAA) have participated or were consulted during the planning stage, in accordance with AD-97-03, AD98-07, and
AD98-14R (Appendix B).
|Consultation with specialized audit areas (SAA)|
|E1 - S6
The Audit Plan includes a review of Provincial Income Allocation issues and procedures to address any concerns, AD02-03R2 and AD02-04.
|PIA Audit Plan|
|E1 - S7
The General Audit Plan was reviewed and approved as mandated by AD98-10.
|General Audit Plan reviewed and approved|
|E1 - S8
The taxpayer was informed of the general audit issues and consulted on administrative aspects in accordance with AD98-14R (Part A, Appendix A).
|Draft Standard (S) - Detailed||Standard short|
|E2 - S1
The appropriate audit steps, procedures and /or techniques were used and were documented in accordance to AD98-13.
|Audit Steps, procedures and techniques|
|E2 - S2
Low potential files within the case were closed after risk assessment indicates little audit risk / potential for non-compliance, in accordance with AD01-01.
|Low potential files stopped|
|E2 - S3
LFCM met/communicated with taxpayer in order to monitor the audit progress and conduct.
|Taxpayer informed of audit progress|
LFCM met/communicated with team members in order to monitor the audit progress. AD98-07 Appendix A #2, #3
|Monitoring Audit Progress|
|E2 - S5
Referrals/consultations were made to the appropriate areas, as required (i.e. Head Quarters, ISS, ECA, Collections, Justice, Valuations, Appraisals…)
|Referrals / Consultations|
Audit conducted using a team consistent with the risk assessment process and General Audit Plan. Ref: Communiqué AD98-07 APP A#1
|E2 - S7
Appropriate actions were taken to manage the audit queries. AD98-14R Appendix A - Communication strategy for the request of information.
|Draft Standard (S) - Detailed||Standard short|
|E3 - S1
The audit results were technically correct in accordance to legislation.
|Audit results technically correct|
|E3 - S2
The audit results were in accordance with audit polices and procedures.
|Audit policy and procedures|
|E3 - S3
Penalties were considered and were properly addressed, when applicable.
|E3 - S4
AD05-02B - The Audit Agreement and Waiver of a Taxpayer’s Right to Object was properly applied.
|Audit Agreement and Objection Waiver|
|E3 - S5
Provincial Income Allocation (PIA) issues were addressed in accordance with established procedures.
|PIA issues addressed|
|Draft Standard (S) - Detailed||Standard short|
|E4 - S1
BFICS was updated and, where necessary, the complexity-rating template (Excel workbook) was prepared and submitted to HQ for their review.
|BFICS and Complexity Rating|
|E4 - S2
The reassessment documents were clear and correctly completed.
|E4 - S3
The audit report reports (T20R, penalty report etc.) were clear, concise, with the appropriate rationale, legislative reference and were cross-referenced to working papers.
|Audit reports clear and concise|
|E4 - S4
The audit documentation (working papers) was clear, complete, well organized and supported the audit findings.
|E4 - S5
Correspondence was clear, concise, complete, well organized, and contains the appropriate language, grammar and spelling.
|E4 - S6
The Provincial Income Allocation Audit Report (PIAAR) was completed in accordance with established procedures. Communiqué, AD02-03R2 (Infozone), AD02-04.
|PIAAR clear & complete|
|E4 - S7
The Permanent file is well organized and contains pertinent information, in accordance with the guidelines provided in the Audit manual.
|Permanent file well organized|
|E4 - S8
The appropriate final sign-offs or approvals were evident in the file. Ref. Communiqué AD98-07
|Sign-off / Approvals|
|E4 - S9
A Final letter was sent to the taxpayer informing them the audit was concluded.
|Final letter sent to Taxpayer|
|Draft Standard (S) - Detailed||Standard short|
|E5 - S1
Security guidelines were followed to ensure confidentiality of taxpayer information.
|Security guidelines for confidentiality|
|E5 - S2
The taxpayer was given sufficient time to prepare for the audit, to respond to information requests, audit queries, and proposals, and to prepare for negotiations, etc., reasonable to the circumstances.
|Enough time to prepare|
|E5 - S3
The taxpayer was provided with a written explanation for all audit adjustments.
|Explanation for adjustments|
|E5 - S4
Submissions were considered and negotiations were conducted appropriately.
|E5 - S5
The Taxpayer Relief provision was appropriately applied, when applicable.
|Taxpayer Relief Provision|
|E5 - S6
A Waiver in respect of the Normal Reassessment Period (Form T2029) was considered, when necessary and for the appropriate purpose.
|E5 - S7
Core Agency Values were displayed throughout the audit process.
|Core Agency Values|
|Draft Standard (S) - Detailed||Standard short|
|E6 - S1
Elapsed time (Days) was reasonable or significant variances were explained.
|Elapse Time (Days)
Overall Audit Efficiency
|E6 - S2
Applied time (hours) was reasonable and significant variances were explained.
|Applied Time (Hours)
Overall audit efficiency
|E6 - S3
A log of action (T2020, Log etc.) was maintained to record significant conduct during the audit.
|Log of action, Documentation|
|E6 - S4
Appropriate action was taken to address undue delays in the conduct of the audit and consideration was given to the availability of statutory authority (i.e. ITA - 231.2, 231.6 requirements), where applicable.
|Undue Delays, Requirements|
|E6 - S5
An independent mid-point review conducted in accordance with AD-00-05.
|Independent Mid-point review conducted|
Audit Process Quality Control List
LARGE FILE CASE MANAGER:
|Audit Process Stages||Control and Follow Ups on Work Performed|
|Program development :
2. Assistance from other TSOs
3. Audit plan
4. Real time audit
5. Risk assessment
6. Team audit
|8. Concurrent audit Customs, excise, GST, HST and QST|
10. Advance ruling
11. Already audited file
12. Non-resident assessment
14. Software used
17. Taxpayer request for adjustments
21. Waiver of letter of right to object
22. Fairness file
24. “Post-mortem” Meeting
|25. Complexity Rating review|
|ACB||Adjusted Cost Base|
|ADA||Assistant Director of Audit|
|AIMS||Audit Information Management System|
|APFF||Association de planification fiscale et financière|
|BFICS||Basic Files Inventory Control System|
|CPB||Compliance Programs Branch|
|CRA||Canada Revenue Agency|
|DID||Detect, Identify, Deter|
|ECA||Employer Compliance Audit|
|ECAS||Electronic Commerce Audit Specialists|
|ISS||Industry Specialist Services|
|ITA||Income Tax Act|
|LBAM||Large Business Audit Manual|
|LFCM||Large File Case Manager|
|LFSM||Large File Section Manager|
|OMoR||Ontario Ministry of Revenue|
|PIA||Provincial Income Allocation|
|PIAAR||Provincial Income Allocation Audit Report|
|QAS||Quality Assurance Standard|
|SARAT||Standardized Audit Risk Assessment Template|
|TEI||Tax Executive Institute|
|TOM||Taxation Operation Manual|
|TSO||Tax Services Office|
Books and Records Required
- Chart of accounts
- The grouping of the various accounts as shown in the financial statements
- Adjusting entries
- Analysis of accounts and reconciliation with the financial statements
- Trial balance
- Consolidated Public Financial Report (of the world business if none for the Canadian)
- Consolidated Financial Statement preparation working papers
- Financial Statements of foreign affiliates, if any
- Financial statements of foreign branches and joint ventures (whether foreign or domestic), if any
- Recent chart showing the structure of the company and its subsidiaries, if any
- Organization chart of management
- List of internal corporate reorganization and amalgamations and wind-ups, if any
- Legal closing documents on acquisitions or dispositions of subsidiaries and / or affiliated companies, if any
- Minute Books for the board of directors, all committees, and shareholders
- Share register
- All filings made pursuant to the incorporation Act
- Provincial tax returns and notices of assessment / reassessment
- Pension Fund statements
- Listing of foreign exchange rates used
- Management reporting letter from external auditor and management’s reply
- Internal audit reports
- Working paper files supporting Schedules 1 (former T2S(1)) items
- Contributed Surplus calculations
- Employee Benefit Manual
- Changes in accounting policies made during the years under audit
Books and Records Required and Related Dates
- Information Required 60 days prior to the start of the audit for the 1997 and the 1998 audit of SSL, ABC Ltd. and XYZ Inc.:
- computer tapes of the General Ledger transactions and General Ledger Master in EBDIC format;
- chart of accounts;
- the grouping of the various accounts as shown in the financial statements;
- adjusting entries;
- analysis of accounts and reconciliation with the financial statements;
- trial balance;
- Consolidated Public Financial Report (SSL only);
- Consolidated Financial Statement preparation working papers;
- Financial Statements of foreign affiliates (other than those already included with Form T1134A or T1134B);
- Financial statements of foreign branches and joint ventures (whether foreign or domestic);
- recent chart showing the structure of SSL and its subsidiaries;
- organization chart of management;
- list of internal corporate reorganization and amalgamations and wind-ups;
- legal closing documents on acquisitions or dispositions of subsidiaries and/or affiliated companies (ownership > 20%); and
- Information required at the start of the audit for the 1997 and 1998 audit of SSL, ABC Ltd. and XYZ Inc.:
- Minute Books for the board of directors, all committees, and shareholders;
- share register;
- all filings made pursuant to the incorporation Act(s);
- provincial tax returns and notices of assessment/ reassessment;
- Pension Fund statement;
- listing of foreign exchange rates used;
- Management Reporting Letter from external auditor and management’s reply;
- internal audit reports;
- working paper files supporting T2S(1) items;
- working papers and documentation for SR&ED claims, including applicable information in electronic format;
- working papers supporting GST returns;
- Contributed Surplus calculations;
- Employee Benefit Manual; and
- changes in accounting policies made during the years under audit.
Additional records that are required after the preliminary review will be requested using query sheets.
Initially Identified Audit Issues for 2007, 2008, and 2009
|101 Salaries and employees benefits||2004-2005-2006|
|102 Meals and entertainment expenses||2004-2005-2006|
|103 Manufacturing and processing benefits||2004-2005-2006|
|104 Capital cost allowances (Schedules 8)||2004-2005-2006|
|105 Reserves and accrued expenses||2006|
|106 Adjusted cost base of shares||2006|
|200 Provincial Income Allocation||2004-2005-2006|
|201 Gain (loss) on disposal of assets (Schedules 4 et 6)||2004-2005-2006|
|202 Deferred income||2004-2005-2006|
|203 Gain/Loss on exchange||2004-2005-2006|
|204 Bad debts||2004-2005-2006|
|205 Cumulative eligible capital deductions (Schedule 10)||2004-2005-2006|
|206 Pension cost and pension expenses||2004-2005-2006|
|207 Interco financing||2004-2005-2006|
|208 Professional fees and legal expenses||2005|
|300 Revenu Québec previous adjustments||2004-2005-2006|
|400 Wind-up of subsidiary||2005|
|500 Part XIII tax on payments to non residents||2004-2005-2006|
|501 Sale of receivables to parent company||2005-2006|
|502 Related party transactions||2004-2005-2006|
ITAS Input Sheet
The images below represent a data entry sheet used by Canada Revenue Agency (CRA) auditors to process adjustments made to Ontario corporate tax returns CT23 and CT8 before the 2009 taxation years (pre-harmonized years). Since April 3, 2008, the majority of the administration of Ontario’s corporate income tax was harmonized between the Ontario Ministry of Revenue (OMoR) and the CRA for taxation years prior to 2008.
Since adjustments to pre-harmonized Ontario returns are rare, this ITAS sheet is rarely used.
This data entry sheet, entitled Integrated Tax Administration System (ITAS), is used to: 1) ensure Ontario Corporation Tax and, or, Ontario Capital Tax reassessments were processed in a timely manner by the CRA and 2) the audit assignment and results are accurately tracked and recorded in the Ontario Ministry of Revenue (OMoR) ITAS.
The contents of this spreadsheet can be described as such:
The header fields include tombstone information: auditor name, telephone number of auditor, area (section and unit) where auditor works; along with Name of Corporation, Federal Account number, AIMS file number, Ontario Account number and CRA case number.
Input fields (summary fields covering a maximum of three consecutive years and including working paper references):
- increase or decrease in ”Ontario Taxable Income (Loss)” including CRA audit changes affecting Ontario only, Ontario specific changes and taxpayer requested changes,
- any changes are required for “Application of Ontario Loss Carry Back”; including non-capital loses, capital losses, farm losses and Restricted farm losses,
- changes to “Income Tax Credits”, namely Incentive Deduction for Small Business Corporations, Surtax, Manufacturing & Processing Profits Credit and Other tax credits,
- Ontario specific changes and taxpayer requested changes for: “Capital Tax: Net Paid-up Capital”; “Capital Tax: Eligible Investments”, “Capital Tax: Total Assets”; “Capital Tax: Aggregate Taxable Capital” and “Corporate Minimum Tax (CMT) Base”,
- Enter any revised “Specified Tax Credits” amounts such as: “Media”, SR&ED” or “Other”,
- any “Allocation to Ontario change” - attach the original and revised copy of T2 Schedule 5,
- list any “Fraud & Penalty” items separately resulting from penalty under the Act, section 162, and
- a space for the auditor to list “Special Instructions” relating to Waiver or Revocation received
Input field for Desk Audit use only (summary fields covering a maximum of three consecutive years) - these fields are a summary of the same input fields mentioned above, without reference to working papers.
The spreadsheet concludes with the auditor and supervisor filling in these cells: Entered by, Approved by, Date processed, Time to process, Start date, Completion date, Down time, Reason for downtime, and a section for the reviewer’s comments.
AIMS Coding for Requirements Issued
|Required Party Code +||Action/Outcome Code (the latest):|
|A||Taxpayer (and related parties)||1||A requirement(s) or a compliance order was issued (monitoring compliance).|
|B||Accountant||2||A requirement was served and complied with.|
|C||Lawyer||3||A compliance order was served and complied with.|
|D||Bank||4||A requirement and/or a compliance order were served but not complied with. Further actions pending.|
|E||Other Third Parties||5||A requirement and/or a compliance order were served but not complied with. Prosecution is in progress.|
|O||Combination of Above Parties||6||A requirement and/or a compliance order were served but not complied with. Prosecution was successful.|
|P||None.||7||A requirement and/or a compliance order were served and not complied with. Prosecution was not successful.|
Enter code for the latest action/outcome. In cases of multiple required parties, enter the action/outcome code that most affects the audit progress and the strongest legal action.
- A2 = A requirement was served to the taxpayer and it was complied with.
- C4 = A requirement was served to a lawyer and it was not complied with.
A further action is under consideration. Once the decision of prosecution is made, update to code 5, and when the outcome is known, enter code 6 or 7 as appropriate.
|Activities||Activity Type Code||Selection Reason Code other than JITSIC||Selection Reason Code JITSIC||ION (JITSIC only)|
|responding to requests from foreign countries, incl. JITSIC
|AIMS cased up audit - reviewing leads received from foreign countries, other than JITSIC
(Spontaneous-in & auto-in)
|AIMS cased up audit - reviewing information received through JITSIC||n/a||n/a||0552||n/a|
|RC509 no audit case - identifying, analyzing and gathering information for potential exchange, incl. JITSIC
|RC509 no audit case - reviewing leads received from foreign countries, other than JITSIC
(Spontaneous-in & auto-in)
532 Large Business -Income Tax Regular
580 Large Business -International Issues
156 Provincial Allocations
The T7W-C sets out the taxpayer's revised taxable income and details of all changes to reported income resulting from the audit. It is also the primary source of information used by the Audit Support/Tax Cal unit to determine the revised income tax payable.
The narrative portion of the T7W-C should provide the following information:
- The taxpayer name and address.
- Detailed description of all adjustments to each source of income. The adjustments should be cross-referenced to supporting schedules, correspondence, notes of meetings held with the taxpayer or the taxpayer's representative.
- Revised Capital Cost Allowance, Loss Applications and other schedules that show the previous and revised figures with explanations of what changes have been made.
- The taxpayer will be provided with a copy of any revisions to Capital Cost Allowance claims for Class 24, 27, 29 and 34 assets.
- The T7W-C and any attachments should provide the details of any changed components of the tax calculation as listed on Forms T99/99A not otherwise evident.
- Following the "Revised Taxable Income" line, comments may be added, where applicable, regarding:
- amounts that are subject to penalties under section 163 of the ITA
- application of penalties under section 162 of the ITA
- number of days interest waived under subsection 220(3.1) of the ITA
- if the taxpayer's loss has been revised, a reference to subsection 152(1.1) of the ITA Notice of Determination is to be made where applicable.
- Where a penalty under Section 163 of the ITA has been levied on income that has been earned in the provinces of Quebec, Ontario or Alberta, an explanation should be provided on the T7W-C (Prov.) of the Amount of income subject to tax on which the penalty applies in those provinces.
Where changes are made to an initial assessment, a T7W-8 will be prepared for T1 individual returns and a T7W-9 for T2 Corporation returns.
Returns (re)assessed with a penalty under subsection 163(1) and/or 163(2) of the ITA, must clearly note on the T7W-C the amount of income subject to penalty so that the non-agreeing provinces (Ontario, Alberta, and Quebec) are able to reconcile the amount subject to penalty.
For T2 Reassessments, the auditor will prepare a T7W-C. It is essential that the explanation of changes be arranged in such a manner as to allocate the total adjustment to the following types of income, where applicable:
- Active Business Income
- Canadian Investment Income
- Foreign Investment Income
- Personal Services Business Income
- Specified Investment Business Income
- Other Adjustments - for example dividends deductible under sections 112 and 113 in computing taxable income.
Where there has been a corporate amalgamation and a return filed by a predecessor company is assessed, the T7W-C should be prepared in the name of new amalgamated company with a reference in the appropriate areas of the T7W-C of the name and income of the predecessor company:
- For example, where A Ltd and B Ltd amalgamate and become AB Ltd, T7W-C's should be addressed to the amalgamated company "AB Ltd" with reference in the "re" area to the income of the predecessor "A Ltd.".
- Similarly the account number of the amalgamated company must be used (a reference to the predecessor's account number should be included in the notice for greater certainty).
The same procedures will apply for re-assessed returns of wound-up companies amalgamated into the parent company, including those companies wound-up where a liquidator has been appointed but no clearance certificate has yet been issued. Note that the transferee or the liquidator has a responsibility only to the extent of the values of the property distributed.
Part 1.3 tax is payable by on every corporation whose taxable capital employed in Canada is in excess of its capital deduction of $10 million. The Part I.3 tax is filed with the T2 return and any changes can be included on the T7W-C provide revised Part I.3 tax information on T99A Special Instruction Area.
Nil Assessment and year under objection
The Federal Court of Appeal previously ruled that no Notice of Objection can be filed for nil reassessments. The Appeals Division thus considers that any objection with regard to a notification that no tax is payable is not valid and the taxpayers are informed accordingly. For situations others than those where we modify a loss (the T/P can then ask for a notice of determination of loss on which he can oppose), the taxpayer has in theory no recourse for the year in question. To avoid that he asks then for a reassessment for the said year to generate tax payable to be able to restore his right to file a notice of objection (double work of issuing reassessments for the same year), it is suggested that the taxpayers be informed that they cannot file a valid objection (or an appeal to Court) if there is no tax payable. They will thus have the possibility of protecting their rights (by leaving a small balance of tax payable).
In the same order of idea, we may have to issue a reassessment for a year already under Objection. It is then necessary to indicate on the T7W-C standard sentences to inform the taxpayer in writing that its notice of objection is cancelled by the reassessment and that he has to file a new notice of objection to protect his right to appeal:
This(These) reassessment(s) nullify(fies) the earlier reassessement(s) and the related objection(s) filed in respect thereof. If you wish to object to the reassessment(s), you must file a new notice of objection.
The purpose of form T99A is to provide the Tax Cal unit with information that cannot be included on the T7W-C and information required to complete various forms to update the T2 file.
In the event that no reassessment is being issued (e.g. where changes are for a statute-barred year) it is necessary prepare a T99A to update the file. A notation should be entered in area L "For update purposes only" or at the top right corner in red.
The auditor must complete one copy of form T99A by for each year reassessed, updated, or where a NIL Notice of Reassessment is to be issued.
If a statute-barred return is reassessed, indicate the reason on the top margin of the T99A, such as:
- T2029 Waiver filed
- Fairness legislation
- Any reason under subsection 152(4) of the ITA, e.g. fraud, misrepresentation attributable to neglect, carelessness or wilful default
- Illegal payments - subsection 67.5(2) of the ITA
Auditors are reminded that rather that processing a priority reassessment, consideration should be given to obtaining a waiver from the taxpayer/registrant for the particular year involved and the CRA policy regarding reopening prior year returns. For more information see 11.3.0 Normal Reassessment Period and 9.11.0 Audit Scope of the Income Tax Audit Manual.
It is generally accepted that "statute-barred problems" can be minimized through early identification and strict control. As it is not always possible to obtain a waiver, the identification and control procedures must be relied on to ensure that a notice is issued on time.
For adjustments requested by the taxpayer/registrant within the three-year period and being followed-up by audit, every attempt will be made either to obtain a waiver or reassess within the prescribed period.
Although the following procedures are outlined primarily to facilitate the processing of a return approaching statute-barred status, priority reassessments might be considered in other urgent or exceptional circumstances such as the taxpayer leaving the country.
Income Tax - To assist the auditor in processing a reassessment where a statute-barred deadline is approaching, procedures have been coordinated among the various sections involved. These procedures apply to reassessments to be issued by Tax Centres. Under some circumstances it may be necessary to issue a reassessment at the TSO, and each office should have local procedures in place to handle these situations.
While the following procedures provide that a priority reassessment may be processed in a short time interval, even on a "walk-through" basis if absolutely necessary, auditors must provide as much lead-time as possible to facilitate the processing in each section.
Categories have been established for the application of the different processing procedures. The reference to "days" is the period determined from the date that the file is forwarded to the responsible processing unit in the Tax Centre. Auditors should add an extra 10 days to the days specified to allow for processing of the file through the review and forms preparation stages. This extra 10-day period may be varied based on individual TSO's experience in processing files or the complexity of the case. Procedures vary depending on the circumstances as follows:
- over 120 days prior to the statute-barred date
- between 60 and 120 days prior to the statute-barred date
- between 30 and 60 days prior to the statute-barred date
- less than 30 days to the statute-barred date
Over 120 calendar days
A special processing procedure is not required if the statute-barred date is over 120 days from the date the file is sent to the responsible processing unit in the Tax Centre.
60 - 120 calendar days
Special control procedures are not required if the reassessment is between 60 and 120 days of becoming statute-barred. Process the file in the normal manner, placing it in a red folder with the statute-barred date clearly marked on the front cover. Also, enter the statute-barred date in RED in the top margin of the T99, T919 or T99A, using the YY/MM/DD format.
30 - 60 calendar days
If a return is to be reassessed and will be sent to the responsible Assessing unit 30 to 60 days prior to the statute-barred date, the following procedures apply:
- Enter the statute-barred date in RED in the top margin of the T99, T919 or T99A, using the YY/MM/DD format.
- The auditor will prepare a three-part Priority Reassessment Control form T287, which will be Assessments Control's method of ensuring that the priority return is adequately controlled while in the process. Note that a TC normally requires a minimum of 15 days to process a reassessment.
- The priority return, processing documents and all three copies of the control form must be placed in a red folder with the statute-barred date clearly marked on the outside. The files will be processed as manual reassessments.
- The control form will be submitted to the team leader for approval as a priority reassessment action.
- Once the auditor has completed the processing procedures the file will be forwarded with:
- Copy 3 of the T287 to Assessments Control and
- Copy 2 to Revenue Accounting.
- The file with copy 1 of T287 will be forwarded for processing to the responsible Assessing unit in accordance with established procedures in the TSO.
- When forwarded by an audit support clerk or other staff members, audit will direct using form T2003, that these files be forwarded on a priority basis and to the attention of the expeditor (liaison offices) where applicable.
The AIMS section will assign priority to each file relative to the respective "Notice to be issued" date on form T287.
When forwarding returns for processing that are within 60 days of being statute-barred, ensure that the prior year information required for general averaging is provided or that a TAPMA identification printout is attached. If for some reason the information is not available, the reason(s) should be documented to alert the Tax Calculation area to the situation.
Less than 30 Days - Walk-through
A return to be reassessed that is within 30 days of being statute-barred, will be processed in accordance with the procedures for the 30 to 60 calendar day statute-barred files
The auditor will complete the priority procedures and pass the file to the team leader, who will forward the file using express delivery or fax to the attention of the expeditor (liaison officer) in the Tax Centre.
The Tax Centre will treat the "walk-through" reassessment in the same manner to ensure that there is no undue delay in completing the reassessment.
Cancellation of a Reassessment on a Priority Basis
If a priority reassessment becomes unnecessary, for example when a waiver is received, record the "Date", "Authority" and "Reason" and notify the expeditor (liaison officer) in the Tax Centre to cancel the requested reassessment action.
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