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Income Tax Audit Manual

Compliance Programs Branch (CPB)

Information

This chapter was last updated September 2024. 

Chapter 10 - This chapter is under review and an updated version will be released at a later date

Disclaimer

Hyperlinks to external or unaffiliated websites are for information purposes only. The Canada Revenue Agency (CRA) is not responsible for the content or practices of such websites. While efforts are made to ensure that hyperlinks are current and up-to-date, it is not guaranteed.

The Integras suite of solutions (Integras) has replaced the Windows Audit Laptop System (WinALS) and the Audit Information Management System (AIMS) for certain audit programs. The Income Tax Audit Manual is being updated continuously to incorporate the use of Integras in the audit process.

For detailed instructions on Integras, go to Integras Reference Guide. This guide has been designed to explain the functionality of the Integras system. For a direct link to the Integras Reference Guide, select the Help menu at the top of the Integras Desktop screen.

Chapter 10.0 Conducting the audit

Table of Contents

10.1.0 Interviewing the taxpayer

10.1.1 Introduction

The purpose of the interview is to gain critical information to help the auditor:

This is also a good time to reconfirm the schedule of the audit and to agree on the frequency of auditor contact and the expected response time for audit queries.

Depending on the size of the business and the amount of segregation of the duties, it may not be possible to receive relevant answers to all interview questions from one individual.

For example, the taxpayer prepares all contracts for business, collects all payments, and makes all purchases. The spouse, who is the bookkeeper, creates all invoices, makes all deposits, pays all non-cash expenditures, and creates a set of books (general ledger and synoptic journal). The representative prepares returns for other taxes (such as goods and services tax (GST), harmonized sales tax (HST), provincial sales tax (PST)), and, once a year summarizes the bookkeeper’s journals, makes adjustments, and files the tax returns.

In this example, it would be important to discuss the business with the taxpayer and the bookkeeper, ask the bookkeeper and representative questions about the books and records and the amounts on the tax return, and finally, discuss any lifestyle and source of funds items with the taxpayer and the spouse.

It may not be appropriate to interview all relevant parties at the same time, since the taxpayer may not wish to answer lifestyle questions in front of a non-related bookkeeper. It may be necessary to interview the relevant parties separately. This should be determined during the initial contact with the taxpayer. For more information, go to 9.18.1, Initial contact.

Before disclosing details about the audit and possibly divulging confidential information with someone other than the taxpayer, the auditor must verify if the third party is an authorized representative. This can be done by checking the business number (BN) system, Random Access Personal Information Data (RAPID), or T1 Case, and by asking the taxpayer.

If the third party is not an authorized representative, the auditor must receive the completed and signed Form AUT-01, Authorize a Representative for Offline Access, or written consent from the taxpayer. The information about a representative on Form AUT-01 is considered taxpayer information of the authorizing or consenting party.

A taxpayer can authorize a representative for online access using the “Authorize my representative” service in My Account or My Business Account. Online access is deemed to provide consent for offline activities as well.

If there is a third party at the initial interview, verbal assurance from the taxpayer that a third party is allowed to be present is acceptable. The auditor should have a CRA witness and ensure that all parties understand that the taxpayer’s assurance is for that point in time only: a blanket verbal assurance is not acceptable. A third party includes accountants, lawyers, and spouses or common-law partners.

During the initial interview, confirm with the taxpayer if a copy of correspondence is also to be sent to the representative. If a copy of correspondence is to be sent to a representative, before communicating with the representative, confirm that there is current authorization on file. If there is no authorization on file, or if it has expired, make sure the taxpayer completes the proper authorization. It is mandatory to include a copy of all correspondence in the audit file.

When interviewing employees about operational procedures, a signed Form AUT-01 is not necessary, as long as the auditor does not reveal any confidential information. The questions asked must only relate to the duties that the employee performs in the business. The auditor should have informed the owner that employee interviews are necessary before conducting the interviews.

Paragraph 231.1(1)(d) of the Income Tax Act (ITA) gives the auditor broad powers, allowing them to require the owner or manager to attend at the place of business and require any person on the premises to give all reasonable assistance and to answer proper questions.

For more information, go to:

For guidelines to conduct enforcement actions under unusual circumstances, go to 4.6.0, Auditing under unusual circumstances.

10.1.2 Interview Questionnaire

The Interview Questionnaire has sections for business history, books and records, bank authorizations, personal expenditures, and tour of premises. It is a good starting point to develop your own, audit-specific, interview. The generic questionnaire should be modified based on:

The auditor should print a copy of the updated questionnaire for each CRA employee attending the interview. Leave adequate space (between lines or print on one side) for clarifications and follow-up questions. Handwriting must be legible to readers other than the auditor and comments should not need to be explained. It is important to write the taxpayers’ responses at the interview to ensure accurate and complete information.

The initial interview is a critical tool to complete a professional and efficient audit. The auditor should have, at minimum, a basic understanding of the business and a thorough understanding of how the interview information is connected to the rest of the audit and the final reports. The auditor must be familiar with the questionnaire they have created, so that they may concentrate on the responses, the meaning of the responses, and if they contradict or confuse earlier statements.

Responses to the interview may create a need to update the Audit Plan. The team leader approval of the Audit Plan is required prior to meeting with the taxpayer. The auditor must follow the Integras procedures to send the Audit Plan to the team leader for approval. If the team leader rejects the Audit Plan, the auditor can revise and resubmit it. However, if the team leader approves the Audit Plan and the auditor needs to amend or expand it, the auditor will need to create another work item in Integras.

For more information, go to 9.6.3, Team leader involvement in the Audit Plan.

10.1.3 Templates and interview working papers

The team leader must encourage the use of the standard templates during an audit. The Integras Template Library has several forms  to document the interview with the taxpayer, including:

Template Library is only available within a case: Integras > Case browser > Electronic Documents tab > Template Library tab.

Templates may be added, customized, renamed, and removed from the Navigation region. However, it is important that the templates for requirements and compliance orders not be changed, for legal reasons. Once a template is added to the Navigation region in Integras, it becomes a working paper.

10.1.4 Summary of initial working papers

Working papers usually prepared before visiting the taxpayer include:

Working papers and purposes
Working paper Purpose  
Notes and adjustments sheet A reminder of the items to clarify or verify.
  
Form T2020, Memo for file
 Document contact with the taxpayer and/or the representatives (so far, initial telephone call and sending the initial letter). It is also an appropriate place to document discussions with team leader regarding the file, such as discussions about the Audit Plan and instructions given.  
Audit Plan
 Prepare an Audit Plan based on information available before visiting the taxpayer; include standard audit procedures and issues of concern noted during the preliminary review. Team leader approval of the Audit Plan is required before contacting the taxpayer.  
Interview query sheet May be in the form of a checklist and includes those audit issues that the auditor must address.  

10.1.5 Tour of premises

The tour of the premises is generally conducted after the initial interview and helps to:

If a tour is not possible, document the reasons on Form T2020, Memo for file , the Audit Plan, and Form T20, Audit Report. These documents are available in the Integras Template Library. A tour may not be possible if a business has been sold or if a plant has been shut down. If the taxpayer refuses access to the business location, advise the team leader. For more information, go to 10.2.2, Legislative authorization to inspect, audit, or examine books and records.

Conducting the tour

Individuals who are knowledgeable about the operations of the business should accompany the auditor during the tour. This may include individuals other than the owner or owners. Write down observations during the tour or as soon as the tour is over.

Written observations must be typed into Form T2020, Memo for file, available in the Integras Template Library. The handwritten notes must be scanned and uploaded in the Integras case.

When the auditor combines a general knowledge of the business, specific knowledge from the initial interview, genuine curiosity, and an open attitude, the person responding becomes more at ease and forthcoming. It should be apparent to all that the auditor is trying to understand the business.

Observations include verifying items from the balance sheet and interview, but it is just as important for the auditor to identify potential gaps, for example:

Including other locations in the tour

Other locations that may be included in the tour:

There are many advantages to driving by the properties belonging to the individuals, but if timing and cost are an issue, talk to your team leader and document the discussion on your Form T2020, Memo for file, available in the Integras Template Library.

For more information about assessing indirect verification of income (IVI) techniques, go to 13.3.0, Indirect verification of income.

10.1.6 Evaluation of internal controls – Under review

10.2.0 Books and records

10.2.1 Requirement to keep books and records

Subsection 230(1) of the ITA places an obligation on every person who is carrying on business or is required to pay or collect taxes or other amounts to keep records and books of account at the person’s place of business or residence in Canada.

Registered charities, registered Canadian amateur athletic associations, registered political parties, and the official agents of candidates in federal elections must also keep certain records. For more information, go to Income Tax Information Circular IC78-10R5, Books and Records Retention/Destruction.

Canadian taxpayers must also keep certain records on their foreign affiliates. For more information, go to Income Tax Information Circular IC77-9R, Books, Records and Other Requirements for Taxpayers Having Foreign Affiliates.

Definition of person

Subsection 248(1) defines a person.

Definition of record

A taxpayer's records include paper and electronic records.

Personal banking records

Personal banking records are part of the books and records of a proprietorship, partnership, or closely-held corporation.

For more information, go to 10.2.2, Legislative authorization to inspect, audit, or examine books and records, for a list of what books and records may be inspected, audited, or examined by an auditor.

Closely-held corporation

A closely-held corporation is an administrative term for this Income Tax Audit Manual only. It means a corporation whose shareholders are:

Personal banking records in all Small and Medium Business audits where indirect verification of income (IVI) has been mandated by Business Intelligence

During an audit of an individual or closely-held corporation, the auditor must obtain the personal banking records of:

To support the risk analysis (Income Tax Assessing IVI Decision Tree) for Small and Medium Business audits where IVI has been mandated by Business Intelligence, the list also includes all contributing members of each household unit.

For more information, go to:

The auditor does not have to make a specific factual link between the business records and the personal banking records to request the personal banking records; reasonable inference is acceptable. For example, unreliable books and records (non-existent internal controls) in a closely-held corporation is a reasonable situation in which to infer that the personal banking information of the shareholder’s household unit, may relate to the audit.

Electronic records

During an audit, the taxpayer may raise questions about the nature and extent of electronic records to be maintained. The auditor should discuss the situation with the team leader. A Computer Audit Specialist (CAS) may have to be consulted for a technically complete answer to the taxpayer.

Auditors should be fully aware of Income Tax Information Circulars:

Relevant sections of the ITA relating to books and records:

Relevant sections of the ITA relating to books and records
ITA Description  
subsection 230(1) General obligation to keep books and records  
subsection 230(4.1) Electronic records
  
section 231
 Definition – a document includes a record  
section 231.1 Inspections – includes documents  
section 231.5 Copy – refers to document  
subsection 248(1) A record includes anything containing information, whether in writing or in any other form.
  

Computer audit specialists

At the time of initial contact with the taxpayer, the auditor should determine if records are kept electronically and, if so, what type of software system is used.

For the auditor to request assistance from a computer audit specialist (CAS), use Create ECAS case action in Integras and complete the template, Request for CAS Assistance, available in the Integras Template Library.

For detailed instructions on Integras, go to Integras Reference Guide. For a direct link to the Integras Reference Guide, select the Help menu at the top of the Integras Desktop screen.

Generally, a CAS may be able to retrieve, process the records or have them processed by a CAS National Processing Lab (Lab), and provide the results to the auditor before their meeting with the taxpayer. The sooner the request for assistance is completed, the faster the results will be provided.

Typically, if information is in spreadsheet software format or if the amount of data is small, the data is retrieved by the auditor. Normally, if the taxpayer used or uses Sage 50, Sage 300 (Simply Accounting), QuickBooks, or Acomba, the auditor will obtain the backup data in person or through the electronic transfer of data options Submit documents, Represent a Client, My Business Account, or My Account. In these cases, the CAS asks the Lab to retrieve the data from the auditor’s Integras CAS case and process it. The Lab will email the auditor and the CAS to inform them that the Lab has uploaded the results to the auditor’s audit CAS case.

If data is stored in off-the-shelf or proprietary accounting systems, or if the amount of data is large, a CAS will assist the auditor with the retrieval and processing of the data by following local TSO assistance procedures.

For more information, go to:

Auditors should encourage the taxpayer to transfer data using Submit documents. For more information, go to 10.2.9, Submit documents and records electronically.

Books and records of foreign affiliates

Books and records of a foreign affiliate of a Canadian taxpayer must be maintained in Canada by the Canadian taxpayer; in some cases, beyond the mandatory retention period.

For more information, go to Income Tax Information Circular IC77-9R, Books, Records and Other Requirements for Taxpayers Having Foreign Affiliates.

Non-residents carrying on business in Canada

Subsection 231.6(2) provides the CRA with authority to require Canadian residents or non-residents carrying on business in Canada to provide foreign-based information or documents.

For instructions to use this requirement, go to 10.8.5, under Requirement to provide foreign-based information - Section 231.6 of the ITA.

Records prepared by external accountants

The CRA does not recognize solicitor-client privilege for accountants. Accountants are expected to produce any working papers, journal entries, and any other document relevant to the audit of the taxpayer.

For instructions to obtain information and documents, go to 10.6.7, Obtaining information or documents from accountants.

Language expectation for books and records

The ITA does not stipulate that books and records be maintained in English or French, only that they be maintained in a way to enable the determination of taxes payable.

If some or all of the books and records are maintained in a language other than English or French, the auditor must use judgment and consult the team leader. If a determination of taxes payable is possible even though the books and records are maintained in a language other than English or French, no further action may be necessary. If, based on the fact pattern of the file, determination of the taxes payable is not possible, adequate books and records have not been maintained.

For more information, go to 10.8.11, Requirement to keep specific records and books of account, under Inadequate books and records.

10.2.2 Legislative authorization to inspect, audit, or examine books and records

In connection with an audit, subsection 231.1(1) provides the legislative authorization for CRA auditors to:

When auditors send audit contact letters or subsequent requests for information or documents, they are using subsection 231.1(1).

Although subsection 231.1(1) allows an auditor to request third parties not under audit to provide information or documents that relate or may relate to the taxpayer under audit, CRA policy advises the immediate use of subsection 231.2(1) in certain instances. For instructions to obtain information or documents from third parties not under audit, go to 10.6.2, Auditor’s authority to obtain information or documents from a third party.

Refusal of taxpayer to provide information or documents

Open, honest, and professional communication with the taxpayer is the best tool to avoid a refusal. The auditor must explain why the items are needed and provide assurances regarding confidentiality. The Taxpayer Bill of Rights confirms the taxpayer’s right to privacy and confidentiality. Every verbal request for information must be followed up in writing with a reference to the auditor’s authority under subsection 231.1.

If the auditor is met with a refusal to provide information, the first step is to determine if the information or documents could be obtained from a third party. The auditor must discuss the situation with the team leader. For instructions, go to 10.6.2, Auditor’s authority to obtain information or documents from a third party.

Taxpayer does not satisfactorily respond to the initial request by the deadline or requests additional time

It is CRA’s expectation that taxpayers will be able to satisfactorily respond to the majority of these requests by the initial request deadline. Where a taxpayer does not satisfactorily respond to the initial request by the deadline or requests additional time, then a follow-up request may be issued with a revised deadline.

A request from a taxpayer for additional days past the initial deadline should be granted for factors or events that are outside of the taxpayer’s control, such as illness, death, natural disaster, and may include a change in representative. These events or factors are not intended to be exhaustive and professional judgment should be used when issuing revised timelines. The justification for granting or disallowing any additional days to respond to a request must be documented in the audit file.

In addition, the follow-up request will include a warning that a compliance order may be sought by virtue of section 231.7 of the ITA. There will be no further additional days provided beyond the follow-up request.

When considering issuing a revised deadline to provide information, auditors will adhere to established standard timelines for taxpayers to respond, as outlined in Annex A in Communiqué AD-20-01, Standard Timelines for Information Requests to Taxpayers for Audit Purposes, and discuss the file with the team leader.

Go to 10.9.2, General comments, for instructions to seek a compliance order. If so, the auditor should obtain the information or documents from the third party.

For more information, go to:

For sample letters to request information or documents, go to the Integras Template Library and Appendix 10.1.0, Letters.

10.2.3 Requirement to keep adequate books and records

Under subsection 230(3), the minister has the authority to require a taxpayer to keep adequate records and books of account to determine their liability or entitlements under the ITA. This action can only be taken after an examination of existing records establishes their deficiency for purposes of the ITA.

There are no specific statutory requirements as to the precise nature of the books and records that a taxpayer must keep. The auditor, together with the advice and assistance of the team leader, has to make this determination using professional judgment and after taking into account the facts and circumstances of the particular situation. To determine the adequacy of the books and records, consider the:

Dealing with inadequate books and records

Inadequate books and records normally indicate that information has not been recorded on the original document that supports it incurred, is connected with generating revenue, or other specific criteria necessary to determine its tax effect. An example may be when a taxpayer uses monthly balances on a trade payable as opposed to itemized receipts.

Inadequate books are when the summary of the records lend no clarity in determining taxes payable.

When the books are inadequate, auditors should not spend time recreating the taxpayer’s bookkeeping. It is appropriate to ask a taxpayer to support specific transactions or totals with specific records.

When an auditor has determined that books and records are inadequate for the purposes of section 230, the taxpayer must be informed in writing. For more information, go to 10.8.11, Requirement to keep specific records and books of account, and Integras Template Library:

For other sample letters, go to the Integras Template Library . When you expect the taxpayer to return a letter you send, such as A-10.1.3, you must mark “PROTECTED B when completed” on the top right-hand corner of each page of the letter.

10.2.4 Location of books and records

Books and records kept in Canada

All taxpayers carrying on business must keep books and records at their place of business or residence in Canada. Books and records is a term meant to include both paper and electronic formats.

If the taxpayer sends a written request to the CRA, permission may be given to the taxpayer to keep books and records at a place other than the taxpayer’s place of business or residence, which could also include locations outside of Canada.

Even though a third party maintains books and records on the taxpayer’s behalf, the taxpayer is still the entity subject to the legislative provisions to keep proper books and records.

For audit procedures when books and records are inadequate, go to 10.8.11. For more information, go to:

10.2.5 Retention period for books and records

General rules

Generally, taxpayers must keep books and records for six years. The six years begins at the end of the last tax year to which the record may relate. For individuals, this would be the calendar year-end. For corporations, this would be the last day of the tax year.

Since the legislative provision uses the term relate, situations involving capital transactions are included. For example, assume a taxpayer purchased a capital asset in 1998 and claimed capital cost allowance (CCA) in each year until the asset’s disposition in 2014. The taxpayer reported a capital gain in 2014. The taxpayer must keep the purchase documents until 2020; six years after the end of the 2014 tax year.

In cases of conflict between the ITA and Excise Tax Act (ETA) as to the length of the retention period in particular circumstances, the provisions of the relevant Act requiring the longer retention period prevail.

For the retention period legislative authority, go to paragraph 230(4)(b) of the ITA and Part 5800 of the Income Tax Regulations. For more information and special situations, go to Income Tax Information Circular IC78-10R5, Books and Records Retention/Destruction.

Request for permission to destroy records

Taxpayers may request permission to destroy records before the legislated deadline by filing Form T137, Request for Destruction of Records, or by providing the same information in a letter addressed to the director of the tax services office (TSO).

Form T137 refers only to Income Tax Information Circular IC78-10R5, Books and Records Retention/Destruction. However, the form can be used for all requests to destroy records before the required time period has expired.

Client Services is responsible for the initial review of requests for early destruction and the reply to the taxpayer. If Client Services finds that the input of other units is needed, then Form T29, Destruction of records recommendation, is routed to Appeals, Criminal Investigations, and Audit for approval.

The reply to the taxpayer should note that the approval does not apply to other taxes and regulations of other administrations or to records relating to customs transactions, as the Customs Act does not provide for early destruction of records.

The letter approving the destruction must include this paragraph:

"This permission to destroy the books and records mentioned above is given under subsection 230(8) of the Income Tax Act, subsection 87(3) of the Employment Insurance Act, subsection 24(2) of the Canada Pension Plan Act, and subsections 98(2) and 286(6) of the Excise Tax Act. This permission does not apply to books and records required to be kept under the Canada Customs Act or to any other federal, provincial, or municipal government department which requires any person or corporation to keep such records or documents."

Each TSO should have a unit responsible to review requests forwarded from Client Services. The assistant director of Audit (ADA) may delegate the signing authority to the responsible section manager.

10.2.6 Borrowing books and records from a taxpayer – Under review

Circumstances where borrowing books and records is necessary

Circumstances where borrowing books and records is necessary

Auditors are expected to conduct the audit at the taxpayer’s place of business. If a place of business does not exist and the books and records are maintained in a dwelling-house, auditors should attempt to conduct the audit at the taxpayer’s dwelling-house by asking the taxpayer for permission or work at the representatives’ place of business if possible.

In rare circumstances, it may be necessary to borrow a taxpayer's books and records. Examples might include:

Computer records

Only a copy of computer records is borrowed from the taxpayer. The copy is destroyed or returned to the taxpayer at the end of the audit.

For more information, go to 13.1.0, Computer-assisted audit techniques.

Control of borrowed books and records

The ADA is responsible for establishing a borrowed books and records control register and a follow-up system for matters relating to books and records. To control borrowed books and records, each TSO must maintain a borrowed books and records control register. Each TSO must have a storage system that can be locked, following security guidelines.

At the time of borrowing the books and records, the auditor must complete Form T2213, Receipt for Borrowed Books, Records and Documents, available in the Integras Template Library. The auditor must be detailed in itemizing what was borrowed. The description could extend to the number of boxes, folders, binders, colours of the materials, and markings and notes that are externally visible. As complete banking information is required on most audits, any gaps or absences in statements should be specifically noted, as this may lead to costs for the taxpayer.

A detailed list will minimize any disputes about missing books and records that may arise at a later date.

For Form T2213, Receipt for Borrowed Books, Records and Documents, available in the Integras Template Library:

When the books and records are returned, the auditor must have the taxpayer sign Copy 3 to acknowledge receipt. Once signed, the auditor will scan Copy 3 into the audit file and the original will update the borrowed books and records control register. It is imperative that the borrowed books and records control register be properly maintained in case of future disputes over the completeness of returned records.

Books and records are the property of the taxpayer. The books and records can never be marked, altered, or damaged. Auditors must return the books and records in the same condition and same order that existed at the time of borrowing. Auditors have a duty to safeguard the borrowed books and records.

Clearly label the records with the name of the auditor and the taxpayer and keep in locked storage when not being examined. When the auditor receives new books and records, the storage location must be included on Copies 2 and 3 of Form T2213 for reference to ensure that the books and records can be located when the auditor is unavailable.

The security of taxpayer information is of primary importance and special care must be taken by auditors who are teleworking or travelling. For more information, go to 3.4.0, Privacy and confidentiality.

Returning books and records to the taxpayer

The auditor must return the borrowed books and records in person to the taxpayer. This will ensure that the auditor can obtain a signed Copy 3 of Form T2213. The form is available in the Integras Template Library. If the taxpayer is not available, the auditor must personally return the books and records to an authorized representative, with the agreement of the taxpayer.

In the rare situation where personal delivery is not possible, return of borrowed books and records must be completed using a tracked mailing system. This includes a TSO‑designated courier or Canada Post’s Priority service. Books and records must never be returned using general mail.

When returning borrowed books and records by mail, the auditor must enclose Copy 3 of Form T2213 with a letter. The letter should request that the taxpayer sign and return Copy 3 of Form T2213.

Once signed Copy 3 of Form T2213 is received, the auditor must return it to the designated individual as well as a copy of the mail tracking receipt verifying that the books and records were returned. If the taxpayer does not return signed Copy 3 of Form T2213, the auditor should ensure the borrowed books and records control register is updated with this information as well as a copy of the mail tracking receipt.

Signed Copy 3 of Form T2213 and the mail tracking receipt must be scanned and uploaded in the Integras case.

When all borrowed books and records are not returned at the same time, the taxpayer must initial and date each item returned on Copy 3 of Form T2213. The auditor will keep Copy 3 of Form T2213 until all the books and records have been returned to the taxpayer.

If the taxpayer cannot be located to return the books and records and no authorized representative is available, package, label, and maintain the books and records in a secure storage area. Prepare and print a memo explaining this action and attach it to a copy of Copy 3 of Form T2213. A copy of the memo is kept in the electronic audit file and the paper copy must be sent to records storage using the appropriate trailing document. The trailing document should be filled out to indicate “Form T2213.” This form has a five-year life and will indicate to other CRA users that the books and records are still in the possession of Audit. Also make a log entry in ACSES noting that the borrowed books and records are in the CRA's possession.

Unclaimed books and records must be maintained in the TSO for six years after the audit is completed. Destruction of unclaimed books and records will be authorized by the ADA.

Forms

Seizure of borrowed records from Audit by Criminal Investigations

If Criminal Investigations begin an investigation while the auditor still has the taxpayer's books and records, Criminal Investigations will seize the books and records from the auditor. If the taxpayer enquires about the status of the audit or the return of the books and records, the taxpayer must be given the name and telephone number of the appropriate individual in Criminal Investigations. The taxpayer must be advised of their rights by Criminal Investigations and no further discussions should take place between the auditor and the taxpayer.

10.2.7 Scanning and copying books and records

Auditors have the authority to scan, print, and copy books and records, or cause to scan, print, and copy any document of the taxpayer. As a result of paperless audits, all documents required to support the audit adjustments must be scanned. Auditors must tell the taxpayer what documents were scanned.

The taxpayer may not have the documents that they should. To conduct the audit, the auditor may have to obtain the missing documents from a third party. Subject to any confidentiality issues, the auditor must provide a copy of the documents to the taxpayer, if requested.

For example, an auditor may have obtained bank statements from a financial institution through the use of a requirement. The taxpayer may not have the bank statements in their possession. The auditor must provide a copy of those bank statements to the taxpayer, if requested.

Auditors may never ask a taxpayer to make a copy of all books and records for the sole reason of wanting to conduct the audit at the TSO instead of at the taxpayer’s place of business.

10.2.8 Penalties for inadequate books and records

Consider penalties if the taxpayer has made no effort to maintain adequate records or the records do not support the returns as filed. A requirement must be issued under subsection 230(3), which can be followed by a penalty under subsection 162(7).

For more information, go to:

10.2.9 Submit documents and records electronically

Taxpayers and representatives can give the CRA a copy of their electronic documents and records through use of the Submit documents service that is available through:

During the initial contact (go to 9.18.0, Contacting the taxpayer), if it is determined that the taxpayer has some books or records in electronic format, confirm if the taxpayer is registered for My Account, My Business Account, or Represent a Client. If the taxpayer is not registered for one of these three portals, they should be encouraged to register.

Submit documents online, explains how to register or submit documents. The information refers to a case or reference number that will be provided by the CRA; the case or reference number is the Integras audit case number.

The initial contact letter templates have the appropriate wording and links for the taxpayer or representative. For more information, go to the letters in the Integras Template Library.

Receiving information through Submit documents

When information is received through Submit documents, the internal system will generate an email notification to the auditor. The email contains the Integras audit case number where the data has been uploaded. To access the data, the auditor has to access the related Integras audit case. Both the computer audit specialist (CAS) and the auditor assigned to the case will have access to the information received. Documents will be available for download in the Electronic Documents > Client Submitted Documents tab of the Integras case.

The information is held for 60 days before being deleted. An email is sent to the auditor when the information is received and, if it has not been downloaded, reminders are sent at 45, 30, and 15 days, in addition to another 24 hours before it is deleted. The 30-day reminder is also sent to the Compliance Programs Branch National Helpdesk to notify the team leader in case the file needs to be reassigned to another auditor.

For detailed instructions on Integras, go to Integras Reference Guide. For a direct link to the Integras Reference Guide, select the Help menu at the top of the Integras Desktop screen.

Resources

10.2.10 Minute book

It is mandatory to request the minute book of the corporation for review. “Minute book” is a generic term used to indicate a collection of corporate records, many of which are mandated by the incorporating jurisdiction. The corporate records normally contained in the minute book include:

Certain jurisdictions may have additional requirements for corporate records that must be generated and held at the registered office, such as a registry of land held in a province.

Although every jurisdiction’s legislation requires these corporate records be maintained, the ITA does not have that requirement. Use the appropriate legislative provisions necessary to access and review the minute book. However, if no minute book exists, document the attempt in subsection D.I), Records Examined, of Form T20, Audit Report.

10.3.0 Maintaining records and/or conducting audits outside Canada

10.3.1 Canada Revenue Agency approval

Permission to keep records outside Canada generally should only be granted to foreign-based taxpayers doing business in Canada or to Canadian-based taxpayers with branches outside Canada. Permission to keep records outside Canada may be granted to Canadian taxpayers if there is a valid reason as to why they are unable to keep records in Canada.

Permission to keep records outside Canada will be granted, provided that the taxpayer agrees to make them available to the CRA for examination and audit. The taxpayer may ship the records to the TSO and provide reasonable assistance necessary to complete the audit or, alternatively, reimburse the CRA for any costs incurred by the auditor and any other officers in travelling to where the books and records are kept to examine them. These conditions are stated in the letter confirming permission to keep records outside Canada that is sent to the taxpayer, which has been signed by an official with authority to administer subsection 230(1) of the ITA.

A copy of the taxpayer's request and the letter of approval or denial signed by the delegated authority must be sent to storage, using the appropriate trailing document transmittal slip and indicating ministerial correspondence.

In evaluating the request to keep records outside Canada, consider:

The factors to consider when reviewing requests to maintain records outside Canada are also available in working paper format. For more information, go to Appendix A-10.2.2, Maintaining Records Outside Canada Checklist.

Electronic records

Income Tax Information Circular IC78-10R5, Books and Records Retention/Destruction, states that books and records kept outside Canada and accessed electronically from Canada are not books and records kept in Canada. The storage medium, such as tape, hard drive, or CD-ROM, must be physically located in Canada, unless the CRA has given permission to keep the records outside Canada.

If books and records are maintained electronically outside of Canada, the CRA may accept a copy of the books and records, provided these are made available in Canada in an electronically readable and useable format for CRA officials and they contain adequate details to support the tax returns filed with the CRA.

For more information, go to Income Tax Information Circular IC05‑1R1, Electronic Record Keeping.

Foreign affiliates

If the books and records of a foreign affiliate are not kept in Canada, the taxpayer can pay for the costs of:

10.3.2 Conducting audits outside Canada

To conduct an audit outside Canada (including in the United States), the auditor must:

  1. obtain written taxpayer consent;
  2. complete the Request for Approval to Travel Outside Canada;
  3. obtain approval from the Competent Authority Services Division;
  4. obtain financial approval through ESS; and
  5. obtain a special government-issued passport, in certain cases.

Each of these steps is discussed below.

1. Obtain written taxpayer consent

Audits at foreign locations are not conducted without the written consent of the taxpayer to pay the costs of CRA travel outside Canada to complete the audit. Discuss scheduling the audit with the taxpayer and consider that time needed to obtain the foreign country's approval of the audit trip is also a factor.

After the taxpayer has agreed to the audit at a location outside Canada, send two copies of the reimbursement acknowledgement letter (go to Integras Template Library letter A-10.1.15, Reimbursement of Costs Acknowledgement) to confirm that the travel costs will be reimbursed.

The taxpayer should sign and return one copy of the letter to the auditor to acknowledge responsibility for reimbursing the CRA for the travel and living costs associated with the audit.

The reimbursement letter must be sent even if the taxpayer has already been advised of their responsibility to reimburse audit costs. A letter provides an updated document for the audit file and reminds the taxpayer of the reimbursement terms.

2. Complete the Request for Approval to Travel Outside of Canada

The auditor must obtain operational approval to travel outside of Canada before seeking financial approval. For approval from the foreign Competent Authority, International and Large Business Directorate, and International Relations Office, complete Request for Approval to Travel Outside of Canada (RATOC). Follow the instructions to complete the RATOC.

The approval of the RATOC is completed by the regional assistant commissioner (AC).

3. Obtain approval from the Competent Authority Services Division

After the regional AC has approved the request, the RATOC will be forwarded to the Competent Authority Services Division (CASD). The auditor is not responsible for forwarding the RATOC to CASD. CASD is a division within the International and Large Business Directorate (ILBD). CASD will obtain approval from the Competent Authority of the foreign country for the auditor to conduct the audit.

The regional AC’s office or CASD may ask for more information, which the auditor must provide to obtain approval. CASD will request a copy of the letter from the taxpayer giving permission for the audit and agreeing to bear the costs of the audit.

For regional AC and CASD permission, the auditor only needs to complete and send the RATOC.

Auditors should send the RATOC as soon as possible after scheduling the audit with the taxpayer. The auditor must schedule the audit far enough in advance to ensure that the regional AC has adequate time to consider the request. Also, CASD needs enough time to inform and obtain permission from the foreign Competent Authority. Without permission from the foreign Competent Authority, the audit cannot start.

Once the RATOC form is approved, an RATOC number is generated automatically and sent to the auditor by email. If the auditor's travel schedule changes after receiving the RATOC number, the auditor must inform CASD immediately through the specific email box.

The approval of an audit trip does not permit the auditor to exchange information with any other foreign governments or to interview affiliates, subsidiaries, parent corporations, or other third parties, including the taxpayer's foreign external accountants and lawyers. The approval relates only to the audit, examination, or inspection of the corporation’s books and records or other specified taxpayers. To interview any third parties or examine public records, the auditor must seek additional approval through CASD. This is not through the RATOC process, but by sending an email to a specific email box managed by CASD.

Exchange of information

The exchange of information with U.S. authorities is under Article XXVII of the Canada-U.S. Income Tax Convention. U.S. authorities would be authorized persons for purposes of CRA confidentiality provisions. Contact a designated team leader in the International Section of the TSO for more information about the specific procedures to request and transmit taxpayer information.

4. Obtain financial approval through ESS

The auditor must not make any financial arrangements for the trip until approval of the RATOC is completed. The RATOC number received by the auditor upon approval of the RATOC must be inserted in the RATOC field of the Travel Request in My Travel in ESS when seeking financial approval for travel.

5. Special government-issued passport, in certain cases

The auditor must obtain a special government-issued passport (green cover) for travel to countries other than the United States. This passport is obtained through the International Relations Office (IRO) Division, which is part of the Legislative Policy and Regulatory Affairs Branch. If necessary, the IRO will also obtain a visa for the auditor for the duration of the audit outside of Canada. Go to Appendix A-10.2.4, Government passport request and instructions, for an example of the form to be sent to IRO.

Since a Canadian cannot hold two Canadian passports at the same, the auditor must transfer their personal passport to IRO while the special government-issued passport (green cover) is valid. The auditor should note the serial number of the special government-issued passport to ask for the same passport on the next trip abroad. It takes at least 10 days to issue a new special government-issued passport, but only five to reissue a passport that was already in use. A reused passport is also less expensive.

For government travel to the United States, auditors must present a valid regular passport (blue cover) or a special government-issued passport (green cover).

If travelling to the United States or some other foreign country for an audit, the auditor must carry a copy of the letter from the taxpayer giving permission from the taxpayer for the audit to take place. This letter may have to be shown to customs officials when entering or exiting the foreign country. Paragraph 241(4)(a) of the ITA allows for the letter to be used for such purposes.

10.4.0 Conducting audits of branches

10.4.1 Introduction

The auditor may find it beneficial to conduct an audit of records maintained at a branch or other operational centre. Generally, the records maintained at a branch relate solely to the day-to-day operations of the branch, but may provide more detail than the records at the head office.

Extending the audit to areas outside the corporation's head office will only be done after considering all the circumstances of the case and approval by the team leader. Some businesses operate as one corporate entity with independent branches (divisions or departments) that each have their own management and accounting records and are located in different parts of the country.

10.4.2 Selection of branches for audit

The importance of examining records, documents, or other information available at a branch location can usually be determined after the audit at the head office location is in progress. If during the audit, it is determined that adequately verifying certain transactions is not possible without obtaining more information from the branch location, the auditor should discuss with the team leader.

If the branch is located in the responsibility area of another TSO, consider having an auditor from that TSO examine the records based on the concerns identified. This decision will be made after consulting the Audit Section manager and, if appropriate, the ADA of the originating TSO.

Under certain circumstances, a branch audit may disclose information that is not evident from the records available at the head office. Reasons to extend an audit to include branch locations include:

When a branch was previously audited together with the head office, the results of that audit should be reviewed to determine what benefits were achieved and if the audit in process warrants similar action.

10.5.0 Audit evidence

10.5.1 What is audit evidence?

Audit evidence is required to support audit assessments and reassessments. This section provides guidelines on the types, sources, quality, and quantity of audit evidence required.

Evidence is oral or documentary items that can be legally relied upon to prove facts. The purpose or role of evidence is to substantiate the facts and to provide a basis for judgement.

Audit evidence must be legally obtained and admissible to be used in court.

Assessments and reassessments rely on the facts asserted by the minister. Facts are considered to be assumed until they are proven. Audit evidence is necessary to establish the facts to the satisfaction of the court. The auditor's role is to provide admissible audit evidence that will enable the court to come to the same conclusion as to the actual facts. The court will base its decision in a case on its legal interpretation of the facts as supported by the audit evidence.

10.5.2 Weighing the audit evidence

Having obtained all the information about the factual issue in dispute, consider these factors in weighing audit evidence:

Remember that oral audit evidence is, in fact, audit evidence. It is therefore incorrect to say, when the taxpayer has made a verbal statement, that there is no audit evidence, even when there are no supporting documents or other individuals able to corroborate the taxpayer's statements. The taxpayer's own testimony constitutes audit evidence that, if credible, can support what was said, and even serve as proof. Mandatory documentation of all conversations with taxpayers on Form T2020, Memo for file, acts as audit evidence in this regard.

Principles for weighing audit evidence

Use these principles as a guide to weigh audit evidence in a fair and impartial manner:

10.5.3 Reliable audit evidence

The more reliable a piece of audit evidence is, the more weight it deserves. The particular characteristics of the audit evidence that determine its reliability can be broadly categorized as:

10.5.4 Type and source of audit evidence

Direct audit evidence – Verbal

Direct audit evidence may be presented verbally. Verbal or oral audit evidence is the personal testimony of individuals, including the taxpayers themselves. Consider oral audit evidence should a case under objection proceed to the Tax Court. The courts seldom disregard what a taxpayer says. During the initial interview and subsequent discussions with the taxpayer, note contradictory statements and clarify as necessary. This type of audit evidence may be useful in later stages regarding the reliability of the testimony.

Direct audit evidence – Documentary

Direct audit evidence may be documentary, such as a letter written by the taxpayer stating that the return was false. Documentary audit evidence may be primary (the original document) or secondary (a copy of the testimony of a witness who has read the document). Generally, documentary audit evidence is considered stronger than oral audit evidence. It is, for example, often prepared by or with the involvement of relatively disinterested parties including customers, suppliers, and employees.

A copy of a document is considered acceptable audit evidence. The auditor must be able to testify that the scanned copy is of an original document. This means that the auditor should scan original documents to make such testimony.

Indirect audit evidence

Indirect audit evidence results from drawing a conclusion from facts.

An example might be an individual who, immediately after purchasing a farm property, applies to the municipal authorities for permission to subdivide the farm property into several individual lots for resale. After approval, the individual obtains municipal permission to add sewer lines and electrical lines to each of the units. The individual then hires appropriate businesses to complete this work. Each of these circumstantial items may mean little, but taken together they provide audit evidence suggesting the individual acquired the property to earn business income through subdivision and resale of the lots, not as a capital appreciation. Further questioning of the individual and others will be necessary to add to the indirect audit evidence.

Indirect audit evidence also works to support or diminish the credibility of direct audit evidence. In the example above, if direct oral evidence had been given by the individual that the intention was to farm and the subsequent development and sale was just circumstance, the transaction might still be seen as on account of capital. The weight (timing of events and number of overt actions) of the indirect evidence would tend to lessen the credibility of the original statement.

Legislated admissible evidence

Copies

Section 231.5 of the ITA states that copies of documents have the same probative force as the original. The copies must have been made or were caused to be made as part of an audit or as a result of issuing a requirement or an enquiry for the purpose of administering the ITA.

These procedures apply when scanning documents:

The auditor must accurately describe the audit evidence and indicate where it can be found if it is not practical or possible to obtain certified scans of the relevant documents.

Affidavits

Under subsection 244(9), an affidavit sworn by an officer of the CRA setting out that the officer has charge of the appropriate records and that the copy attached is a true copy of a document, is evidence of the nature and contents of the document. The copy will be considered as having the same force as the original document.

10.6.0 Obtaining information or documents from third parties not under audit

10.6.1 Introduction

The instructions in this section are specific to obtaining information from third parties, not the taxpayer under audit. For audit steps to follow to obtain information or documents from the taxpayer under audit, go to 10.7.5.

A third party is defined as a taxpayer that is not the taxpayer under audit.

During an audit, there may be a need to contact third parties to obtain information that is essential to the audit. Reasons for contacting third parties include:

10.6.2 Auditor's authority to obtain information or documents from a third party

Auditors have the authority to examine the books of account and records that are needed to determine the taxes payable under the ITA as well as to obtain assistance from the taxpayer necessary to perform their work under the inspection powers in section 231.1. This authority also permits an auditor to interview the taxpayer under audit.

Legislative authority

Subsection 231.1(1) provides the authority for authorized persons to examine books and records. The legislation specifies that any authorized person is allowed to examine, at all reasonable times, any of the following that may be relevant in determining the obligations and entitlements of the taxpayer:

In addition, the wording in subsection 231.1(1) “to inspect, audit or examine” a taxpayer’s books, records, and documents is broad enough to include asking the taxpayer for an oral interview. The auditor may enter into any premises or place where books and records are or should be kept and require a person on the premises or place to give the auditor reasonable assistance and answer proper questions.

10.6.3 Types of third parties

There are two categories of third parties: unnamed and named.

1. An unnamed third party is an entity that the auditor believes has information or is non-compliant, but the auditor is unable to identify that entity. An example may be: during an audit, a large adjustment is found to salary expense, and the representative is surprised and says that they handle all of their clients in the same manner. “All of their clients” are likely specific taxpayers, but their identities are unknown, so they are unnamed.

Obtaining information specifically on this unnamed taxpayer or group requires the authorization of a judge. For more information, go to 10.8.3, Requirement to provide information or documents.

2. Named third parties are typically taxpayers whose identities were made apparent during the review of the books and records or interview of the taxpayer under audit. Named third parties typically can be grouped into two categories: those of interest for lead generation, and those who may have information which relates or may relate to the taxpayer under audit.

Third parties who may have information include:

10.6.4 Methods of obtaining information or documents from named third parties

Obtaining information or documents through personal visits

The auditor

Third parties may be contacted through a personal visit, letter, or telephone call.

Another auditor from the same tax services office

View Integras to determine if another auditor from the same TSO is currently auditing the third party in question. If so, the auditor who needs the information or documents should ask the other auditor to obtain the document or information. This is a valid use of subsection 231.1(1).

An auditor from another tax services office

If information or documents are needed from a third party whose books and records are located in the geographical responsibility of a second TSO, an auditor from the second TSO may be asked to help obtain the information or documents. The auditor from the first TSO needing the information or documents, after discussing with the team leader, should submit a request for authorization through the ADA of the first TSO to the ADA of the second TSO. The request should contain adequate information to enable the auditor in the second TSO to provide complete assistance.

Obtaining information or documents through written request

In some cases, information or documents may be obtained from a third party by sending a written request. Obtaining information by mail is used if a visit to the third party is not possible. The written request must be specific as to what information or documents are required.

When information or documents are required from a third party whose books and records are located in the geographical responsibility of a second TSO, approval should be obtained from the ADAs of both the first and second TSO before sending a letter. This approval does not apply to sales transaction information requested from eBay or PayPal.

Obtaining information or documents through use of a telephone call

If the request is for documents to be provided or just for oral information, if the third party is contacted in the responsible area of another TSO, approval should be obtained from the ADAs of both the first and second TSO before placing the telephone call.

10.6.5 Procedures for obtaining information or documents from named third parties

The following procedures generally apply to obtain information or documents from third parties. However, each TSO may have its own procedures and some specific rules apply to special situations.

Section 231.1 gives an auditor broad inspection powers and is most often the first tool an auditor should use to seek information from the taxpayer or third party. Notable exceptions are:

Depending on the nature and volume of the information sought, a reasonable amount of time for a third party to respond may vary. Thirty days is considered a normal bench mark. It is important to try and obtain the information as early in the audit as possible. In all cases, a letter must be sent to taxpayer setting out the date and time of the appointment.

Before visiting the third party

Before contacting the third party, the auditor should access Integras to determine if an audit of the third party is in process. Before visiting a third party, the auditor should review the BN system to determine the appropriate contact person they should call to set up an appointment. The third party should receive written confirmation of the request. If it is determined that a paper copy of the third party’s income tax returns is needed, the auditor should order them.

During the visit to the third party

Upon arrival at the third party's place of business, the auditor must provide the contact person with identification and a business card. The auditor must state the reason for the visit is to obtain information or documents necessary to complete another audit.

During the conversation with the third party, the name of the taxpayer under audit will likely have to be stated by the auditor. This is a legitimate release of confidential information. However, the auditor must not specifically state that taxpayer is under audit. The third party may draw its own conclusions, but the auditor will not breach the confidentiality provisions of section 241. The auditor must tell the third party that its books and records are not under audit.

Conduct the visit in a courteous and professional manner. If the third party does not provide the information or documents necessary, inform the team leader and issue a requirement. For instructions to issue a requirement, go to 10.8.3, Requirement to provide information or documents.

Concluding the visit

When concluding the visit, ensure that the third party understands that the records were not audited and thank them for their co-operation.

After visiting the third party

Document the visit and conversation on Form T2020, Memo for file, available in the Integras Template Library. The source of the information (type of journal or ledger) should be included. Specific documents may be scanned; the auditor has the authority to complete these scans.

A copy of the part of Form T2020 relating to the third party should be sent to Iron Mountain (IRM) using the third party’s BN to confirm that their records were not audited at the time of the visit.

Telephone calls to third-parties

The auditor may telephone a third party to obtain information or documents, although a personal visit is preferred. The auditor should follow the same procedures as noted above with respect to preparation and introduction.

Specific third-party situations

Spouse or common-law partner of an individual under audit

To provide the greatest degree of confidentiality, the individual under audit is requested in writing to provide the spouse or common-law partner’s information. If the individual refuses or does not provide the information, the spouse or common-law partner is asked directly, in writing.

If the spouse or common-law partner refuses or does not provide the information, the auditor should discuss the issue with the team leader and consider issuing a requirement. For more information, go to 10.8.0, Requirement guidelines.

Individual shareholder and spouse or common-law partner of shareholder of a corporation under audit

The shareholder and the spouse or common-law partner are asked directly, in writing, for their own information.

For each individual who refuses or fails to provide their own information when requested directly, the auditor should discuss the issue with the team leader and consider issuing a requirement. For more information, go to 10.8.0, Requirement guidelines.

Corporations related, associated, or connected to a corporation under audit

A request in writing is sent to the third-party corporation. If the auditor is aware of who has, or who should have knowledge or control of the information sought, the letter will be addressed to the third-party corporation and the attention of the individual who has the information.

If the third-party corporation refuses or fails to provide the information, the auditor should discuss the issue with the team leader and consider using a requirement. For more information, go to 10.8.0, Requirement guidelines.

Federal, provincial, or municipal governments

For federal, provincial, or municipal government departments, the auditor must determine if a specific written collaborative agreement (WCA) exists between the CRA and the relevant government department. A memorandum of understanding (MOU) is a specific type of WCA. If a WCA exists, use the provisions in the WCA to obtain the information or documents. If no WCA exists, the auditor must discuss the issue with the team leader and consult the federal-provincial liaison in the TSO.

The Information and Relationship Management Directorate (IRMD) of the Strategy and Information Branch manages all of the CRA’s WCAs. To see if a federal or provincial WCA is active, go to The WCA Search Tool has a new look.

10.6.6 Obtaining information or documents from financial institutions

Authorization to obtain banking information

What is a bank authorization?

A bank authorization is a letter signed by the taxpayer / contributing member of the household, authorizing a financial institution to release the information to the auditor. A bank authorization is not a formal requirement to provide the information nor is there a legal obligation to do so.

Purpose for obtaining an authorization

The purpose of the bank authorization is to give the CRA a tool to ask the financial institution for missing banking information or to verify, confirm, and locate banking information, such as account balances, loan accounts, RRSP balances, mortgages, credit card statements, in addition to the existence of safety deposit boxes. Bank authorizations can be used to deal with chartered banks, trust companies, credit unions (for example, Caisse Desjardins), other lending institutions, and investment companies.

By signing the bank authorization, the taxpayer / contributing member of the household authorizes the financial institution to charge their account for the administration fees to provide the requested information. It is not the CRA's policy to absorb the expense if the taxpayer / contributing member of the household refuses to pay the administration fees. Each financial institution or branch needs its own authorization. For joint accounts, all account holders must sign the bank authorization.

When to use a bank authorization

During the initial interview:

If the taxpayer and the contributing members of the household have kept and provided all banking information, it is still mandatory to include a customer profile, for the taxpayer and every contributing member of the household, from each financial institution that holds any financial instrument of a taxpayer or contributing member of the household. At a minimum, this will provide negative confirmation.

Example: A corporation has two bank accounts with Bank A, the sole shareholder has accounts only at Bank B, and the shareholder's spouse does their banking at Bank C. There are no other contributing members in the household. A customer profile from Bank A should be obtained for the corporation. Customer profiles for both spouses should be obtained from Bank B and for both spouses from Bank C.

Use this standard bank authorization template in all cases where a bank authorization is necessary. Go to letter A-10.1.27, Bank Authorization, available in the Integras Template Library. The letter template is also available at Letters (CRA Electronic Library > Compliance Programs Branch Reference Material > Audit > Income Tax – Forms and Letters > Letters > Chapter 10).

Always complete the bank authorization with the name and the address of the financial institution involved. In no cases should a blank bank authorization be used.

Some financial institutions have indicated that a request for bank information can be processed more efficiently if the auditor first requests the taxpayer / contributing member of the household's bank statements and preliminary information (“Know your customer” documentation). After reviewing this information, the auditor will request information relating to specific transactions.

The majority of larger financial institutions now have designated locations called Third Party Demands Group (TPDG), where all requirements are served and processed. Consequently, these financial institutions may no longer provide customer information (including the customer profile) at their local branches. In these situations, auditors should:

Some branches of larger financial institutions in smaller communities and local institutions, such as credit unions (for example, Caisse Desjardins), may still provide, directly at their branch, information, such as the customer profile, and access to the branch manager’s file, and sometimes other account information. If the taxpayer’s branch of account agrees to provide such information, the auditor can use the bank authorization form as a tool, to be presented directly at the branch. However, if the branch refuses to provide the information and offers to transfer the bank authorization form to the designated branch (TPDG) for processing, the auditor should use a requirement served to the designated branch (TPDG), and not give the bank authorization to the branch of account.

Visiting the financial institution (delivery of bank authorization)

Visiting the financial institution to obtain financial information is limited to circumstances where the taxpayer’s branch of account allows that such information can be provided directly to the auditor.

Planning the visit

When planning the visit to a financial institution, this should be considered:

Initial contact

These procedures are recommended for initial contact with the financial institution:

During the visit

The procedures are (similar to visits to other third parties):

Protecting and verifying the information or documents received

Information or documents received from the financial institution must be protected following security guidelines. These procedures apply:

Refusal to co-operate

When a financial institution either unduly delays providing information or documents without a valid reason or provides only partial information or documents, the first step is to follow up directly with the designated branch of the financial institution on which the requirement was served. For contact information for the designated branches, go to RFI / RTP Financial Institution contacts - CNWS.

If the situation cannot be resolved or if the financial institution refuses to provide the information, the Compliance Programs Branch has established an escalation process with a designated liaison officer for requirements served to financial institutions. Remember not to send taxpayer information by fax to the designated branches.

Sources of information from financial institutions

Savings accounts

There are many types of savings accounts. Usually savings accounts bear interest at a higher rate than current or chequing accounts, but the method to calculate interest depends on the restrictions that apply to the account. For example, clients may or may not be able to write cheques from their savings accounts.

The bank may keep the cheques drawn from a savings account, except for trust accounts. Most bank branches use a computerized microfiche system for savings accounts. Passbooks for savings accounts should be available from the taxpayer.

Current accounts and personal chequing accounts

Personal chequing accounts are similar to current accounts, usually bear no interest and are generally intended for individuals rather than businesses. Typically, the bank sends the client a monthly statement of all transactions, including cleared cheques, debit and credit memos. Auditors must review cancelled cheques included with the bank statements. The backs of the cancelled cheques may provide information about other bank accounts of the taxpayer.

Joint accounts

A joint account is an account opened in the name of more than one person. Any kind of account can be a joint account. In general, two signatures are needed to withdraw or draw cheques on joint business accounts, but joint personal chequing accounts usually need the signature of only one of the account holders.

Investments

Investments most commonly available from banks include:

When questioning the taxpayer as to the nature and extent of its financial assets, the auditor should keep in mind the variety of financial instruments now available. The above list is not exhaustive.

Safety deposit boxes

If the taxpayer has a safety deposit box, the sign-in card must always be included in the list of documents that the auditor needs to examine. Frequent access noted on the sign-in card may indicate unreported income.

The meaning of frequent access will vary depending on the taxpayer’s explanations and the nature of their business. If, in the auditor’s and team leader’s judgment there has been frequent access, an immediate viewing of the contents of the safety deposit box should be arranged. Immediate viewing ensures that the individual does not remove information or documents that support unreported income. The auditor and a team leader must attend a viewing of the contents of a safety deposit box together.

Information or documents in the safety deposit box may need to be scanned. Viewing and possible scanning of the contents of the safety deposit box are acceptable uses of the authority of subsection 231.1(1).

A will included in the contents of the safety deposit box should not be examined or read under any circumstances.

Manager's file

When the auditor visits a bank to obtain information, request access to the manager's file. This file may contain some information about the taxpayer, such as balance sheets and income statements that have been provided at the bank's request. Since this file often contains information about the client's credit rating and other similar information, the bank manager may decline access. After discussing with the team leader and if the information in the manager’s file cannot be obtained elsewhere, it may be appropriate to issue a requirement to the bank to obtain access.

10.6.7 Obtaining information or documents from accountants

An important audit step is to use the accountants' working papers to reconcile financial statements and adjusting entries to the tax returns filed. Accountants' working papers, correcting or adjusting entries, and supporting vouchers for financial statements relate to a taxpayer’s books and records and are necessary to complete the audit. The accountants may be asked for other information necessary to complete the audit, such as information in connection with an audit or review engagement and advice papers.

Types of information or documents available from accountants

The documents and other information that may be requested from accountants are:

Files relating to tax consulting, preparing income statements, and other consulting services may also be available.

Occasionally, an accountant may refuse access to working papers and adjusting entries, citing solicitor-client privilege, even if the taxpayer has signed an authorization. Solicitor-client privilege does not exist between an accountant or auditor and their client. Usually, asking the accountant is sufficient to obtain access to working papers. For more information, go to 10.7.1, Solicitor-client privilege and litigation privilege.

If the accountant refuses to provide access to the working papers, an auditor must discuss the issue with the team leader. Informing the taxpayer of the delay caused by the accountant may cause the accountant to provide access to the working papers.

If the accountant still does not provide access to the working papers, discuss the issue with the team leader and consider issuing a requirement. For instructions to issue a requirement, go to 10.8.5, Preparing requirements.

If the accountant does not follow the requirement, issue a compliance order. For instructions to issue a compliance order, go to 10.9.0, Compliance order guidelines.

10.6.8 Obtaining information or documents from lawyers and notaries – Under review

Until further notice, CRA auditors must not, under any circumstances, issue requirements or compliance orders to lawyers or notaries for information related to their clients where that information is held in their capacity as a legal advisor. Consult July 6, 2016, memorandum, Chambre des notaires du Quebec court case.

10.6.9 Obtaining sales transaction information from eBay or PayPal

If a taxpayer under audit is identified as potentially earning business income through eBay or PayPal, an auditor can request sales transaction information from the two entities. When testing for completeness and accuracy of sales, and as explained in 13.4.24, Banking information, the information reviewed for the bank deposit analysis (for deposits) includes bank accounts and near-bank accounts. PayPal is considered a near-bank account.

Procedure

To request eBay or PayPal sales transaction information, you must fill in all the required fields in the relevant letter available in the Integras Template Library:

The letters are also available in the CRA Electronic Library > Compliance Programs Branch Reference Material > Audit > Income Tax – Forms and Letters > Letters > Chapter 10.

Usually, these letters must always be printed on pre-printed CRA letterhead. However, employees may not be able to enter the workplace to print letters on letterhead. In this case, go to CRA letterhead files to download CRA letterhead R350, and issue letters on this template.

You must include the taxpayer’s email addresses in the letter, as eBay and PayPal need them to retrieve the information. Any transaction IDs or account numbers (19-digit) known should also be included for identification.

eBay and PayPal – Requirement to Provide Documents or Information

Letter A-10_1_25 to eBay and Letter A-10_1_26 to PayPal are requirements for information and must be signed by the delegated authority.

If the auditor is unable to serve the requirement for information in person, it can only be sent through registered or certified mail. The tracking form showing that the requirement was signed for by the receiving party must be scanned and uploaded in Integras.

For more information, go to 10.8.0, Requirement guidelines. If you need help, email RFI Assistance referrals / DPR Renvois assistance (CRA/ARC).

and issue letters on this template

10.6.10 Public sources of information

Information may come from any source that is currently accessible to the public or that would be accessible to the public on request and that is governed by rules applicable to the public. These sources include, but are not limited to:

Generally, information from these sources should be obtained through a designated liaison officer. Each TSO has procedures to follow to obtain (or provide) information from (or to) federal, provincial, and municipal agencies.

Types of information from public sources

Public information is usually defined in federal, provincial, and municipal statutes, regulations, and by-laws and includes:

10.7.0 Information gathering techniques

General comments

CRA officials are authorized to inspect, audit, or examine the books and records of a taxpayer and any document of the taxpayer or of any other person that relates, or may relate, to a taxpayer’s books and records that may be relevant to the administration or enforcement of the ITA, including electronic records.

CRA officials are authorized to request and receive any documents needed to conduct a proper inspection, audit, or examination, unless these documents are protected by solicitor-client privilege.

For more information, go to Communiqué AD-10-01, Acquiring Information from Taxpayers, Registrants and Third Parties, for guidelines on what must be considered when making requests for information and for guidelines about what to do when there is a claim of solicitor-client privilege.

For more information, go to:

10.7.1 Solicitor-client privilege and litigation privilege

Definition of solicitor-client privilege

Clients and their lawyers engage in confidential communication orally and in writing, as part of a court proceeding or not. Solicitor-client privilege means that the client has the right to refuse to disclose those confidential communications to any third party, including the CRA. The client’s right to refuse extends to preventing other third parties from disclosing those confidential communications. Solicitor-client privilege can only be waived by the client.

Steps that the CRA must follow in respect of a solicitor-client privilege claim have been legislated in section 232 of the ITA. However, as a result of the SCC decisions in Chambre des Notaires and Duncan Thompson, the SCC declared subsection 231.2(1), section 231.7, and the definition of “solicitor-client privilege” in section 232 of the ITA invalid and unconstitutional when used and applied to notaries and lawyers in Quebec and elsewhere in Canada.

Instructions when solicitor-client privilege is invoked by a taxpayer who is a notary or a lawyer

As a result of the SCC decisions in Chambre des Notaires and Duncan Thompson, CRA auditors must not, under any circumstances, issue requirements or compliance orders to lawyers or notaries for information related to their clients where that information is held in their capacity as a legal advisor.

However, if the notary or lawyer is the subject taxpayer under audit, CRA auditors should proceed as usual and request information using their audit powers pursuant to section 231.1, for lawyers across Canada and notaries in the province of Quebec:

Instructions when solicitor-client privilege is invoked by a taxpayer who is not a notary or a lawyer

The auditor must not request, or attempt to examine information or documents for which a solicitor-client privilege (legal advice privilege) has been made, even if the auditor believes the information or documents are not subject to the solicitor-client privilege.

The auditor must tell the team leader that a solicitor-client privilege has been invoked. With the team leader’s approval, the auditor must send a letter to the taxpayer to obtain facts about the nature of the document for which solicitor-client privilege has been invoked, including:

After these details are obtained, contact the Department of Justice for assistance in resolving the claim of privilege. If the taxpayer refuses to provide the information noted in the bullets, contact the Department of Justice.

If an accountant raises a solicitor-client privilege claim, go to 10.6.7, Obtaining information or documents from accountants. The claim of solicitor-client privilege may be resolved by a judge.

Definition of litigation privilege

Clients, their lawyers, and other third parties will engage in confidential and non-confidential communications orally and in writing, as part of a court proceeding. Such communications may be restricted from release in certain circumstances, usually dependent on an order of a judge or of a specific legislative statute in a province. This is litigation privilege.

Litigation privilege is not legislated in the ITA, but solicitor-client privilege is legislated. However, as a result of the SCC decisions in Chambre des Notaires and Duncan Thompson, the SCC declared subsection 231.2(1), section 231.7, and the definition of “solicitor-client privilege” in section 232 of the ITA invalid and unconstitutional when used and applied to notaries and lawyers in Quebec and elsewhere in Canada. Litigation privilege was not part of the SCC decisions. For more information on when litigation privilege is invoked by the taxpayer, consult the next subject.

Instructions when litigation privilege invoked by taxpayer

The auditor must complete these steps:

For more information, go to memorandum, Chambre des notaires du Quebec court case.

10.7.2 Authorization to inspect, audit, or examine books and records

For a description of what information or documents auditors can request from taxpayers under audit or third parties not under audit, go to 10.2.2, Legislative authorization to inspect, audit, or examine books and records, and for instructions to obtain information or documents from taxpayers under audit, go to 10.7.5, Instructions to obtain information or documents.

Inspection provisions are the starting point for seeking information from a taxpayer, whether or not the documents are located within or outside of Canada.

An authorized person is entitled to request taxpayer information under the inspection power found in section 231.1. In this context, an authorized person is a person who is authorized by the minister of national revenue, or by someone delegated by the minister, to perform their duties under sections 231.1 to 231.5 and as set out in other relevant acts.

Under subsection 231.1(1), an official has the authority to inspect, audit, or examine:

10.7.3 Requirements

A requirement, as described in section 231.2, is a legal document that compels a taxpayer or third party to provide any information and/or document located in Canada for the purpose of administrating or enforcing the ITA. A requirement under section 231.2 can also be issued to obtain information related to the administration or enforcement of a tax treaty with another country. A requirement under section 231.6 extends the powers given under section 231.2 and it requires a person to provide foreign-based information or documents.

The case of Redeemer Foundation v MNR confirmed that section 231.2 allows officials to obtain information about one or more taxpayers where the person served with the requirement is not under audit, subject to the requirement for judicial authorization if the minister is seeking information relating to unnamed persons from a third party. However, within the case, it was also stated that “the requirement under section 231.2 of the ITA should not apply to situations in which the requested information is required in order to verify the compliance of the taxpayer being audited.”

This means that the inspection powers under section 231.1 should be used to gather information that should be in the books and records from a taxpayer, or any other person who has such information, as long as the request is made in the context of a bona fide audit, and a requirement to provide information under section 231.2 should only be used to obtain information about one or more taxpayers where the person served with the requirement is not under audit.

Other types of requirements can be used to demand non-filers to file returns or to require a person to keep specific records or books of account.

Traditionally, an official would consider issuing a requirement when the requested information and documents which are, or ought to be, in the taxpayer’s books and records have not been provided; however, a compliance order should be considered in this circumstance.

For instructions to issue a requirement, go to 10.8.3, Requirement to provide information or documents.

10.7.4 Compliance orders

The minister may obtain a compliance order under section 231.7 with respect to a failure to comply with either a request under section 231.1 or a requirement for information under section 231.2. These provisions provide a civil remedy to obtain compliance with the minister’s request for access, assistance, information, or documents. This allows a judge to order a person to provide any access, assistance, information, or document sought by the minister. An official will seek a compliance order if the information requested under the inspection powers or under a requirement to provide information or documents, is not being provided.

For instructions to seek a compliance order, go to 10.9.2, General comments.

10.7.5 Instructions to obtain information or documents

To obtain information or documents from taxpayers under audit:

•        Request the information using the authority of section 231.1. If the request was made verbally, it must be followed up in writing.

•        If the taxpayer refuses or does not provide the information, discuss the issue with the team leader and consider issuing a compliance order warning letter.

•        If it is decided to proceed with a compliance order warning letter, it should restate the authority under section 231.1  of the ITA and contain the phrase “. Failure to comply with this request may result in the CRA initiating legal proceedings for a compliance order under section 231.7 of the Act. Failure to comply with the compliance order could result in a contempt of court conviction.”

•        The compliance order warning letter should only be sent if non-compliance will be followed up with a compliance order. For more information, go to 10.9.0, Compliance order guidelines.

Personal banking records as subset of information or documents requested

Information or documents include personal banking records. To review the CRA’s policy on obtaining personal banking records, go to 10.2.1, Requirement to keep books and records, under Personal banking records.

For all Small and Medium business audits where IVI has been mandated by Business Intelligence, the auditors must obtain personal bank statements of the:

•        proprietor under audit;

•        partners of a partnership under audit; or

•        shareholders of a closely-held corporation under audit.

The personal bank statements should be requested early in the audit. Go to 10.2.2, Legislative authorization to inspect, audit, or examine books and records, for a description of what information or documents auditors can request from taxpayers under audit or third parties not under audit.

The auditor does not have to make a specific link between the business records and the personal banking records to request the personal banking records.

To obtain information from a third party (not under audit):

•        Auditors can request the information using the authority of section 231.1. If the request was made verbally, it must be followed up in writing.

•        If there is non-compliance, discuss the issue with the team leader and consider issuing a requirement under section 231.2. For more information, go to 10.8.0, Requirement guidelines.

•        If there continues to be non-compliance, discuss the issue with the team leader and consider issuing a compliance order, if information or documents have still not been provided. For more information, go to 10.9.0, Compliance order guidelines.

10.7.6 Coding for compliance orders and requirements

Auditors must code requirements and compliance orders in the Integras Finalize Audit Attributes tab, in the field, Requirement Coding.

For detailed instructions on Integras, go to Integras Reference Guide. For a direct link to the Integras Reference Guide, select the Help menu at the top of the Integras Desktop screen.

10.8.0 Requirement guidelines

10.8.1 What is a requirement?

A requirement is a legal document issued by the CRA that compels a person to:

10.8.2 Types of requirements and demands

Requirements all compel a person to perform a specific act.

Non-compliance inspection requests issued under subsection 231.1(1) and subsection 231.2(1) can be followed by a compliance order.

For more information, go to 10.9.0, Compliance order guidelines, and Communiqué AD-10-02, Use of Information Gathering Tools.

Demands are authorized under several different subsections of the ITA and allow the minister to demand a person to comply, regardless if the ITA had placed an obligation on the person.

As an example, paragraphs 150(1)(d) and 150(1.1)(b) work together to say that if an individual does not have any of the exceptions listed in paragraph 150(1.1)(b), then they do not have to file a return of income. Subsection 150(2) allows the minister to demand a return be filed.

10.8.3 Requirement to provide information or documents

General guidelines

Requirements for information or documents under subsection 231.2(1) are issued to third parties, not the taxpayer under audit.

When the taxpayer under audit does not provide information or documents and the auditor cannot obtain the information or documents from a third party, the auditor must discuss the issue with the team leader and may seek a compliance order. For more information, go to 10.9.0, Compliance order guidelines.

The goal of auditors is to obtain audit evidence necessary to adequately address audit issues and support an audit adjustment. Before issuing a requirement, an auditor must consider the intention to enforce, as a requirement should not be issued if there is no intention to enforce it in the event of non-compliance.

When issuing a requirement, an auditor must demonstrate that the information or documents required are, or appear to be, relevant and are sought in relation to the administration or enforcement of the ITA or of a tax treaty.

The auditor must consult the team leader when deciding to issue a requirement. All discussions must be documented on Form T2020, Memo for file, available in the Integras Template Library.

A requirement can be served in person by the auditor. If the auditor is unable to serve the requirement in person, the requirement can only be sent through certified or registered mail. The tracking form showing that the requirement was signed for by the receiving party must be scanned and uploaded in Integras.

Criteria for issuing a requirement for information or documents

The decision to issue a requirement is a matter of professional judgement and is usually made whenever:

A requirement can be challenged by the recipient in a court. The court must be satisfied that the information or documents are required for a purpose related to the administration or enforcement of the ITA.

Accordingly, the auditor must be able to demonstrate the relevancy and need for a requirement. To make this demonstration, the auditor must have:

Documents include all original electronic and paper records.

10.8.4 Authority and authorization to issue demands and requirements

The requirement must be signed by an individual with signing authority.

For more information, go to

·       Income Tax Act – Authorization to exercise powers or perform duties of the Minister of National Revenue.

·       Communiqué AD 24-01, Guidance on the appropriate use of signatures, Guidelines and Policies – Compliance Programs Branch (dce-eir.net)

Note: When a manager is executing a requirement, use the generic title, “Manager, Audit.” If the person signing the demand or the requirement is in an acting position, do not use “acting” in the title.

For a complete list of all delegations of authority, go to Delegation of powers, duties, and functions.

10.8.5 Preparing requirements

Content

A requirement must contain:

- RFIs issued pursuant to subsection 231.2(1) of the ITA:

- RFIs sent to financial entities listed as part of the: RFI / RTP Financial Institution Contacts - CNWS list should use only a signature block and a statement, “This document was approved and issued by the delegated authority named in this letter.”

- RFIs sent to all other recipients must use a wet signature or a secure electronic signature given that the authenticity of the RFI may be challenged by the recipient, and there are legal consequences for refusal to comply under section 231.7 of the ITA.   

The identity of the person must be the legal name of the person and any operating names, if known, or any known alias.

When preparing a requirement, be specific if the document sought is known. Otherwise, the requirement must be general, asking for all documents related to the transaction or period under review.

Addressing the requirement

When issuing a requirement to a:

Address the requirement to the corporation, not to an individual. The requirement may be directed to the attention of an individual in the corporation known to be a current officer, director, or employee authorized by the corporation to communicate with the CRA. When applicable, use the subject line to clearly identify the name of the person who is the subject of the review.

Issue the requirement to the partnership at its address or place of business, and to the attention of a specific partner or person in authority with whom the CRA has been dealing with in its audit.

If there is reason to believe that the company will not comply, a second requirement can be issued simultaneously or subsequently to an individual known to have possession, power, or control over the information sought. As with the requirement issued to the corporation, use the subject line to identify the name of the person who is the subject of the review.

If the address used is not accurate, the requirement may not be enforceable in court.

Checklist

Ensure the requirement contains:

A foreign-based requirement under section 231.6 should be used to require the information located outside Canada from a person resident in Canada or a non-resident person carrying on business in Canada.

Serving a requirement to a third party

When an official wants to obtain from a third party who is not under audit, information relating to a taxpayer under audit, the official must first determine if the third-party information is with the taxpayer under audit, or with the third party. If the information is with the taxpayer under audit, the official must first make a request under subsection 231.1(1). If the information is with the third party, the official must follow these procedures:

Requirements to financial institutions for banking records of the taxpayer under audit

Financial institutions will require a formal requirement under subsection 231.2(1) before providing access to the taxpayer’s information. If the financial institution is non-compliant, compliance proceedings under section 231.7 should be undertaken.

The requirement should contain as much information as possible about the taxpayer to facilitate the search of the financial institution’s national database. The social insurance number (SIN) can be included on the requirement. The financial institution may require the SIN to aid in the search for the correct taxpayer. The auditor is authorized to give the SIN to the financial institution in this situation.

Requirements must be addressed to a specific, correct legal entity. Ensure that the correct legal name is being used. For example, the correct legal name is the Royal Bank of Canada, not RBC or the Royal Bank. As well, the mortgage subsidiaries of some financial institutions have different addresses, as do the credit card subsidiaries. The requirement must be served to the correct legal entity at the correct legal address. For the correct legal entity and correct legal address, go to RFI / RTP Financial Institution contacts - CNWS.

If serving requirements on financial institutions, serve the requirement to the designated branch, the Third Party Demands Group (TPDG), identified by the financial institution under section 462 of the Bank Act. Auditors should serve the requirement to the designated branch (TPDG), unless the taxpayer’s branch of account allows that the information be directly provided.

When serving requirements on financial institutions to obtain their customer information, officials sometimes have difficulty obtaining information in a reasonable period of time. A two-step process for serving requirements on financial institutions has been established to obtain information in a reasonable amount of time:

Letter templates for requirements issued to financial institutions for banking records of the taxpayer under audit are available in the Integras Template Library:

If there is still difficulty obtaining information from the financial institutions, the Compliance Programs Branch has established an escalation process with a designated liaison officer for income tax requirements for information. Email the liaison officer at RFI Assistance referrals / DPR Renvois assistance (CRA/ARC).

Requirements to financial institutions for banking information of persons not under audit

The financial institutions may be reluctant to provide banking information of a third party for the audit of a named taxpayer. Under subsection 231.2(1), an auditor can require the financial institution to provide documents of a third party, if requested in the context of the audit of a named taxpayer.

For the mandatory audit steps to obtain personal banking records, go to 10.2.1, Requirement to keep books and records, under Personal banking records. For instructions to issue requirements for personal and business banking records to third parties not under audit, go to 10.6.2, Auditor’s authority to obtain information or documents from a third party.

When serving requirements on financial institutions to obtain information of a third party not under audit, officials sometimes have difficulty obtaining information in a reasonable period of time. A two-step process for serving requirements on financial institutions has been established to obtain information in a reasonable amount of time:

Letter templates for requirements issued to financial institutions for banking records of persons not under audit are available in the Integras Template Library:

If there is still difficulty obtaining information from the financial institutions, the Compliance Programs Branch has established an escalation process with a designated liaison officer for income tax requirements for information. Email the liaison officer at RFI Assistance referrals / DPR Renvois assistance (CRA/ARC).

Requirements to lawyers not under audit

As a result of the SCC decisions in Chambre des Notaires and Duncan Thompson, CRA auditors must not, under any circumstances, issue requirements or compliance orders to lawyers or notaries for information related to their clients where that information is held in their capacity as a legal advisor.

CRA auditors should continue to try to obtain the documents in question from alternative sources, including requesting the documents directly from the taxpayer using CRA’s audit powers pursuant to section 231.1. If the taxpayer refuses to provide the information, contact the Department of Justice for assistance.

For more information, go to memorandum, Chambre des notaires du Quebec court case.

Serving accountants

For instructions of the process to follow before issuing a requirement to an accountant not under audit, go to 10.6.7, Obtaining information or documents from accountants. Once a decision is made to issue a requirement to an accountant not under audit, follow the 10.8.5 instructions under:

Unnamed person requirement – Subsection 231.2(2) of the ITA

When an official wants to obtain from a third party who is not under audit, information relating to an unnamed person, the official can request the information under subsection 231.2(2). When an official anticipates a challenge to such a request, the official should issue a requirement to a third party who is not under audit, for information relating to an unnamed person; however, judicial authorization under subsection 231.2(3) must be obtained before issuing the requirement.

An application for judicial authorization under subsection 231.2(3) should be made if the information sought:

As indicated in the case of Redeemer Foundation v MNR, an official can obtain information on unnamed persons during the audit of a taxpayer without judicial authorization (for example, under section 231.1), regardless of whether or not there is a possibility or a probability that the audit will lead to the review of other unnamed persons, as the CRA should be able to obtain information it would otherwise have the ability to see in an audit. However, when an official is seeking information on unnamed persons from a third party, such as a brokerage firm, outside the context of an audit of that third party, judicial authorization is required under subsection 231.2(2).

Note that the Federal Court, in the case of The Queen v Amex Bank of Canada, decided that the CRA was entitled to require third parties to provide information relating to an unnamed credit card holder that was relevant to an audit of a named taxpayer, without obtaining judicial authorization under subsection 289(3) of the ETA (the parallel provision to subsection 231.2(3) of the ITA), since the credit card holder was not under audit or investigation and the information was for the audit of a named taxpayer.

When judicial authorization is required, a letter or an email must be sent to the local representative of the Department of Justice by the director of the TSO. This letter or email must identify the official that the representative of the Department of Justice must communicate with on the file. Judicial authorization is usually granted if:

The authorization may be subject to the conditions set out by the judge.

Under the ITA, subsections 231.2(5) and 231.2(6) allow a party to obtain a judicial review of any authorization granted under subsection 231.2(3). Otherwise, the same considerations apply as for standard requirements for information relating to specific parties.

Requirement to provide foreign-based information – Section 231.6 of the ITA

If non-compliance with a request under section 231.1 is on the basis that the information is foreign-based information, a foreign-based requirement under section 231.6 must be used to require the information from a person resident in Canada or a non-resident person carrying on business in Canada.

Foreign-based information is information or documents located outside of Canada, which may be relevant to the administration or enforcement of the ITA. If the information in electronic form is stored on servers outside Canada, but its purpose is in respect of a Canadian business and is accessible by the Canadian business, the information is not considered foreign, but within Canada, and a requirement under section 231.2 or a compliance order under section 231.7 must be used.

Officials need only show that information they request may be relevant to the administration or enforcement of the relevant legislation to secure the information. A minimum time-period of 92 days must be allowed the person to provide the information.

There is no stipulation that section 231.6 is operative only after a request under section 231.2 has failed. If a request under section 231.1 has not been complied with and it is unclear if the information is foreign-based or not, a foreign-based requirement can be issued at the same time as a requirement under section 231.2, but the two requirements should be issued separately. It is possible that there will be overlap in the information requested in the two requirements.

Subsection 231.6(8) provides a sanction whereby a person who substantially fails to comply with a foreign-based information requirement (for example, withholds any information or document covered by the requirement), cannot use any of the foreign-based information or documents in a subsequent civil proceeding. Note that the minister does not have the ability to use a compliance order under section 231.7 to enforce a requirement for foreign-based information, but a compliance order under subsection 238(2) can be obtained from the court.

For more information, go to:

For examples of requirement letters in the Integras Template Library, go to letter:

For information on requirements and books and records, go to 10.8.11, Requirement to keep specific records and books of account.

10.8.6 Reasonable time to comply

The ITA provides that the taxpayer is to be given a reasonable time to comply with a requirement to provide information and documents. For requirements issued under subsection 231.2(1), jurisprudence has established a 30-day period as reasonable from the date of the notice of requirement or the date when it is served on the taxpayer.

If it can be reasonably established that a shorter or longer compliance period is warranted and the auditor can justify that position, issue such a requirement with a different period. Have the team leader approve any period of less than 30 days.

Extension

Extensions of time in a requirement are not permitted, as that would invalidate the requirement. Avoid any wording that could be construed as granting an extension of time.

The auditor can choose to delay proceeding to the issue of a compliance order. This delay will allow the taxpayer to provide the information or documents set out in the requirement. Deciding to delay is only done after discussing with the team leader.

If the taxpayer submits all the information or documents after the due-date in the requirement, auditors should not proceed with any further action.

For more information, go to learning product TD1080, Audit Information Gathering Tools: Inspections, Requirements and Compliance Orders.

10.8.7 Service by registered mail

Service by registered mail is acceptable and may be used when compliance is expected, if the taxpayer or third party resides in a remote or inaccessible area, or if several attempts at personal service have failed. If the auditor has any reason to expect non-compliance on the part of the taxpayer or third party, personal service should be undertaken.

10.8.8 Cross tax services office service of requirements

All requirements are issued by a person with delegated authority, such as the manager in the TSO where the information and documents can be obtained, or by the manager of the TSO seeking the information. Delivery and servicing of requirements is the primary responsibility of the TSO that issued and signed the requirement, unless alternate arrangements are made between the TSOs.

10.8.9 Cost of compliance

The CRA will not reimburse any costs related to compliance with a requirement.

Requirements for information or documents are to be restricted to items necessary to assess the correct amount of tax.

For more information, go to McKinlay Transport Ltd et al v The Queen et al, SCC (1990) DTC 6243.

10.8.10 Timing of requirement issued

There is no time limit or range imposed by the Act for issuing a requirement. A requirement is issued "for any purpose related to the administration or enforcement [of this Act]"; therefore, there is no inherent restriction on the timing of the serving of the requirement. A requirement may be issued at any time, including the objection and appeal stages, provided that the taxpayer is not being investigated for tax evasion.

10.8.11 Requirement to keep specific records and books of account

Inadequate books and records

Adequate books and records are not specifically defined in the ITA. Subsection 230(1) generally says books and records must be adequate to determine the taxes payable. The auditor and team leader must make this determination using professional judgment and after taking into account the facts and circumstances of the specific audit. Factors to take into account include:

The record-keeping requirements of other organizations that the taxpayer deals with, such as banks, landlords, other creditors, and statutory or regulatory bodies, can also be considered when determining the adequacy of the books and records.

Dealing with a first instance of inadequate books and records

The procedures in this section assume that a books and records letter listing deficiencies does not already exist. The auditor must determine this by reviewing archived paper documents (using ReQuest Web) and any previous audits through Integras. If a previous books and records letter exists, go to the area below, Dealing with a second instance of inadequate books and records.

Once it has been determined that the books and records are inadequate, the auditor must:

Completing the audit with books and records in their deficient state

If the auditor and team leader decide that it is possible to complete the audit in spite of the deficiencies, a letter addressing the deficiencies must be issued. When issued at the same time as a proposal or at closing, it is important to note that the letter addressing deficiencies is separate from the proposal or final letter that outlines the results of the audit. The letter addressing deficiencies must note specifically how the books and records were deficient and what the taxpayer must do to ensure adequacy in the future.

The auditor and team leader may choose to issue Integras Template Library letter A-10.1.2, Informal Books and Records, or letter A-10.1.3, Informal Books and Records Agreement, depending on the nature of the deficiencies.

When you expect the taxpayer to return a letter you send, such as A-10.1.3, you must mark "PROTECTED B when completed" on the top right-hand corner of each page of the letter.

Whichever letter is issued, in addition to the electronic upload, a paper copy must be sent to storage using the appropriate records trailing document slip, selecting “Other,” and then indicating the appropriate title in the description area. The auditor must ensure that any conversations with the taxpayer about deficiencies are documented on Form T2020, Memo for file, available in the Integras Template Library.

The auditor must also provide to the taxpayer, a copy of:

Postponing the audit until the taxpayer corrects the deficiencies

If the auditor and team leader decide on this action, the deficiencies in the books and records and the importance of keeping proper records must be discussed with the taxpayer. A letter addressing the deficiencies (Integras Template Library letter A-10.1.2 or A-10.1.3) must be issued to the taxpayer.

When you expect the taxpayer to return a letter you send, such as A-10.1.3, you must mark "PROTECTED B when completed" on the top right-hand corner of each page of the letter.

Whichever letter is issued, include a time frame to complete the corrective measures as the audit is in progress. An initial deadline of 30 days to correct the deficiencies must be provided. A different reasonable time frame may be granted, but the taxpayer must provide rational grounds.

The auditor must provide to the taxpayer, a copy of:

If the taxpayer does not correct the deficiencies within the time frame outlined in the letter, the auditor must prepare and serve the taxpayer a requirement. A requirement to keep adequate books and records is issued under subsection 230(3). Such a requirement can only be issued after the taxpayer has received letter A-10.1.2 or A-10.1.3, as noted in the previous paragraphs. The auditor must ensure that the requirement to keep specific records and books of account is signed by a person with delegated authority.

For information to prepare the requirement, go to the 10.8.5 instructions under:

If the taxpayer does not follow the requirement, then a penalty ordered by a judge under subsection 238(1) may be administered. Failure to follow a requirement to keep adequate books and records is not addressed with a compliance order. For more information on the penalty process, go to the paragraph below, Penalty for inadequate books and records.

As the requirement and possible penalty action may not be conducted during an active audit, the auditor must document all reasons for the delay on Form T2020, Memo for file. The form is available in the Integras Template Library.

Dealing with a second instance of inadequate books and records

In the context of an audit

If an auditor commences an audit and notes deficiencies in the books and records that were already outlined in a letter to the taxpayer, this is a second instance of inadequate books and records.

Since a letter was previously issued outlining the deficiencies, a further letter is not necessary. The auditor may proceed to issue a requirement under subsection 230(3). Before issuing a requirement, the auditor and team leader must discuss with the taxpayer why the deficiencies were not corrected.

For information to prepare the requirement, go to the 10.8.5 instructions under:

If the taxpayer does not follow the requirement, then a penalty ordered by a judge under subsection 238(1) may be administered. Failure to follow a requirement to keep adequate books and records is not addressed with a compliance order. For more information on the penalty process, go to the paragraph below, Penalty for inadequate books and records.

As the requirement and possible penalty action may not be conducted during an active audit, the auditor must document all reasons for the delay on Form T2020, Memo for file, available in the Integras Template Library.

In the context of a follow-up to a letter outlining deficiencies (non-audit situation)

The auditor may have to complete a follow-up in a non-audit situation. The follow-up would be necessary to verify that previously-outlined deficiencies have been corrected by the taxpayer. If the deficiencies have not been corrected, this is a second instance of inadequate books and records. Since a letter was previously issued outlining the deficiencies, a further letter is not necessary. The auditor may proceed to issue a requirement under subsection 230(3). Before issuing a requirement, the auditor and team leader must discuss with the taxpayer why the deficiencies were not corrected.

For information to prepare the requirement, go to the 10.8.5 instructions under:

If the taxpayer does not follow the requirement, then a penalty ordered by a judge under subsection 238(1) may be administered. Failure to follow a requirement to keep adequate books and records is not addressed with a compliance order. For more information on the penalty process, go to the paragraph below, Penalty for inadequate books and records.

Penalty for inadequate books and records

An administrative penalty under subsection 162(7) may be applied when the taxpayer has failed to comply with a duty or obligation imposed under the ITA. Whether or not the administrative penalty is applied, a judge may decide to summarily convict the taxpayer of an offense under subsection 238(1) and impose the fine or the fine and a term of imprisonment as outlined in that subsection. If the judge convicts the taxpayer under subsection 238(1), the judge may further order under subsection 238(2) any action the court deems necessary to enforce compliance.

The auditor and the team leader must obtain approval from the director of the TSO before proceeding with the application for a penalty under 238(1). If the director of the TSO approves the application, the Department of Justice must be contacted to provide assistance.

The auditor will be asked to demonstrate:

10.8.12 Failure to comply

When the recipient of a requirement fails to comply under section 231.2, a decision to proceed with civil action must be made.

For more information, go to learning product TD1080, Audit Information Gathering Tools: Inspections, Requirements and Compliance Orders.

10.9.0 Compliance order guidelines

10.9.1 Background

A compliance order is an order to comply with requests for information made by the CRA. The order is issued by the Court. The CRA can seek a compliance order when there is a failure to comply with an inspection request or a requirement. An official will seek a compliance order if the information requested under the inspection powers (go to 10.7.0, Information gathering techniques) or under a requirement to provide information or documents (go to 10.8.0, Requirement guidelines), is not being provided.

Subsection 231.7(1) of the ITA came into force June 14, 2001. These provisions provide a civil remedy to obtain compliance with the minister's request for access, assistance, information, or documents sought by the minister under subsection 231.1(1) and subsection 231.2(1). This allows a judge to order a person to provide any access, assistance, information, or document sought by the minister.

10.9.2 General comments

A compliance order under section 231.7 offers these benefits:

•        a quicker process than prosecution will result;

•        the person will not be convicted of an offence;

•        there will be shorter delays in obtaining the information; and

•        the taxpayer must appear before a judge to explain non-compliance.

Since the judge presiding at a compliance application has jurisdiction to make rulings on questions of privilege, the compliance order provision can also be used to resolve claims of solicitor-client privilege, except when the provision is used and applied to lawyers and notaries for information related to their clients where that information is held in their capacity as a legal advisor. For more information, go to memorandum , Chambre des notaires du Quebec court case.

If the application is successful, a judge orders the person to provide access, assistance, information, or documents sought by the minister. Failure or refusal to comply with a compliance order can result in a person being found in contempt of court and therefore, subject to appropriate punishments by the Court.

Compliance order provisions under subsection 231.7(1) operate notwithstanding the availability of criminal prosecution provisions under section 238.

In practice, the non-compliance will usually be with respect to a requirement. These provisions operate as an alternative to proceeding by prosecution under subsection 238(1). These guidelines should be considered if there is non-compliance with requirements issued to third parties, to taxpayers under audit or examination, or taxpayers who are the subject of collection measures taken by the CRA. For non-filers, proceed with the prosecution provisions.

Usual practices and procedures must continue to be followed to decide when to use the provisions of subsections 231.1(1) or 231.2(1). The same criteria, as the ones used for prosecution action upon non-compliance, will apply for initiating the process.

Before proceeding to a compliance order, following an initial request under subsection 231.1(1), a second request for the outstanding information must be sent with a statement, such as:

“ Failure to comply with this request may result in the CRA initiating legal proceedings for a compliance order under section 231.7 of the Act. Failure to comply with the compliance order could result in a contempt of court conviction.”

If, after 30 days, the requested information has not been provided, the auditor is able to pursue a compliance order.

Before requesting assistance from the Department of Justice, many TSOs have an internal process that requires the preparation of a report recommending that a compliance order be obtained. This report is to be approved by management. Check with local management.

When it is decided to pursue this compliance order, a letter or email must be sent by the ADA of the TSO to the local representative of the Department of Justice asking for assistance with a compliance order. This letter or email must identify the auditor handling the file, with whom the representative of the Department of Justice will communicate.

Generally, applications under these sections will be taken in the Federal Court and be handled by the Tax Law Services Section of the Department of Justice. Subsection 231.7(1) must be considered in cases where compliance is sought, but where a prosecution is not considered to be appropriate.

Counsel will provide guidelines as to what documents need to be prepared and what steps must be taken. It can be expected that civil cases will require similar audit evidence of non‑compliance as that needed in a prosecution for non-compliance. The auditor will need to establish:

•        the actions taken by the CRA;

•        the actions taken by the officer to achieve compliance and the responses or actions of the taxpayer; and

•        any facts within the personal knowledge of the officer as to reasons why the taxpayer has not complied.

Much of the audit evidence needed to support the case will be presented by affidavit, but it is expected that the officer may be cross examined on any affidavits prepared and may be required to attend at court if the matter proceeds to trial. Auditors will be advised as to details of what will be required by Department of Justice counsel.

For more information, go to learning product TD1080, Audit information gathering tools: Inspections, Requirements and Compliance Orders under Seeking a compliance order.

The functional program contact at Headquarters (HQ) must be advised of applications taken under subsection 231.7(1) and any documents must be forwarded to HQ. It is not necessary that HQ approve or comment on preparing documents. They will be prepared together with counsel from the Department of Justice.

The Business Audit Division in HQ should be informed immediately if there is difficulty in obtaining assistance from the Department of Justice.

10.9.3 Case selection

Proceed with the civil provision for a compliance order under subsection 231.7(1) when seeking compliance with requests:

For non-filers, proceed with the prosecution provisions under subsection 238(1).

The minister of national revenue is responsible to administer and enforce the ITA. The Department of Justice provides legal advice and guidance and must decide when prosecution is appropriate. The minister has the discretion to recommend prosecution action to the Department of Justice and is responsible to make the final decision if charges should be laid. Counsel for the Attorney General of Canada is responsible to make the final decision if a prosecution will proceed after charges have been laid. The minister will decide on the appropriateness of using subsection 231.7(1), in consultation with counsel from the Department of Justice.

10.9.4 Protocol

Civil action

An official may decide to proceed directly to a compliance order if the taxpayer refuses to produce the information in response to a request under the inspection powers set out in section 231.1. When an official decides to proceed directly to such a compliance order, the official would send a second written request for the information that is outstanding. This letter must indicate that the taxpayer has not submitted the information previously requested. The letter must also state that if the previously requested information is not provided to the CRA within 30 days, the matter of non-compliance will be referred to the Department of Justice for a compliance order under subsection 231.7 of the ITA. The second request must contain a statement, such as:

“ Failure to comply with this request may result in the CRA initiating legal proceedings for a compliance order under section 231.7 of the Act. Failure to comply with the compliance order could result in a contempt of court conviction.”

For an example of a compliance order warning letter, go to Integras Template Library letter A‑10.1.8, Compliance Application Warning - Failure to Provide Information and Documents.

If, after 30 days, the taxpayer has not provided the requested information, a letter or email must be sent by the ADA of the TSO to the local representative of the Department of Justice to ask for assistance in the form of a compliance order. This letter or email must identify the official that the representative of the Department of Justice is to communicate with on the file. Before applying to a judge for a compliance order, the Department of Justice representative will likely contact the taxpayer to inform them how the file will proceed.

When an application is made before a judge, the judge must be satisfied that the person was required under the applicable sections of the legislation to provide what was sought and be satisfied that it is not protected by solicitor-client privilege.

Failure or refusal to comply with a compliance order could result in the person being found in contempt of court, and therefore, subject to the appropriate punishments of the Court. If a taxpayer was prosecuted and convicted for not complying with a requirement, a compliance order can be obtained from the Court under subsection 238(2).

Prosecution

Under subsection 238(1), where a person has failed to comply with any of sections 230 to 232, or an order under subsection 238(2), they are guilty of an offence and, in addition to any penalty otherwise provided, are liable on summary conviction of:

•        a fine of not less than $1,000 and not more than $25,000; or

•        both the fine described in paragraph 238(1)(a) and imprisonment for a term not exceeding 12 months.

Under subsection 238(2), where a person has been convicted by a court of an offence under subsection 238(1) for a failure to comply with a provision of the Income Tax Act or a regulation thereof, the court may issue a compliance order to compel the person to provide the required information to enforce compliance with the provision.

If an official is considering applying this provision, the local representative for the Department of Justice should be contacted for assistance.

The Department of Justice provides assistance if you pursue each option, compliance, or prosecution. In all cases, the discretion to prosecute remains with the Attorney General.

10.9.5 Guidelines

If a taxpayer under audit does not provide information or documents and the auditor cannot obtain the information or documents from a third party, the auditor must seek a compliance order. Guidelines are:

•        The auditor must have requested the information; if done verbally, it must have been followed up in writing.

•        The auditor must have discussed the failure of the taxpayer to provide the information or documents with the team leader.

•        The auditor must have prepared a short summary of actions taken to date in the form of a memorandum or report. Each TSO may have its own internal process with respect to the form the summary will take. The memorandum or report will be sent to the ADA, the director of the TSO, and the Department of Justice and should be prepared with that audience in mind.

•        After approval by the team leader, the auditor must issue a second letter to the taxpayer. The second letter is referred to as the compliance order warning letter and must include this paragraph:

“ Failure to comply with this request may result in the CRA initiating legal proceedings for a compliance order under section 231.7 of the Act. Failure to comply with the compliance order could result in a contempt of court conviction.”

For an example of a compliance order warning letter, go to Integras Template Library letter A‑10.1.8, Compliance Application Warning - Failure to Provide Information and Documents.

The compliance order warning letter must include the specific information or documents that need to be provided. Also, the auditor must attach a copy of the previous letter already sent to the taxpayer.

•        The auditor will provide a 30-day response time in the compliance order warning letter. To be clear in the compliance order warning letter, the auditor must specify the date at which 30 days expires. That date should not fall on a weekend or holiday.

•        The auditor can personally deliver the compliance order warning letter to the taxpayer. The auditor must explain the implication of failure to provide the information or documents. The implication for non-compliance is that the Department of Justice will contact the taxpayer and initiate court proceedings.

•        In the circumstance that personal delivery cannot be made, the auditor must send the letter in registered format that requires a signature at the recipient end to verify receipt.

•        At the 25th day, the auditor must complete the memorandum or report and have both the team leader and section manager approve it in preparation for forwarding to the ADA. The auditor will also obtain the contact information in the Department of Justice.

•        If the auditor has not received the information or documents at the end of the 30 days, the auditor will forward the memorandum or report to the ADA.

•        After the ADA has approved the memorandum or report, the auditor will forward it with a copy of letters and other relevant documents, in encrypted email to the Department of Justice lawyer.

•        The auditor must follow any subsequent instructions from the Department of Justice lawyer.

To the extent possible, applications must proceed expeditiously. These provisions provide that the proceedings proceed on an application for a compliance order. Applications may be commenced before the Federal Court (Trial Division).

For more information, go to 10.7.1, Solicitor-client privilege and litigation privilege.

10.10.0 Research and analysis

10.10.1 General comments

The primary purpose of CRA audits is to ensure that taxpayers have complied with the provisions of the ITA. To properly apply any legislative provision, auditors must be able to fully understand and correctly interpret complex legal text. Some degree of technical research is usually needed for all, but the simplest provisions.

Both commercial publishers and the CRA produce resource material dealing with the interpretation of Canada's tax legislation. The CRA publishes documents that auditors may need to be familiar with, particularly if the taxpayer asks questions during the audit.

For more specific technical information, go to Chapters 20 through 31 and learning products in the Directory of Learning Products.

10.10.2 Research – Income tax

Sources of income tax law

The ITA is a statute of the Parliament of Canada and is the primary source of income tax law in Canada. The three other legislative documents created to support the ITA are the:

  1. Income Tax Application Rules;
  2. Income Tax Regulations; and
  3. tax treaties.

For more information, go to learning product TD1000-000, How the Income Tax Act and the Excise Tax Act Work. This course explains the structure of the ITA and the information generally contained in commercial print editions of the legislation.

Income Tax Act

The official version of the ITA is Chapter 1 of the Revised Statutes of Canada 1985 (5th Supp.), together with all the amendments subsequently adopted by Parliament. However, most users generally refer to one of the consolidated versions produced by commercial publishers, such as Carswell, CCH, or Ernst & Young. In addition to a reproduction of the legal text, the commercial publishers include more information in tables, indices, headnotes, and footnotes to help users locate, understand, and apply the provisions of the legislation.

Income Tax Application Rules

The Income Tax Application Rules (ITARs) form Chapter 2 of the Revised Statutes of Canada 1985 (5th Supp.). Chapter 2 complements Chapter 1 and is an integral part of Canadian tax law.

Part I of the ITARs, consisting of sections 1 through 68, provides transitional rules for the 1971 tax reform changes to the ITA. Some of these rules, such as those dealing with disposition of property acquired before 1972, are still relevant.

Part II of the ITARs provides transitional rules dealing with changes effective December 1, 1991. Auditors should be aware of the possible application of ITARs when dealing with situations straddling these dates.

Income Tax Regulations

The Income Tax Regulations are passed under the authority of the ITA, under authority delegated by Parliament to the federal Cabinet. As a result, regulations can be changed, added to, or deleted by order-in-council without parliamentary approval. Regulations complement the ITA, but do not modify or contradict it. The regulations are valid only if they are within the law, as authorized by the ITA.

Within sections of the ITA, there are expressions:

These expressions indicate that regulations apply. The actual references are listed in the footnotes to the section.

For example, paragraph 20(1)(a) authorizes the deduction from income of:

"such part of the capital cost to the taxpayer of property, or such amount in respect of the capital cost to the taxpayer of property, if any, as is allowed by regulation."

The wording of this provision indicates that regulations apply. The footnotes refer to Part XI of the regulations, where the CCA rates and the various classes are described.

Tax treaties

Canada has signed bilateral tax treaties or agreements with the United States, the United Kingdom, and other countries. These treaties deal with matters of concern to taxpayers engaged in international transactions. Canada's bilateral treaties are enacted and adopted by Parliament and form part of the Canadian domestic law.

The purpose of tax treaties is to eliminate double taxation and to prevent tax evasion with respect to taxes on income and capital gains.

Tax treaties can be amended by protocol agreed to and signed by both contracting states. Tax treaties can also be withdrawn for political reasons.

If there is conflict, the tax treaty supersedes the ITA and must be considered when dealing with non-resident taxpayers or international corporations.

For more information, go to Department of Finance Canada, Tax Treaties: In Force.

10.10.3 Canada Revenue Agency public documents

Income tax folios

A chapter of an income tax folio is an updated version of the technical content in one or more income tax interpretation bulletins (ITs) and also includes the material now in the income tax technical news (ITTN). Chapters are published as the content is updated; ITs and any ITTN updated by a folio chapter is cancelled. It is expected that the update process will take several years.

For more information, go to:

Income tax interpretation bulletins

Updated ITs are replaced by income tax folios. As the updated information is published in the income tax folios, the related ITs and ITTNs are cancelled.

ITs publicize the CRA's interpretation of the provisions of a particular subject and announce significant changes in CRA interpretations and their effective dates. Although ITs are not law, they may be relied on to ensure that the CRA's interpretation of the law is applied consistently.

ITs are technical and references to relevant case law and other CRA publications, as well as examples, are included if appropriate.

ITs reflect the CRA's interpretation of the law in force at the time the ITs are published. When past updates were required, the CRA revised an IT or issued a special release. When referring to an IT, it is important to note its effective date.

An interpretation described in an IT, revised IT, or special release applies as of the date the IT or special release is published, unless otherwise specified. When there is a change in a previous interpretation or position, including a change resulting from a court decision and the change is beneficial to taxpayers, it is usually effective for current and future assessments and reassessments. However, if the change is unfavourable, the effective date of the change is stated in the IT or special release. These changes are usually effective for the current and later tax years or for transactions entered into after the date of the IT or the special release.

Income tax information circulars

Income tax information circulars (ICs) are published to inform the general public on procedural matters about the Income Tax Act, the Estate Tax Act, and the contribution provisions of the Canada Pension Plan. They are also the means for announcing changes in organization, personnel, and operating programs, as well as other administrative developments of general interest to broad segments of the public.

Advance income tax rulings

An advance income tax ruling (Ruling) states the CRA's position on specific situations in respect of the taxpayer to which the Ruling is given. The taxpayer must request a Ruling and pay a fee for the service. All information supplied by the taxpayer is confidential. Severed versions of Ruling letters are made available to the public through the Access to Information Act.

For more information, go to Income Tax Information Circular IC70-6R9, Advance Income Tax Rulings and Technical Interpretations.

When using Rulings, auditors should ensure that no relevant ITA provisions, case law, or CRA interpretations have changed. The CRA does not amend published Rulings to reflect changes in law or interpretation.

Technical interpretations

Technical interpretations are general opinions, but often provide valuable interpretative insight. No fee is charged for this information. The public has access to severed versions of these interpretations, available in the CRA Electronic Library.

Income tax technical news

As ITs are updated and replaced by income tax folios, information now in ITTNs is included in the income tax folios and the related ITs and ITTNs are cancelled.

ITTNs inform the public about:

ITTNs deal with many tax topics at the same time, whereas ITs were issued for a specific subject.

10.10.4 Internal Canada Revenue Agency documents

Legislation information bank

The legislation information bank (LIB) reproduces all the letters written by HQ for each section of the ITA. Access to this database is through the mainframe and is generally restricted to team leaders.

Tax analyses

Tax analyses are highly structured training documents that relate exclusively to the study of complex sections of the ITA. A tax analysis includes a brief introduction of a subject, a detailed analysis of the legal text, a summary example, and additional information to complement subsequent tax research.

Research guides

Research guides are similar in nature to tax analyses, but deal with less complex sections of the ITA.

10.10.5 For future use

10.10.6 For future use

10.10.7 Remission orders

Remission orders are passed by the federal Cabinet for relief of federal taxes under the authority of section 23 of the Financial Administration Act.

Remission orders permit the Governor in Council, acting on the advice of Treasury Board or the minister of national revenue, to grant relief of any tax, fee, or penalty when it is deemed to be in the public interest. This provision may also be used in exceptional circumstances to grant relief to specific persons. Remission orders are permissive only and there is no appeal against a decision not to remit.

A remission order may apply to one specific amount or transaction or to on-going situations.

10.10.8 Jurisprudence

There are three federal judicial levels that hear tax cases. Due to the hierarchical structure of the judicial system, it follows that the higher the judicial level, the more important the decision becomes. It is always recommended to determine if a case is under appeal at a higher level of court before considering it as a final decision. Carswell Tax Partner and CCH Tax Works both list cases under appeal.

For more information, go to 19.0, Objections and appeals.

10.10.9 Research – Other documents

The CRA has released a collection of documents under the Access to Information Act. These documents are identified by an eight-digit alphanumeric code, for example E9612343. The letter identifies the language (that is, E for English and F for French). The next two digits indicate the calendar year in which the request for information was received. The following four digits indicate the file number and are assigned in ascending order as requests are received in the year. Finally, the last digit indicates the document type.

This chart lists the document types:

List of document types
Document Type Code Document Type Code  
0 Round Table Questions  
1 Statement of Principal Issues  
2 External Sources  
3 Ruling  
4 Committee Report  
5 Opinion  
6 Head Office Memo
  
7 Memo  
8 Ministerial Letter, Brief, Issue Sheet
  
9 Legal/Finance/Policy Division
  

10.10.10 Research – Location of documents

Public documents

While hardcopies of many documents still exist, electronic versions are much more accessible and up-to-date; CRA auditors generally use these sources of information:

These databases are maintained by commercial publishers and are available to any subscriber. They contain the documents available to the public as well as some other documents and features that auditors may find useful. Personal preference and availability will determine the source of information used by each individual auditor.

Internal documents

For electronic versions of internal documents, refer to:

CRA Electronic Library

The CRA Electronic Library is maintained by the Legislative Policy and Regulatory Affairs Branch. The CRA has an arrangement with Ernst & Young to maintain the CRA Electronic Library. In addition to public documents, the library includes internal databases available to the CRA for tax administration purposes, such as Audit Manuals, sector profiles, internal memos, directives, communiqués and the research guides.

Integras

The Tools menu, at the top of the Integras Desktop screen, includes links to key resources and an option to search for previous cases.

Any Integras case that has been created with the same nine-digit BN or SIN is listed in the Integras Case Listing tab.

Note: Auditors may get a Case Access Reason screen where they will have to choose a reason to justify their access.

The Relationship Overview tab displays any cases that are related to the selected case. Auditors have the option of viewing the cases that are related by clicking a row in the Relationships List table and clicking the Open button.

For detailed instructions on Integras, go to Integras Reference Guide. For a direct link to the Integras Reference Guide, select the Help menu at the top of the Integras Desktop screen.

10.11.0 Leads and referrals

10.11.1 Introduction

Auditors often need to interact with other CRA offices or program areas to request or provide assistance or to exchange information. This is normal practice and results in more efficient use of resources. Some situations also require communications with other government departments or agencies.

Assistance from specialists is necessary because auditors generally do not have expertise in highly specialized industries or specific areas, such as property valuation. For example, an auditor may request assistance from the Valuation Section to determine the fair market value (FMV) of a non-arm's length transfer of property. The auditor prepares a referral and later receives the information requested to complete the audit.

Auditors have access to a great deal of taxpayer information in day-to-day audit activities. When that information indicates the likelihood of significant non-compliance, a referral or a lead with the relevant information may be prepared for further review by the appropriate sections.

Lead vs referral

While the two terms are similar, there is a different use for each term.

Lead – prepare a lead when a current audit results in information in any form that identifies potential non-compliance activities and indicates that an audit may be required either on the taxpayer under audit, but for a different year or issue, or on a different taxpayer.

Referral – prepare a referral when compliance action that is related to the current audit is required by another area, such as by Criminal Investigations or the non-filer unit.

Depending on the nature of the suspected problems and the location of the taxpayer involved, a lead or referral may be sent:

A referral is also used to route work to the appropriate area within the TSO. For example, if the Audit Division receives a taxpayer request (TPR) that involves several different matters, including a collections issue, a referral would be forwarded to the Revenue Collections Division.

Leads and referrals are both initiated and received by auditors. General information will be provided for handling leads/referrals and the sections that auditors deal with. Specific forms are used for leads to the Audit Division and referrals to the Tax Avoidance Division, Criminal Investigations, Valuation Sections, etc. For other situations, a memo or letter will often be used to provide the necessary details.

10.11.2 Leads to Audit – Tax services offices and regions – Under review

Leads

A lead is information in any form that identifies potential non-compliance activities and indicates that an audit may be required.

Leads form an integral part of the workload selection process. Information may be obtained from various sources including:

Information from internal sources

Auditors deal with taxpayer information in the CRA's internal databases on a daily basis and must be alert to questionable items or inconsistencies that may indicate the existence of non‑compliance. Forward relevant information to the appropriate section for follow-up and auditors must remember that access to taxpayer information is on a need-to-know basis. Team leaders must be consulted, particularly if more research is necessary.

Information from public sources

CRA employees may gather information from any source that is available to the general public. This information includes, but is not limited to, the classes of information that are available to the public under the Access to Information Act. In collecting public information, CRA auditors are bound by any rules applicable to the general public with respect to cost, time frames, etc. Some useful sources of public information include provincial and municipal registries and newspapers.

Information from informants

All information from informants, including Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) and National Anti-drug Strategy (NADS) leads, is directed immediately to Criminal Investigations to consider. Disclosure of any informant's information or of the identity of the informant is to be strictly avoided. Immunity from disclosure of the identity of informants is an established Crown privilege and a rule of common law. This rule is founded on grounds of public policy and on the necessity of preserving the sources of information. All leads from informants are the responsibility of Criminal Investigations and even though they may request that other sections assist with the follow-up of the lead, the original lead will remain under the control of Criminal Investigations.

Criminal Investigations communicates any necessary information to the other sections on Form T133A, Enforcement lead. Designated officers, generally the Business Intelligence officer, receive the lead information on a secured shared drive. The Business Intelligence officers will review the information on a regular basis (not to exceed every three months) and select the leads considered to have the highest potential tax at risk for possible audit action. If no audit action is warranted, screener comments will be entered into the electronic Form T133A template and the lead will be returned to Criminal Investigations with reasons for rejection; in this case, no copy of the information is placed in the taxpayer's file.

The original information will always remain in Criminal Investigations to protect the source of the information. Attachments provided by informants may be scanned into the electronic version of the Form T133A lead for review by designated Business Intelligence officers. If it is considered necessary for an auditor to examine information or attachments in the electronic lead, a meeting can be arranged with the appropriate Business Intelligence officer who has access to the file.

Once the audit work is completed, the electronic Form T133A will be completed on the shared drive. Any supporting documents that may identify the source of the information, including notes made by an auditor when reviewing any electronic attachments, are to be returned to Criminal Investigations. No information from the informant, NADS, and FINTRAC will be kept on the taxpayer's file. If a working paper is created, remove FINTRAC identifying information, such as DC#, Type of Reports, and Time of day of transaction. If the audit reveals potential tax evasion, the matter is referred back to Criminal Investigations on Form T134, Referral to the Criminal Investigations Division, available in the Integras Template Library.

For more information, go to Criminal Investigations Manual > Historical > March 2014 > Chapter 3.2, Form T134 Completion Instructions.

Information from taxpayer’s records

During an audit, information, such as source documents from various sources, is reviewed. If during the audit, non-compliance of a third party is suspected, the auditor will usually prepare a referral that includes the information required for follow-up.

Subsection 231.1(1) of the ITA authorizes entry and examination of books and records only to the extent that they relate to information that is or should be in the books or records of the taxpayer or to determine amounts payable under the ITA. Therefore, this section cannot be used to enter a taxpayer’s premises and gather information for the purpose of selecting other taxpayers for examination.

Preparation of leads

To generate a lead, record information on Form T133, Lead or Project Information, available in the Integras Template Library. Leads should only be prepared based on the level of risk, taking materiality into consideration. The primary purpose of the procedure is to create a productive workload.

When completing Form T133, take care to ensure that all the details of the transactions are noted so that the information can be verified and traced to the original source of the information. Also ensure that the information on the lead form is factual and clear without bias or personal comment.

Leads must be reviewed and approved by the auditor’s team leader. Once a lead has been approved, the auditor scans the approved Form T133 and submits it directly to the appropriate regional Business Intelligence (BI) Section through their generic mailbox given below:

When the lead is on a taxpayer other than the one under audit, the Form T133 lead is not to be kept in the Integras case.

10.11.3 Referrals to other programs

Occasionally, a reviewer will determine that a referral to another program is appropriate.

Referrals and assistance requests to Computer Audit Specialist, Real Estate Appraisal (REA), Business Equity Valuation (BEV), and Aggressive Tax Planning (ATP) programs are done within Integras. The auditor will select Create a case and assign the referral or request to the team leader of the appropriate program.

For detailed instructions on how to create these referrals and requests for assistance in Integras, go to Integras Reference Guide. For a direct link to the Integras Reference Guide, select the Help menu at the top of the Integras Desktop screen.

An example of a referral could be a referral to the Non-Filer Program.

Non-filer

A review of a file may identify non-filers that have not been identified by other means. A lead is prepared and the case is reviewed to determine if further action is necessary. Check the Système Universal Delpac System (SUDS) to see if someone is working on the file.

10.11.4 Referrals for real estate appraisal or business equity valuation

The Real Estate Appraisal (REA) Program and Business Equity Valuation (BEV) Program each have groups of qualified experts to determine the fair market value (FMV) of assets. If the FMV of assets is an audit concern, depending on the nature of the asset involved, obtain a conclusion on the FMV from REA or BEV. 

REA determines the FMV of property, such as:

BEV determines the FMV of assets, such as:

REA and BEV provide real estate appraisal and business equity valuation services to Audit and to all areas of the CRA, including Appeals and the Department of Justice. Both programs encourage auditors and others to consult or have informal discussions as required before making a formal referral through Integras.

For more information, go to:

10.11.5 Referrals to Scientific Research and Experimental Development

If an auditor comes across a situation indicating there may be problems related to a Scientific Research and Experimental Development (SR&ED) tax credit, the team leader should be consulted. This might include a taxpayer who may be entitled to an SR&ED tax credit, but has not applied for it.

10.11.6 Tax avoidance and General Anti-Avoidance Rule

Role of the Tax Avoidance and the Aggressive Tax Planning Programs

Within the Compliance Programs Branch (CPB), two areas are responsible to administer tax avoidance programs. The Tax Avoidance Division (TAD) is part of the International and Large Business Directorate (ILBD) and the Aggressive Tax Planning (ATP) Audit Program Section is part of the High Net Worth Compliance Directorate (HNWCD). Tax avoidanceFootnote 1  programs exist to meet the challenge of abusive tax avoidance. These programs are responsible for identifying emerging tax avoidance issues, arrangements, products, and handling cases requiring a remedy for tax avoidance. TAD has the mandate to administer the General Anti-Avoidance Rule (GAAR).

Tax Avoidance (TA) auditors participate as team members on all Large File audits under the policy set out in Communiqué ILBD-16-02, Roles, Responsibilities and Accountabilities of the Integrated Large Business Audit Team. ATP auditors in the regions report to the ATP Audit Program Section, in the Audit Division of the HNWCD.

Assistance request to Aggressive Tax Planning Teams

Tax avoidance can be found in many different forms. Auditors will come across unusual or complex series of transactions in their work area that may necessitate a second opinion on the tax implications.

Discussions with ATP should take place at the earliest possible stage of an audit to help determine if the transaction may be abusive or avoidance in nature and to limit the resources devoted to a case. The request can be a formal assistance request (Integras) or informal assistance request (informal consultation).

The informal consultation or assistance request is the first stage in the referral process. The section manager, team leader, or a delegated person will be available at all times to receive consultations from auditors and others about matters that may involve abusive tax avoidance.

The open-door informal consultation (in person/virtual) used by ATP is intended to encourage auditors to come forward to discuss suspected abusive or avoidance transactions. Timely suggestions at the consultation stage will help auditors to answer any questions they may have more quickly and result in better referrals.

ATP accepts a referral for preliminary examination to evaluate the situation and specific circumstances of the case. After preliminary examination, the section will accept the referral for in-depth examination or reject it. If the ATP auditor is not certain if there is abusive tax avoidance, recommendations will be made for more audit steps to clarify the issue. Once the audit steps are complete, the matter will be further reviewed until a decision is reached.

As a general policy, it is understood that ATPFootnote 2  is responsible for the application of tax avoidance provisions. But in cases where only specific anti-avoidance provisions apply to well-known tax planning arrangements (same or similar facts), the ATP auditor may provide assessing instructions and positions to Audit with respect to the particular tax avoidance scheme. In cases of more complex and/or new tax avoidance issues, the ATP auditor will ask the referring auditor for a formal referral.

If no abusive tax avoidance is considered present, the ATP auditor can suggest technical audit remedies or recommend referral to another specialty area.

Instructions on preparing an Aggressive Tax Planning referral

These instructions are applicable to auditors working in all areas of the CRA except for the Integrated Large Business Audit Teams (ILBAT).

To prepare a file for ATP, the referring auditor’s report should include (where applicable):

TSOs may establish alternative or additional procedures. ATP will advise the auditor if the file will be accepted within 60 days after receiving the referral. 

ATP can accept cases if:

Auditors may always consult with ATP on issues arising in tax shelter cases that have been assigned as part of general audit workload. The ATP auditors have access to resources from the Tax Promoter and Advisor Compliance Section (TPACS) within the HNWCD.

If there are indications of possible fraud, the auditor should refer the case to Criminal Investigations.

Referrals to ATP are done within Integras. The auditor will select Create case, Create ATP assist, and assign the referral to a team leader of the program.

For detailed instructions on how to create these referrals in Integras, go to Integras Reference Guide. For a direct link to the Integras Reference Guide, select the Help menu at the top of the Integras Desktop screen.

ATP responsibility for examination and reassessment

ATP is responsible for completing an in-depth examination after a case has been accepted, including obtaining necessary waivers and issuing requirements for information. The section is also responsible for preparing proposal letters, receiving and rebutting representations from taxpayers, and, except for GAAR cases, approving or abandoning proposed reassessments.

Normally, ATP will issue a reassessment for a taxpayer for a tax year reflecting any audit adjustments related to tax avoidance issues, and the referring auditor will issue a reassessment for any other audit adjustments. In less complex cases, and only at the request of ATP, the referring auditor may issue a single assessment for all adjustments. If the regular audit is completed, but the tax avoidance issue remains unresolved and the taxpayer wants the adjustments processed, ATP will allow the referring auditor to process their file if Audit’s adjustments do not affect the tax avoidance issues.

If the audit adjustments are processed before the tax avoidance issues are completed, the taxpayer must be advised in writing that the tax avoidance matter is outstanding and further adjustments may be required. If a taxpayer files a notice of objection to the audit adjustments, any subsequent reassessment of a tax avoidance issue for the same year has to be coordinated with Appeals.

HNWCD field technical assistance

For HNWCD auditors, including ATP auditors, HNWCD Field Audit Support (FAS) should be the first point of contact for any non GAAR related technical assistance. Depending on the nature of the technical issues involved, FAS will involve other technical areas such as the RATA. The 

FAS can provide assistance to the ATP auditors as follows:

Any assistance related to third-party penalties should be directed to the Tax Promoter and Advisor Compliance (TPAC) Program within HNWCD, as they are coordinating these audits for all programs within the Agency (email Third-party penalties-HQ-HNWCD / Pénalités imposées à des tiers-AC-DOCVNE (CRA/ARC)).

General anti-avoidance rule referrals

All cases are subject to the direction of TAD HQ when applying the GAAR. 

For TAD and TA auditors, the RATA assigned to each region is the first point of contact. The RATA can provide assistance to TAD and TA auditors as follows:

Furthermore, the National Avoidance Technical Advisors (NATA) can assist TA and ATP auditors with complex and highly technical issues related to international and abusive tax avoidance transactions. 

As soon as it becomes apparent that the GAAR will be recommended as a primary or alternative assessing position in a case, the TA or ATP auditor has to refer the case to TAD HQ for approval before a reassessment under the GAAR can be issued. 

Some cases may, at the discretion of the GAAR managers, be rejected by TAD HQ if not submitted within 60 days of the statute-barred date.

According to communiqué ILBD-14-01, Memorandum of Understanding (MoU) between the ILBD and Income Tax Rulings Directorate (ITRD) Concerning Technical Assistance to Audit Staff , TA audit issues, including the application of specific anti-avoidance provisions and the GAAR, are to be sent to TAD HQ. Other types of questions should be sent to the Legislative Application Section (LAS).

Preparing a GAAR referral

These instructions are applicable to auditors working in an ILBAT or an ATP team. The list of documents and information below must be submitted or provided as part of the mandatory GAAR referral process to TAD HQ.

Major tax avoidance issues

Listed below are some of the major issues that continue to be of concern to the ATP and TA.

International tax avoidance

International tax avoidance is simply offensive tax avoidance that involves international transactions. For tax avoidance purposes, it excludes transfer-pricing issues. 

Increasing international opportunities for trade have also created new avenues for avoidance. Tax law continues to evolve to meet the latest challenges in recognizing foreign investment income (foreign investment entities or FIEs) and transactions with foreign affiliates and offshore trusts. 

The government is committed to safeguarding Canada's tax system, and to that end, continues to be an active participant in multilateral efforts to address base erosion and profit shifting (BEPS).

For international audit issues, refer to 15.0.

10.11.7 Referral to Collections and Verification

Introduction

Before conducting an audit, auditors are responsible to review the status of the taxpayer’s account by reviewing the Standardized Accounting System or the Automated Collections and Source Deductions Enforcement System (ACSES) to determine if there is an outstanding balance. For information on how to navigate within this system, go to ACSES. Other problems that may become evident include comments about past or current financial difficulties (possibility of bankruptcy) and outstanding returns.

If the Revenue Collections Section is dealing with a taxpayer’s file, the auditor should discuss the audit with the team leader before contacting the taxpayer. Document this discussion on Form T2020, Memo for file, available in the Integras Template Library. ACSES identifies the Collections officer in charge of the account to ensure that Audit and the Revenue Collections Section work together and to minimize duplicate effort.

Auditors are responsible to identify cases that involve significant amounts that may be difficult to collect and to refer the case to the Revenue Collections Section. Auditors must always inform their team leader as soon as a collection problem is clear or is strongly suspected. It is not necessary to wait until the audit is complete to start to deal with the situation.

Referral procedures

Make all referrals to Revenue Collections using the REACH application.

There are four times when a referral to Collections is mandatory:

  1. The combined outstanding balance will (after audit adjustments) exceed $1,000,000.
  2. The combined outstanding balance will (after audit adjustments) exceed $250,000, but be less than $1 million.
  3. There are reasonable grounds to believe that any delay in enforcing collection will make collection unlikely – also known as “jeopardy,” section 225.2.
  4. It is suspected that the taxpayer has left or is about to leave Canada, also known by the section of the ITA that deals with this issue – section 226.

The ITA imposes a 90-day waiting period before any collection proceedings (legal action) can be taken (paragraph 225.1(1.1)(c)).

Jeopardy occurs when a delay in collection (due to collection restrictions imposed by section 225.1) may result in danger of loss to the Crown.

The term danger of loss refers to amounts already assessed that are subject to collection action. Danger of loss may occur not only in cases of fraud, but also in cases where the tax debtor may dispose of, liquidate, or otherwise transfer property beyond the reach of the CRA.

Under section 226, when a taxpayer’s prescribed filing and remittance period is not yet past and there are reasonable grounds to believe that the collection of an amount could be jeopardized if there is a delay in assessment, Revenue Collections may take collection action to eliminate or reduce revenue loss. You must bring this situation to the attention of the Assistant Director, Revenue Collections.

A judge may allow collection action under section 225.2 only on an amount that has been assessed, including cases where the NOA has not yet been issued. Section 226, taxpayer leaving Canada, does not require that an assessment has already occurred.

If the auditor believes that there is a danger of loss that could be lessened under sections 225.2  or 226, the referral should be made as soon as there are reasonable grounds.

Circumstances that may indicate collection problems

Collection of the amount assessed may be a problem if:

Reasonable Grounds

For a jeopardy request, a Collections officer needs to answer four essential points. The auditor is in the best position to get the information necessary to give these answers.

  1. Fiscal liability: an amount of taxes that are owed and that the liability exists. This means that the assessment must have been completed. If the referral is made before the proposal package is completed (and this is preferable), estimate the amount of taxes, and the Collections officer will update their work based on the assessed amount before making application to the judge.
  2. Risk of loss: all audit evidence that indicates that if Collections waits for the 90 days provided by subsection 225.1(1.1), the amount may not be collectible.
  3. Recovery potential: all audit evidence of property available to satisfy the debt to CRA. This should also include any property that has been transferred at below fair market value, including appropriations under subsection 15(1), and property transferred to related persons.
  4. Proof: all other audit evidence that both supports and detracts from the argument that the collection is in jeopardy. This is necessary to make full, fair, and frank disclosure of the facts.

Procedures after referral to Revenue Collections

The auditor continues conducting the audit to the point where the proposal package has been approved by the team leader. The Collections officer will be coordinating between the Department of Justice, Audit, and Collections for the submissions to obtain orders under sections 225.2 or 226 and Audit should allow Collections to advise on processing the audit case. There may be times when it may be necessary to forego the final interview and representation period: the auditor would simply close the case with adjustments.

When this happens, the auditor will close the case and forward it on a priority basis together with Form T287, Priority assessments and re-assessments control. The auditor must also contact the technical help section of the processing tax centre and ask that the notice of assessment not be sent to the taxpayer, but be sent to the auditor as soon as possible.

Either when the Collection officer delivers the jeopardy order, or shortly after, the auditor is still responsible to explain the audit adjustments. The auditor must consult with the team leader and decide if they will still accept representations which, if received, can be added to the audit case using the codes for Audit Action (22). Document this discussion on Form T2020, Memo for file, available in the Integras Template Library.

Include in the case, a brief note on Form T20, Audit Report, about communications with Revenue Collections and the referral made using the REACH application..

Referrals from Revenue Collections

A Collections officer may contact the auditor or the team leader about problem accounts when an audit has been initiated. The Collections officer will usually ask for current financial information, such as bank accounts or information on other assets, and will tell the auditor if they should get other information

The Collections officer should provide the amount owing. The auditor should give the Collections officer the approximate amount of additional tax that will be assessed as a result of the audit. Document all discussions and actions on Form T2020, Memo for file, available in the Integras Template Library.

10.11.8 Referrals to Criminal Investigations 

An auditor administers the civil provisions of the ITA, which includes examining the books and records of taxpayers to establish their degree of compliance with income tax legislation and to ensure that the appropriate taxes are assessed and entitlements received. Auditing is distinct from investigating, which is administered by the Criminal Investigations Program (CIP). CIP’s mandate is to investigate significant cases of tax evasion and, where appropriate, refer them to the Public Prosecution Service of Canada (PPSC) for criminal prosecution.

The Supreme Court of Canada (SCC) decisions in R. v Jarvis, 2002 SCC 73 (Jarvis) and its companion case, R. v Ling, 2002 SCC 74 (Ling), discussed the distinction between the audit and investigative functions and the impact the investigative function has on the taxpayer’s constitutional rights sections 7 and 8 of the Canadian Charter of Rights and Freedoms (Charter)  may be engaged.

The SCC found that auditors can conduct bona fide audit activity of a taxpayer, even if there are indicators that tax evasion or fraud may have occurred. This audit activity is permitted as long as it pertains to the resolution of the taxpayer’s civil tax liability, including the application of civil penalties. The SCC said auditors "cross the Rubicon" when a determination of the penal liability of an individual becomes the predominant purpose of an inquiry into the tax affairs of that individual. The continued use of the audit and inspection powers beyond that point to gather information that may be relevant evidence to proving penal liability will infringe those rights in the event of a subsequent prosecution.

Examples of bona fide audit activity include:

In summary, if an auditor’s actions do not support their civil income tax reassessment, they must not be done. For this reason, there must also be no contact or discussions between Audit and CIP about a specific case before making a formal referral to CIP.

To ensure that there is no confusion as to the auditor’s intent, it is critical for the auditor to ensure that their Audit Plan and working papers clearly demonstrate the link between the audit work performed by the auditor and determining the taxpayer’s civil tax obligations. Someone reading the audit file must be left with no doubt about how the audit steps the auditor undertook contributed to determining the taxpayer’s civil liability, including the application of civil penalties.

Referrals to Criminal Investigations

The appropriate time to consider a referral to CIP is when evidence of tax evasion, fraud or other tax related offences have been discovered. Otherwise, the ability of CIP to properly investigate may be compromised. This point in time may be after all audit steps have been substantially completed, but it may also come prior to that.

Files should always be referred to CIP before seeking the taxpayer's representations related to the application of penalties under subsection 163(2) of the ITA or section 285 of the ETA.

The auditor must discuss the file with their team leader to determine if a referral to CIP is needed.

This discussion must be summarized on Form T20, Audit Report or Form T2020, Memo for file, available in the Integras Template Library. In all cases, auditors should make notes in their T2020 to document when and why they considered referring the case to CIP. 

Auditors should read Communiqué AD-14-01, Impact Arising from the Jarvis and Ling Decisions, to review the importance of distinguishing civil audit from criminal investigations actions and for further guidance on determining when referrals should be made to CIP. It is imperative that auditors refer cases to CIP when appropriate.

If an auditor, in consultation with their team leader or manager, determines that a referral to CIP is not necessary, the auditor issues their proposal letter and processes the file following established procedures.

If an auditor, in consultation with their team leader or manager, determines that a referral to CIP is necessary, the auditor completes Form T134, Referral to the Criminal Investigations Division, available in the Integras Template Library and send it, along with all information required to support the proposed audit adjustments by encrypted email to T134 Referrals-Criminal Investigations / Renvois T134-Enquêtes Criminelles. The Form T134 should set out the reasons for which the file is being referred to CIP. The auditor will receive acknowledgment of the referral from CIP Headquarters along with a note that it has been forwarded to a specific regional office, where it will be assigned to an investigator. This acknowledgement generally takes three to five calendar days.

Within 25 calendar days of the date of the referral, CIP will interview the auditor. The purpose of this interview is for investigators to crystalize what was in the auditor's mind at the time of the referral. Criminal courts have a history of placing a great deal of importance on the testimony of auditors in determining whether the predominant purpose of their actions was the determination of penal liability.

From the date of the referral until an investigator interviews the auditor, the auditor must not engage in any discussions with the taxpayer or their representative related to the potential adjustments, to negotiate a settlement, or to try and obtain concurrence in regard to audit findings. In addition, a proposal letter must not yet be issued to the taxpayer, although a proposal letter may be prepared.

Once a referral has been made to CIP, under no circumstances does an auditor destroy any documents (including electronic records) related to the file. If a referral is accepted by CIP, all related documents and data prepared by the auditor as of the date of the referral, except for the borrowed books and records of the taxpayer, which will be seized via search warrant if necessary, must be provided to CIP. These documents should include, but are not limited to, working papers, copies of any taxpayer records made as part of the audit, electronic records used during the audit, original handwritten notes of interviews with the taxpayer or third parties, and any documents received from foreign tax authorities where investigative/prosecution use is permitted. Any borrowed books and records of the taxpayer must be kept in secure storage within the Audit Section.

Communications with the taxpayer or Criminal Investigations post-referral

It has been established that the CRA is under no legal obligation to inform taxpayers that they are under criminal investigation until criminal charges are laid. As such, CIP will notify the taxpayer that they are under criminal investigation before charges are laid, but only in cases where doing so will not be injurious to the CRA investigation.

After an auditor refers a file to CIP and they communicate with the taxpayer or their representative (regardless of who initiated the communication), the auditor must not mention the referral to CIP, or answer any questions about the referral or the criminal aspects of the case. If the taxpayer or their representative asks the auditor about the status of the case, the auditor must only discuss the civil aspects of the case.

If a referral to CIP is made, the investigator will be in contact with the auditor at these times during the investigation (as appropriate):

If the taxpayer or their representative requests the return of their books and records while CIP is deciding whether to accept the referral, Audit must comply with the request. In such a situation, CIP must be advised of the request before returning the books and records.

Processing the civil (re)assessment

Audit is responsible for processing any civil reassessment resulting from their audit work, regardless if the file is accepted by CIP or not.

Generally speaking, the auditor will issue the proposal letter and complete the audit immediately after receiving confirmation from CIP on whether or not they have accepted the referral. When completing the audit, follow all standard procedures for file completion. This includes reviewing the proposed reassessment with the taxpayer, considering the taxpayer’s representations, and conducting any additional audit work that may be required, to ensure that the final reassessment is accurate.

At any point after the interview with the investigator, auditors may complete the civil aspects of the case, regardless of whether or not CIP pursues the criminal aspects of the case. However, in some situations, the completion of the audit may need to be either deferred, done by way of letter to the taxpayer, or done with other non-standard audit completion steps, should CIP believe that the investigation could be compromised or there could be auditor safety concerns. For further information about these situations, go to Communiqué AD-23-01, Referrals to the Criminal Investigations Program. In either of these two cases, CIP will advise the auditor that this deferral is required when they communicate their decision on the referral.

If completing the audit is deferred, the auditor considers proactive taxpayer relief. Proactive taxpayer relief will not apply to the period of time during which CIP is deciding whether or not to accept the referral.

In all cases, to apply penalties under sections 162  or 163, the notice of assessment or reassessment must be issued before any criminal charges are laid by CIP. If the audit reassessment is processed after the date charges are laid, civil penalties cannot be applied under subsection 239(3). Because of this, the auditor must be aware of their workload and the steps that are necessary to resolve it in an appropriate manner. Investigators will contact the referring auditor before charges are laid for a status update on the finalization of the civil (re)assessment(s).

For more information, go to:

10.11.9 Referrals to Canada Border Services Agency (Customs)

Overview

As the result of administrative consolidation, new working relationships developed within the CRA. HQ and the regions have implemented many initiatives that are contributing to more effective and efficient enforcement of the various acts administered by the CRA as well as enhancing compliance efforts.

In developing new working relationships, the CRA must ensure that officers are duly authorized to exchange information and to exercise the powers provided in the different acts that the CRA administers.

For more information on providing taxpayer information to the Canada Border Services Agency (CBSA), go to 10.11.15, Consulting with other federal government departments and/or agencies.

Legislative authority

Subparagraph 241(4)(d)(ii) allows a CRA official to provide taxpayer information to an official for the purposes of administering or enforcing an Act of Parliament that provides for the imposition and collection of a tax or duty.

Consultations versus referrals

Consultations

Consultations may involve the exchange of information unrelated to a specific taxpayer or importer (for example, consultations on applying specific provisions of the Customs Act in relation to the ETA). On the other hand, they may involve the exchange of information obtained from returns or accounting documents filed by a specific taxpayer or importer under the provisions of the various acts administered by the CRA. The Customs Commercial System (CCS) has information on imports into Canada by the importer. A FIRM (Facility for information retrieval management) report can be generated detailing the import information.

There are no limits on the exchange of this information within the CRA if the information has been obtained from taxpayers or importers in administering each of the acts. However, any information obtained from foreign governments cannot be provided unless permission is obtained from the foreign government.

Referrals

Referrals generally involve the exchange of taxpayer information (subsection 241(10)) obtained during an audit.

During an audit, an auditor should obtain information only for the purpose of administering the act or acts for which the authority has been given. At no time should information be obtained for the sole purpose of making a referral.

Situations that require referral to Canada Border Services Agency (Customs)

Customs officials are interested if taxpayers may not have complied with the requirements of the Customs Act, Customs Tariff, Export and Import Permits Act, and legislation administered on behalf of other government departments. Customs would be interested if goods were classified incorrectly, the goods were improperly described, the goods were declared at a higher or lower value than the true value, or the origin of the goods was falsified.

When it is considered appropriate to make such a referral, the referral should include the taxpayer’s name, address, and BN, as well as details of the situation that gave rise to the referral.

Obtaining information for a referral during an audit

Information for a referral should be obtained only while conducting standard income tax audit procedures.

Access to information obtained under mutual assistance agreements

Mutual assistance agreements between Customs and other countries provide only for the exchange of customs information. These agreements cannot be used to request information for income tax purposes.

However, if information that Customs acquires through these agreements is of interest and value to income tax, Customs must obtain approval before considering sharing the information.

Making a referral to Canada Border Services Agency - Customs investigation

If a referral involves suspected fraud under the Customs Act, the referral should be made directly to the Customs Investigation Unit. Auditors should be aware of CRA guidelines for the timing of referrals to Criminal Investigations, in view of the implications of the Canadian Charter of Rights and Freedoms. Auditors have no authority to obtain information unrelated to administering and enforcing the ITA, ETA, Canada Pension Plan, Employment Insurance Act, and Excise Act. Information should be obtained only to administer or enforce these acts.

If the referral involves other matters relating to the Customs Act, the referral should be made to the Customs Trade Administration Services Unit.

In some cases, TSOs and the Customs offices in their districts have reached agreements regarding procedures for consultations or referrals (for example, specific persons may be named as liaison officers through whom consultations or referrals are channelled). Before consulting with or making a referral to Canada Border Services Agency (Customs), the matter should be discussed with the team leader to determine the proper administrative procedures in the TSO for the specific type of consultation or referral.

Further limitations on assistance from Canada Border Services Agency (Customs)

Income tax and GST/HST auditors are authorized for any purpose related to administering and enforcing the ITA, the ETA, the Canada Pension Plan, the Employment Insurance Act and the Excise Act. Auditors cannot assist or participate in the examination of imported goods (or mail) as authorized under section 99 of the Customs Act. Only Customs officers may open and examine imported goods and mail and may do so solely for the purposes of enforcing and administering the Customs Act. This also applies to the examination of travelers' documents.

Documents legally accessed under section 99 of the Customs Act should not be photocopied, unless there is a valid purpose under the Customs Act for doing so. The documents in themselves should demonstrate this purpose.

10.11.10 Referrals to another tax services office

Introduction

Auditors should be familiar with the procedure for making referrals to other TSOs and for seeking assistance from other TSOs. If the taxpayer’s books and records are located in another TSO’s area of responsibility, the audit should be referred to that TSO. If a file has reassessment issues that involve taxpayers who are the responsibility of another TSO, the auditor will either:

The circumstances of the particular audit will determine if an auditor should consult another TSO or seek their assistance. There are many reasons to seek assistance, including a request for the audit of a branch operation.

Guidelines for referring an audit to another tax services office

Consult the team leader about referring an audit to another TSO. Use judgment to avoid encroaching on the responsibility of another TSO and generally, no changes should be made without the consent of an audit manager in that TSO.

Audit referred to other tax services office

If, following discussion with the team leader, a decision is made that an audit should be referred to another TSO, outline the details of the potential adjustment on Form T133, Lead or Project Information, available in the Integras Template Library, and forward to the ADA of that TSO. The originating TSO keeps a copy of Form T133. The receiving TSO determines the appropriate action to deal with the issues identified.

Include specific details in the referral, such as:

Audits not referred to another tax services office

An auditor in an originating TSO may be responsible for a project that will reassess multiple taxpayers located in geographical areas of other TSOs. To ensure consistency and efficiency, it may be appropriate that the auditor in the originating TSO complete all the reassessments. Such a decision may be taken only after approval by the team leader, section manager, and ADA. If such a decision is taken, these steps must also be completed before issuing the proposal letters:

10.11.11 Requesting assistance from another tax services office

There are many reasons to consult or seek the assistance of another TSO when completing an audit, including:

A common reason for requesting assistance from another TSO is to complete a branch audit. A branch audit is required when the taxpayer’s head office is located in a different TSO’s jurisdiction. The taxpayer may have branches or divisions in locations that involve several TSOs and possibly other regions.

In most cases, the information and data necessary to complete an audit is available at the taxpayer's head office. However, if during an audit the auditor determines that certain transactions cannot be verified without obtaining additional information from another location, the auditor should consider asking for assistance from another TSO to examine the records or to have information sent to the head office for examination.

Procedures for requesting assistance of another tax services office – Branch audit

Address requests for assistance from another TSO to the ADA of the TSO for responsibility for the area where the branch is located. Include in the request:

The receiving TSO will acknowledge receipt of the request for assistance and advise the originating TSO when they anticipate an auditor will be available to complete the audit. If the receiving TSO is not able to complete the audit due to a lack of resources, the sending TSO should be advised immediately so that alternate arrangements can be made.

After the branch audit has been assigned to an auditor in the receiving TSO, the auditor in charge should be notified and provided with an anticipated start date. Open communication between the branch auditor and the head office auditor is essential at all times during the audit.

Branch audit reports

The branch auditor prepares a report at the end of the audit and includes:

The originating auditor should state if the branch audit work was beneficial and make a recommendation about the future audit of branch locations.

Attach a copy of the branch audit report to the taxpayer's audit file.

10.11.12 Consultation on film and media tax credits

The Film and Media Tax Credits Section (FMTC) provides functional direction and policy guidance to the Film Services Units (FSUs) established in several of the TSOs. The FMTC is part of the Scientific Research and Experimental Development (SR&ED) Directorate in HQ.

Information relating to the review and processing of federal and provincial film and media tax credit claims may be requested from the FMTC.

Local administration of the film and media tax credit program

SR&ED in the TSOs is responsible for this program. Auditors should discuss questions and queries with SR&ED. The FMTC in HQ is responsible for the policies and procedures relating to processing the film and media tax credit claims. If, for any reason, a file involving a film or media tax credit is sent to Audit in error, contact SR&ED.

Prescribed forms and certificates issued by the Canadian Audio-Visual Certification Office (CAVCO), the Ontario Media Development Corporation (OMDC), Creative BC, or Manitoba Film and Music (MFM) must be included in the file before it is reviewed to determine whether the claim will be accepted as filed (downscreened) or selected for an audit.

A taxpayer may submit a modified claim or a file that was previously audited may become the subject of a subsequent audit by a section other than the FSU. In such cases, it is always preferable to contact the FSU to discuss the file and come to an agreement on the steps to take.

If information on the certification of a file for which CAVCO, the OMDC, Creative BC, or MFM is responsible is required, auditors should contact the FMTC.

Resource persons and addresses

For contact information, go to Film and Media Tax Credits Section.

10.11.13 Consultation and referrals on non-residents

During an audit, an auditor may discover that a Canadian resident or non-resident has paid an amount or credited an amount to a non-resident. The auditor must ensure that the:

To ensure that this is done properly, the auditor must discuss the file with the Non-Resident Audit Section in their local TSO, while the audit work is ongoing. A risk assessment will be conducted by the Non-Resident Audit Section for potential non-resident tax issues.

The Non-Resident Audit Section will provide the result to the auditor for further action, depending on the risk determined as:

  1. Low risk or simple non-resident tax issue: Non-Resident tax auditor provides guidance to the auditor as an audit assist. A supplemental file is added to the primary case.
  2. Medium risk or multiple non-resident tax issues: Non-Resident tax auditor conducts the audit of non-resident tax as an audit assist. A supplemental file is added to the primary case.
  3. High risk or complex non-resident tax issues: a referral from the auditor is required. NonResident auditor sets up a separate case and takes action accordingly.

Regardless of the outcome, whether the Non-resident Audit Section provides guidance to the auditor as an audit assist; or performs their own work as an audit assist or as a separate file, this work must be documented on Form T20, Audit Report, under section J: Other items.

For more information, go to:

10.11.14 Referrals to Technical Applications Sections, Real Estate Appraisal Section, and Business Equity Valuations Section

The Technical Applications Sections, Real Estate Appraisal Section,  and Business Equity Valuations Section provide expert advice on:

For contact information, go to: 

Technical and application issues relating to the following specialized areas are addressed by the appropriate division/directorate in HQ as follows:

Technical Applications Sections

Auditors should attempt to resolve any issues, including the application of the ITA, by completing the necessary research. If the issue cannot be resolved after conducting research, the auditor must discuss the matter with the team leader. 

If the matter remains unclear after the discussion, the auditor or team leader can contact the Small and Medium Enterprises Directorate (SMED) Technical Applications Sections in HQ, by email to Business Audit - Technical Referrals / Vérification d'entreprises - renvois techniques (CRA/ARC) or through Microsoft Teams, for an informal discussion with a technical specialist. The technical specialist will provide the auditor or team leader with guidance on the issue and may provide suggestions regarding additional information that may be required. If the request is not sent directly by the team leader, the auditor should make sure that the team leader is copied on the email.

Auditors can also request formal assistance from the SMED Technical Applications Sections for more complex issues arising from their audit after their research is done, and they have established a preliminary opinion on how to treat the transaction or issue. For formal requests, the auditor must ensure that the team leader is copied on the email.

For procedures on how to obtain income tax assistance from the SMED technical support teams, go to September 27, 2012, memorandum, Headquarters Technical Support Program for Small and Medium Business Audit.

Auditors and team leaders must not contact the Income Tax Rulings Directorate (ITRD) in the Legislative Policy and Regulatory Affairs Branch directly about interpretative issues related to the ITA or the jurisprudence. If need be, the Technical Applications Sections will refer the issue to ITRD.

Technical Applications Sections - Information to include in referrals

A complete request for a formal response should include the following information:

Note that the technical officer assigned the referral may ask for more information. It is recommended that the file remain open while the referral to HQ is outstanding and the taxpayer or representative is advised that additional audit work may be required.

Additional information

The auditor must document all items needing Technical Applications Section assistance on Form T2020, Memo for file, Form T20, Audit Report, and the Audit Plan. Upload any relevant correspondence to and from the Technical Applications Sections in the Integras case.

If a taxpayer asks for a copy of referrals and correspondence with the Technical Applications Sections, the auditor must provide the items requested. Please ensure that the Informal Disclosure Guidelines are followed. Any reference to other taxpayers or any information that cannot be disclosed under the Privacy Act, the Access to Information Act, or the ITA, must be severed before its release. The auditor must discuss the severing with the team leader.

It is not the Technical Applications Section’s role to respond directly to any taxpayer representations. When the taxpayer makes a representation after the Technical Applications Section has provided its recommendation, the auditor and team leader must first determine if any new material item has been raised by the taxpayer before making a further referral to the Technical Applications Section. If the taxpayer does not raise any new material item in a representation, no further referral to the Technical Applications Section is warranted. However, auditors can reach out to the Technical Applications officer to discuss the representations, if needed.

For more information, go to September 27, 2012, memorandum, Headquarters Technical Support Program for Small and Medium Business Audit.

Consulting with regional Department of Justice lawyers

Legal advice relating to the general audit of tax and other related issues must be requested through the appropriate technical section. Consequently, field employees should refrain from discussing and/or obtaining informal legal opinions from Department of Justice employees on an ad hoc basis. The purpose of this policy is to centralize control over requests for legal assistance to avoid multiple requests to the Department of Justice by different TSOs on the same matter. It is also to ensure that a particular legal opinion is not in conflict with an established internal administrative position or policy.

Since the Technical Applications Section will review all the facts pertaining to a request for legal assistance before referring the issue to the Department of Justice, it is important that the TSO provide all the relevant details and documents.

Technical assistance to tax practitioners and the public

Auditors and team leaders must not provide technical advice to taxpayers and tax practitioners. Taxpayers and tax practitioners who ask questions outside the scope of the audit must be referred to the CRA website.

Support provided by the Real Estate Appraisal Section and the Business Equity Valuations Section

The Real Estate Appraisal Section is part of the Non-Resident Compliance Division (NRCD) within the Small and Medium Enterprises Directorate (SMED) and provides support to the Real Estate Appraisal Program.

The Business Equity Valuations Section is part of the Tax Avoidance Division (TAD) within the International and Large Business Directorate (ILBD) and provides support and technical guidance to the Business Equity Valuation Program.

Auditors should direct referrals to the Real Estate Appraisal or Business Equity Valuation group that serves their TSO. The appraisal/valuation group may in turn request assistance from HQ if the circumstances of the case are complex or particularly sensitive.

Real Estate Appraisal consultants provide assistance about tangible real property, personal property, machinery, and equipment. Business Equity Valuation consultants provide assistance in determining the FMV of intangible property.

Support provided by Industry Specialist Services

Industry Specialist Services (ISS) are part of the Domestic Tax Division of the International and Large Business Directorate (ILBD). The ISS employees are located in designated TSOs across Canada and can provide information, advice, and assistance on the operations and taxation of specific industry sectors.

ISS also play an important role in promoting compliance by ensuring that participants in these industry sectors understand their obligations under the acts, including the ITA, ETA, and Excise Act. ISS also work closely with industry associations and their clients to detect, identify, and resolve potential problem areas and issues as soon as possible.

For more information, go to Industry Specialist Services (ISS).

Industry sectors with specialists

There are specialists for these industry sectors:

ISS have developed checklists of audit issues to consistently treat and resolve issues of national scope and disseminate information to the field. For the audit checklists and reference materials developed to date, visit the webpages above.

ISS also provide specialized training courses on the taxation of particular industries. Courses have been given or contracted on the deposit-taking sector, insurance, oil and gas, and mining industries.

Referrals and consultations with Industry Specialist Services

Auditors will not seek technical advice or advice regarding the operation of a particular industry without having first thoroughly researched the issue and taken advantage of all relevant and available reference sources, such as team leaders, audit checklists developed by ISS, sector profiles, etc. Team leaders should follow the procedures discussed in 10.11.14, Referrals to Technical Applications Sections, Real Estate Appraisal Section, and Business Equity Valuations Section, if they need more information or guidance.

For more information about the ISS program, including HQ contacts, go to Industry Specialist Services (ISS).

Advance income tax rulings

An advance income tax ruling (Ruling) is a written statement issued by the relevant division within the Legislative Policy and Regulatory Affairs Directorate to a taxpayer. The Ruling states how the CRA will interpret and apply specific provisions of existing Canadian income tax law to specific transactions that the taxpayer is contemplating in the near future. The relevant division is determined based on the nature of the entity requesting the Ruling and the type of transactions contemplated. For example, a Ruling involving international transactions would be processed by the International Division in LPRAB. The taxpayer or tax practitioner must provide all relevant documents. A fee to recover costs is charged for this service.

Once a Ruling is issued, it is binding on the CRA. Transactions on which a Ruling was issued are subject to review by the TSOs during any subsequent audit.

Although the Ruling is considered binding, it may be revoked or become invalid for:

Advance income tax rulings subject to subsequent audit action

A copy of the Ruling or “advance ruling” issued by LPRAB is sent to Iron Mountain (IRM) as the taxpayer’s trailing document. A second copy is sent to the TSO to the attention of the ADA.

The auditor must review the Ruling and verify that the transactions were carried out as noted. The auditor must report the results of this review on Form T20, Audit Report, under J) OTHER ITEMS.

The auditor’s review must ensure that:

If the auditor finds a discrepancy between how the proposed transactions were carried out and the stipulations in the Ruling, the auditor must discuss this with the team leader. The author of the Ruling must also be consulted.

If the discrepancy is sufficient to revoke the Ruling, such a decision will be made by LPRAB. LPRAB will issue the revocation letter to the taxpayer and provide a copy to the TSO. The auditor must participate in meetings between LPRAB and the taxpayer that discuss the revocation. The auditor must also consult LPRAB to ensure that any resulting reassessment action is accurate.

For more information, go to Income Tax Information Circular IC70-6R9, Advance Income Tax Rulings and Technical Interpretations.

Access to unsevered advance income tax rulings

An auditor may need access to an unsevered Ruling during an audit. Unsevered Rulings are not available through the Knotia database. Instead, the auditor must contact LPRAB at Income Tax Rulings Information Database (TRID).

Unsevered Rulings are provided on a need to know basis only at the discretion of LPRAB. The auditor must discuss the issue with the team leader before making this request.

Business registration

Taxpayers can register for a BN by mail, telephone, or Internet.

Business enquiries agents provide telephone enquiry service to the public and are part of the Taxpayer Services Division of the CRA. The agents do not provide interpretations, but they do provide general or routine information, issue BNs, and provide CRA forms and publications upon request to the public. The Taxpayer Services Division has a national toll-free network for its business registration service.

For more information, visit Business number registration.

10.11.15 Consulting with other federal government departments and/or agencies

The CRA has entered into many written collaborative agreements (WCA), including memoranda of understanding (MOU), with other federal government departments or agencies. The WCAs and MOU allow for exchange of information and assistance to administer relevant pieces of legislation.

If an auditor needs information or documents from another federal government department or agency to carry out an audit, or has information or documents that could be useful to another federal government department or agency, the auditor must discuss the issue with the team leader before proceeding. The auditor and the team leader must determine if a WCA in effect is relevant. The WCAs are at The WCS Search Tool has a new look.

Before releasing confidential information or documents outside of CRA, section 241 of the ITA must be reviewed. As well, auditors and team leaders must consult the designated federal-provincial/territorial liaison in the TSO before releasing any confidential information or documents.

Sharing taxpayer information with the Canada Border Services Agency

Access to RAPID was an acceptable practice when Customs was part of the CRA. Since transferring to the Canada Border Services Agency (CBSA), a separate government organization, CBSA employees need to request taxpayer information in writing from local field offices.

The CRA can provide taxpayer information to an official of the CBSA solely for the purposes of the administration or enforcement of a federal law that provides for the imposition or collection of a tax or duty (subparagraph 241(4)(d)(ii)). This includes the Customs Act and the Customs Tariff.

At this time, the CRA cannot share tax information for the purposes of immigration or food inspection programs.

Canada Border Services Agency needs tax information to:

Procedures for the release of taxpayer information to Canada Border Services Agency employees

Before disclosing taxpayer information to an official of the CBSA, ensure that the CBSA official has a work-related need to know and has the appropriate personnel security reliability status. The CSBA assistant director must approve the CBSA official's request and send it in writing to their counterpart assistant director in the CRA (for example, Criminal Investigations, Collections, or Audit).

Assistant directors in TSOs and tax centres (TCs) must approve requests for information. However, the director, Information and Relationship Management Directorate, Strategy and Integration Branch, must approve the release of information directed to CRA HQ.

A record must be maintained of all information that is released to the CBSA that sets out:

The CBSA official may request taxpayer information without having the taxpayer’s SIN. In this situation, it is acceptable to use RAPID Option T to attempt to properly identify the taxpayer for whom information is being sought.

For individuals, any taxpayer information (such as their name, address, taxable income, outstanding arrears, etc.), with the exception of the SIN, can be released to an official of the CBSA.

For businesses, any taxpayer information (such as the names of directors, address, etc.), with the exception of owner or director SINs and the North American Industry Classification System (NAICS) code, can be provided. The CRA needs a special release from Statistics Canada to share this information.

Consulting with Employment and Social Development Canada

Referrals from Employment and Social Development Canada (ESDC) are received if information becomes available that indicates income tax issues. The CRA is also committed to providing leads to ESDC if information is received or becomes available that indicates abuse of employment insurance (EI). Procedures for referring these cases and the necessary information follow.

Use of information

Information received from ESDC is used to enforce the ITA, the ETA, and the Excise Act, as well as for analysis and evaluation.

If information received from ESDC concerns an ongoing EI investigation, the CRA must ensure that any efforts to determine the effect of potential unreported revenue do not compromise the EI investigation.

Type of information released to the Canada Revenue Agency

This information is received from ESDC, if available:

Referrals from Employment and Social Development Canada

ESDC refers taxpayers to the CRA when there is information that indicates that there may be unreported revenue. The information is subject to the conditions of a memorandum of understanding (MOU) and privacy restrictions. The information may be received verbally or in writing.

Situations that Employment and Social Development Canada refers

Examples of situations that may result in unreported revenue and/or an increase in income tax payable include:

10.11.16 Consulting with provincial and territorial governments

The CRA has entered into many written collaborative agreements (WCA), including memoranda of understanding (MOU), with other provincial/territorial governments and agencies. The WCAs and MOU allow for exchange of information and mutual assistance to administer relevant pieces of legislation.

If an auditor needs information or documents from a provincial/territorial government or agency to carry out an audit, or has information or documents that could be useful to a provincial / territorial government or agency, the auditor must discuss the issue with the team leader before proceeding. The auditor and the team leader must determine if a WCA is in effect. The WCAs are available at The WCA Search Tool has a new look.

Before releasing confidential information or documents outside of CRA, section 241 of the ITA must be reviewed. As well, auditors and team leaders must consult the designated federal-provincial/territorial liaison in the TSO before releasing any confidential information or documents.

10.11.17 Requests for information – Countries with which Canada has signed a tax treaty

A tax treaty between Canada and another country may include a provision allowing Canada to request that country obtain information or documents from a taxpayer residing in that country.

Auditors and team leaders must:

If it is decided to make the request for information, it must be sent by the Competent Authority Services Division in ILBD. The auditor and team leader must not send the request themselves. Ensure that the request for assistance is clear and that any additional information or documents are included that will assist the other country to complete the CRA’s request.

Section 241 allows the release of information or documents in this type of request. However, auditors and team leaders must consult the team leader in ILBD to verify that the fact pattern allows for a release of information or documents to another country.

10.11.18 Referrals from the Appeals Division

Audit is required to provide assistance to Appeals. This assistance, which includes carrying out additional audit work on matters under objection and arising from a previous audit as well as auditors attending an examination for discovery or a Court at the request of Appeals or the Department of Justice, should be provided on a priority basis.

Record time spent providing this assistance under activity types:

279 Office Examination in the International TSO, TCs, and Sudbury TSO

537 Large File Case (income tax)

689 Large File Case (GST/HST)

569 Small enterprises (income tax)

649 Medium enterprises (income tax)

570 Office audit

Audit must respond to every request for assistance from Appeals and must expend the full-time equivalents (FTEs) necessary to meet this responsibility. Because of the obligatory nature of this activity, the FTEs expended on this are not included in the TSO performance indicators.

Roles and responsibilities of auditors

For the roles and responsibilities of Appeals officers and auditors in the resolution of objections to assessments and reassessments resulting from audit activities, go to Communiqué AD-15-03, Changes resulting from the Revised Protocol between the Appeals Branch (Appeals) and the Compliance Programs Branch (Audit) of the Canada Revenue Agency, and RC4067, Protocol – Between the Compliance Programs Branch and the Appeals Branch of the Canada Revenue Agency.

The auditor will:

When the review results in a possible assessment or reassessment, the auditor is not to proceed with the adjustments. The auditor is to provide the results of their findings to the Appeals Division for final decision..

Additional work required by Appeals Branch

The Appeals Branch may ask an auditor to complete more work if:

Appendix 10.1.0 Letters

The letter templates are available in the Integras Template Library. Please refer to the library for the current version.

The letter templates are also available at Letters (CRA Electronic Library > Compliance Programs Branch / Reference Material > Audit > Income Tax – Forms and Letters > Letters). If there are changes to the letters, the templates in the CRA Electronic Library are updated when the library material is published, usually every two months.

There are two versions of the letters: electronic and paper.

Use the electronic version to write to the taxpayer or their representative through Audit enquiries in the My Account, My Business Account (if a T2 audit), or Represent a Client portals. Otherwise, use the paper version.

There are differences between the electronic and paper versions of the letters. In the electronic version:

To identify the electronic version, the filenames include ED (electronic document) between the letter’s number and title; for example, A-10_1_2 ED Informal Books and Records.doc. There is no change to the paper version filenames.

Appendix 10.2.0 Forms, templates, and checklists

A-10.2.1 Referral to Criminal Investigations Directorate Checklist (Under review)

A-10.2.2 Maintaining Records outside Canada Checklist

Use this questionnaire to determine if permission to keep books and records outside Canada may be granted to the taxpayer.

Taxpayer Information
Taxpayer:    
Address:    
BN/SIN:    
General Information
Type of Organization:    
Name(s) of Shareholder(s):
    
Number of Years in Operation:    
Major NAICS:    
Description of Products/Services Provided:    
Factors to Consider
  Yes/No/NA Comments:
Does the taxpayer have a satisfactory history of compliance?    
Has the taxpayer previously requested and received authorization to keep records outside Canada for purposes of another tax administered by the CRA?    
Has the taxpayer been denied a request to keep records outside the country in the past? If yes, obtain the details of the request and determine the reasons for the refusal.    
What is the taxpayer's volume of business in Canada? Taxpayers with limited business activity in Canada and therefore limited tax liability would not warrant the costs of conducting an audit. Permission would not generally be denied under these circumstances.
    
What are the restrictive policies of the country where records are to be kept? Permission must be based on country-specific access to offshore books and records.
    
Conclusion
  Yes No
Request to maintain records outside Canada is approved?
    
Dates and signatures
Reviewed by:  Date:  
(Auditor)    
Approved by: Date:  
(Team Leader, Audit)    

A-10.2.3 Form T133A, Enforcement lead

Go to Form T133A, Enforcement lead.

A-10.2.4 Government passport request and instructions

Government passport request and instructions
From/To:    
Organization:    
Fax:
    
     
To/From:    
Organization:

Passport/Travel Support

International Relations Office Division

Ottawa, Canada

  
Phone:    
Fax:    
Date:
    
     
Specifics of Travel    
Travel Authority Number    
Destination    
Departure and Return dates    

Purpose for Travel

Note: for non-operational travel (for example, bilateral or multilateral meetings or conferences), approval of your Branch's management (VECR, Client Services, P&L, etc.) is required.

    
Your office mailing address    
     
Timeframe for obtaining Special passport – 5 days  
  New special passport – 10 days  
  Visa – On top of time required for special passport, 5 days to several weeks depending on destination
  

Mailing Address:

International Relations Office Division

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