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Dealing with the CRA? Don’t Panic

By Peter V. Aprile, The Globe & Mail, Thursday April 4th, 2011

Notices of reassessments issued by the Canada Revenue Agency (CRA) can have serious financial implications for small businesses.

In 2009 and 2010, the CRA audited approximately 380,000 small and medium businesses and issued notices of reassessment requiring these businesses to pay $2.1-billion in tax, interest and penalties. In some cases these reassessments are wrong and the handling of improper reassessments can greatly impact the success or failure of the business. In these circumstances, it is imperative that business owners are prepared dispute incorrect reassessments. A recent client story illustrates these points.

The client was caught in the tangled web of the CRA. His notice of reassessment was based on incorrect CRA assumptions and indicated that he owed a large tax bill. The CRA purported that the client owed a significant amount of tax, interest and penalties alleging that the business did not report all of its income and that the documents to support the amounts claimed in the tax returns were insufficient. If the client had been forced to pay the CRA’s tax bill, his business would have been financially devastated.

The business owner didn’t know where to turn, so he sought advice from his accountant and a law firm. Unfortunately, he incurred significant fees with few results. Dissatisfied and distraught, the client retained our legal firm.

Our firm reached an out-of-court settlement with the CRA on the basis that their audit methodology contained errors and argued that this methodology was insufficient to satisfy the agency’s evidentiary burden of proof. The settlement confirmed that the client had, in fact, reported all income and that the CRA’s methodology was flawed leading to a substantial reduction in tax, interest and the deletion all penalties.

Here are eight things that the client wished he had known before he received the CRA’s notices of reassessment:

1. The CRA doesn’t always get it right. Taxpayers have the right to pay no more tax, interest and penalties than required by law. If the CRA gets it wrong, taxpayers must challenge the CRA’s interpretation and application of the facts and law to ensure that they are not paying more than their fair share. Notices of reassessments and tax disputes are not necessarily an indication that the taxpayer, or his accounting professional, has done something wrong.

2. Act quickly and with purpose. Taxpayers must file a notice of objection to dispute a notice of reassessment. The general rule is that a taxpayer must file his or her notice of objection within 90-days of the date that the CRA mailed the notice of reassessment. If the taxpayer does not deliver a proper notice of objection within the 90-day period, he or she may apply for an extension of time to object. The CRA will consider applications for an extension of time to object if the application meets all relevant conditions and if it is filed within one year of the 90-day period. However, the CRA may deny a taxpayer’s application for an extension of time and, therefore, it important to file a proper notice of objection within the 90-day period

3. It’s on you. Generally speaking, the normal reassessment period is three years for individual taxpayers and four years for corporate taxpayers. If the CRA issues a notice of (re)assessment within the normal reassessment period, the onus is on the taxpayer to prove that the assessment is wrong in fact and law. Taxpayers should be prepared to present factual and legal support for their position that the reassessment is wrong. If the CRA issues a notice of reassessment outside the normal reassessment period, taxpayers should understand the impact of this shift in the burden of proof and make strategic decisions to take advantage of the shift.

4. The CRA doesn’t make ‘deals.’ The CRA is not motivated to settle tax disputes in the same way as business people. The CRA will not compromise based on the amount in dispute or the cost of litigation or other soft factors. Instead, the CRA believes that tax disputes must be settled on a “principled” basis i.e., the CRA will not agree to settle a dispute unless persuaded that the taxpayer’s position is correct in fact and/or law.

5. Don’t bring a knife to a gun fight. In most cases, tax disputes are won or lost based on more than accounting or the words written in the Income Tax Act. In addition to knowledge of the relevant legislation, the tax dispute process is governed by the case law, rules of procedure, the onus of proof, the standard of proof and the rules of evidence. In our experience, the party with the greater understanding of the legislation, case law and rules often has a significant advantage.

6. The Taxpayers’ Ombudsman ability to help is limited. The role of the Taxpayers’ Ombudsman is to review service-related complaints about the CRA that have not been resolved through the CRA’s service related complaint process. Service related complaints include, but are not limited to, CRA employee behaviour and poor information. In these cases, the Taxpayers’ Ombudsman may ‘provide advice to the Minister of National Revenue about service-related matters in the CRA’. The Taxpayers’ Ombudsman does not have the power to review, comment or influence the correctness of any CRA audit, objection, assessment or decision to deny taxpayer relief.

7. Begging should be a last resort. In our experience, taxpayers too often choose not challenge the merits of the assessment and, instead, simply choose to ask the CRA to waive or cancel interest and penalties under the taxpayer relief provisions (formerly known as the ‘fairness provisions’). The taxpayer relief provisions can apply when a taxpayer has not being able to meet tax obligations due to extraordinary circumstances such as financial hardship, disruptions in service such as a postal strike, an error in a CRA publication, or a disaster such as flood or fire. Although the provisions can be a powerful tool in a taxpayer’s arsenal, it is the tax equivalent to approaching the Minister of National Revenue on bended knee as opposed to disputing the reassessment on substantive basis as a matter of right. In most cases, if a taxpayer has an arguable case the better route is to dispute the reassessment. If the taxpayer is unsuccessful, the provisions may be a valuable final option.

8. Know where to get help. A very small portion of tax lawyers practice tax dispute resolution and litigation. As discussed, the initial phases of the process move quickly and, therefore, clients often struggle to research and retain the right tax dispute lawyer. We recommend that clients take the time to understand their options in advance or speak to their accounting professional to ensure that s/he knows, or has worked with, a suitable tax dispute lawyer should the need arise.

Tax agency gives itself an "A" for service but auditors say grading scheme rigged

By Dean Beeby, The Canadian Press – June 12, 2011

OTTAWA — The Canada Revenue Agency has been giving itself an "A" in its report card on service to taxpayers — but a new audit suggests the grading scheme was rigged.  Last fall, the agency said it was doing a stellar job in responding to written requests from taxpayers for GST and HST rulings and interpretations.

Since 2006, officials have promised to get responses out within 45 days at least 80 per cent of the time. And in a recent annual performance report to Parliament, the agency said it met the 45-day deadline 93 per cent of the time.  But that claim has withered under the scrutiny of internal auditors, who did their own independent grading — and gave the agency an anemic 74 per cent, well below the minimum standard.

The auditors found that the agency had been excluding from the calculation all written requests that arrive at Ottawa headquarters, counting only those handled by nine regional offices, from Halifax to Vancouver.  Including the weaker performance at headquarters drags down performance by 15 percentage points.

The agency also started the clock ticking on responses to written requests only when the questions were entered into its computer system, not when the request was actually received by an office.  Using proper date-stamping, the auditors found performance was pulled down by another four percentage points.

"Clients who look at the standard for GST-HST written enquiries would likely assume that it applies to all requests received, regardless of where they are processed, and that it is measured from the time that it is received by the agency," says the newly released audit, dated January this year.  The agency issued almost 3,700 GST and HST rulings and interpretations in the last fiscal year, and just over a fifth came from headquarters.

The audit report called on the agency to use "date received" rather than "date inputted" in calculating its service levels, which officials have been doing since January this year.  But management has rejected a second recommendation, that headquarters' performance always be included in the calculation.

"The rulings and interpretations issued by headquarters ... are of a highly technical nature and are often precedent and-or policy-setting," agency spokesman Noel Carisse said in an email response to questions. "Some of the issues deal with present legislative anomalies which require a significant amount of time to resolve."

The agency last week published an amendment to its service standards to make clear that highly technical rulings and interpretations — that is, those typically issued by headquarters — will not be included when calculating performance.  In the meantime, officials will by December this year develop an internal timeliness measure for rulings from the Ottawa head office.

Carisse noted the agency saw a surge in enquiries as Ontario and British Columbia converted their provincial sales tax to the HST last year. "We are now starting to see a decrease in the number of requests for HST-related enquiries as registrants become more familiar with their responsibilities and entitlements under the new regime," he said.

The agency also answers almost 100,000 telephone enquiries each year about GST and HST — but does not properly review the quality or accuracy of those responses, says the audit.  Management officials say a survey to review the accuracy of telephone responses was killed in 2004 to save money. Carisse says the agency is looking at ways to revive quality control for regional offices over the next year.

The audit did not examine dozens of other service standards at the Canada Revenue Agency, raising questions about whether the publicly posted grades for those are accurate.  Copyright © 2011 The Canadian Press. All rights reserved.

If we were a tad underwhelmed by the announcement that "Canada's New Government" is bringing us a Taxpayer's Bill of Rights, it might be because we've seen it all before. 

A short history lesson is in order... 

In 1983 while in opposition, the Conservatives latched on to a hot issue: abuses by Revenue Canada, which were being reported from across the country. They struck an informal task force under the chairmanship of Perrin Beatty. The group traveled coast to coast documenting complaints amid heavy press coverage. The public outrage was one small factor in the 1984 Conservative sweep.  Perrin Beatty was "rewarded" by becoming Minister of National Revenue. And one of the first things he did was to bring in a Taxpayers' Declaration of Rights.  We would be among the first to say that this was a public relations move and that the document had no legal status. But we, like many others in the tax field, had a framed copy of the declaration on our wall.  Fast forward a couple of decades. We came across this paragraph on the CRA Web site late last year:

"The declaration called Your Rights pledges the CRA's commitment to client rights and fair treatment. This declaration is posted in all our service areas across Canada and is included in a variety of CRA publications, such as income tax guides. It replaces the Declaration of Taxpayer Rights."  This great announcement is a direct steal from an earlier Tory government and it remains meaningless. Why should we get excited about a document which has no legal status and will be ignored by every CRA bureaucrat other than their public relations people?  They are also bringing us an ombudsman who supposedly will take care of taxpayer complaints.  But note that the Taxpayers' Ombudsman will not review a complaint until all of CRA's other complaint resolution mechanisms have been exhausted. In addition, the Taxpayers' Ombudsman: - will not have the authority to review complaints relating to tax policy or pro-gram legislation; - will not have the authority to review any decision of, proceeding in or matter before, a court; - will not be provided with any directive powers, but will have the traditional authority to conduct reviews and make recommendations; and - will not have the authority to discipline any person for their actions.

In fact, like most government ombudsmen, the incumbent will have to quickly adjust to the fact that his or her powers are basically those of publicizing depredations wreaked by the bureaucracy but with no real power to remedy them. Nor will the government have to heed any recommendations.  Readers will forgive us if we view the whole exercise with a certain level of cynicism. The PR exercise first undertaken by Beatty almost 25 years ago was legally meaningless (though we have two autographed copies of the document in our offices) and we don't believe for a second that this "initiative" will be anything other than more of the same.  Our politicians seem to believe that taxpayers are completely naive if not just plain stupid.

--- - Arthur Drache, CM, QC is an Ottawa-based lawyer at Drache Associates LLP and is associate counsel to Miller Thomson LLP.

Read more: http://www.financialpost.com/scripts/story.html?id=c8b2cb4d-0d65-4881-8771-9db59add37e0&k=35290#ixzz1EA9LzLqv

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