Risk-based Audit Process
In the newest evolution of “Big Brother is watching you.” CRA has announced it has instituted a risk-based approach to audits whereby CRA meets with senior representatives of the taxpayer to:
- Explain the redefined risk-based approach to large business compliance and how the approach affects taxpayers;
- Share CRA’s findings and observations noted during the taxpayer’s risk assessment; and
- Understand how the taxpayer manages tax risk at its highest governance levels.
While I don’t like too much government control, I actually think this is a great idea because it will now make the world of business wake up and realize that the glory days of tax planning is over. We have moved to the era of audit ready bookkeeping and how to record data in a manner that demonstrates good corporate governance.
This Approach to Large Business Compliance is being phased in over a five-year period commenced in November, 2010. During this period, CRA officials conduct meetings with Large Business enterprises’ senior executives. There they discuss tax compliance and risk of non-compliance associated with their business activities. Activities such as governance regime, internal controls, and inherent and behavioral risk factors affecting their risk segmentation.
It is important to note that companies need a formal method of identifying and responding to corporate tax risks. These taxpayers are or will be informed that this lack of tax risk governance, in the absence of other mitigating controls, will weigh negatively on their overall risk rating with the CRA.
The CRA is of the view that the success of the Approach to Large Business Compliance is based on a well-informed, transparent tri-partite relationship. Providing further information on the risk assessment process in a published document would be in the best interests of all parties.
As expected, CRA is fine-tuning their risk assessment process and exploring ways to leverage technology in their drive to a more automated state and enhanced accuracy and efficiency.
During the face-to-face meetings, the taxpayer is informed of their risk rating. At that time, they will be informed of why they have attained this rating and what can be done to reduce the rating in the future. It is not a debating forum where taxpayers can “negotiate” a better rating.
Each taxpayer is risk assessed on a yearly basis based on the latest available information. Currently, as for the meetings, CRA officials are meeting with each Large Business taxpayer and discussing their individual risk rating over the 5-year phase-in period. Once this round of meetings is completed, CRA will consider revisiting taxpayers to review their rating.
The CRA’s Approach to Large Business Compliance (ALBC) discloses the criteria used in risk evaluating all taxpayers. The large business population is being risk assessed using several techniques, such as:
- Undertaking a historical analysis of audit results and a corresponding analysis of behavioural patterns;
- Examining every large business taxpayer in their TSOs and assessing their risk based on analysis and local knowledge;
- Conducting issue-based risk assessment to determine whether taxpayers are participating in tax planning schemes;
Additionally, consideration is being given to a number of risk factors, such as:
- Audit history;
- Industry sector issues;
- Unusual and/or complex transactions;
- Corporate structure;
- Major acquisitions and disposals;
- International transactions;
- Corporate governance;
- Participation in aggressive tax planning; and
- Openness and transparency.
These factors will vary by taxpayer and the taxpayers will be advised as to the factors considered in their risk assessments There will be face to face meetings that the CRA will conduct. All factors are considered collectively in arriving a global risk rating for the entity.
So far CRA has not shared any information related to any taxpayer’s risk rating with other tax jurisdictions. In the future, any request made by another tax jurisdiction will be reviewed by the CRA on a case by case basis.
CRA has created a national risk assessment calibration committee which has been formed to supplement the regional calibration committees to ensure national and regional consistency.
So in conclusion, we are of the opinion that the only way to avoid stress and aggravation is to give up on the idea of doing anything to save on taxes. One is better to be compliant and transparent. That does not mean that you can not make business-driven decisions based on good business practices that have the secondary benefit of saving taxes in Canada.
This is just another way of saying that all businesses need to be Audit Ready at all times. This means that business needs to rethink how accounting is to be done and what is corporate governance.