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Seven Areas The Canada Revenue Agency is Scrutinizing

Fasken
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Tax Law Bulletin

The 2021 Federal Budget devoted an additional $304.1 million to the Canada Revenue Agency (CRA) to help it combat tax evasion and aggressive tax avoidance. The federal government expects to recover $810 million in revenues over five years.

Based on public documents and information gathered from the CRA and DOJ, we have generated the below list of CRA audit activities already underway and expected to increase over the next couple of years. Even if a taxpayer has done nothing wrong, they may still have to convince eager auditors that they have complied with the law.

1. CEWS Applications

  • As of March 25, 2021, the CRA has processed and approved more than 2.7 million Canada Emergency Wage Subsidy (“CEWS”) applications for businesses, charities, and organizations in the not-for-profit sector, delivering over $71 billion in payments to support over 5 million workers.
  • The CRA started post-payment CEWS audits in August 2020 and is looking for deliberate non-compliance. Should CEWS funds have been misused, the penalties can include repayment of the wage subsidy, an additional 25% penalty, and potentially imprisonment in cases of fraud.
  • As this is new audit subject matter, CRA auditors may be inexperienced and skeptical. Even if a taxpayer did not intend non-compliance, they will need help convincing the CRA that any mistakes were honest. 

2. Gains or Income from Cryptocurrency Transactions 

  • The CRA is pursuing persons who have transacted with cryptocurrency to ensure that the proper taxes have been paid. The Federal Court recently granted the Minister of National Revenue’s application to require a major cryptocurrency trading platform to produce to the CRA a list of customer accounts along with details of transactions involving cryptocurrency.     
  • Cryptocurrency (e.g., Bitcoin) is not legal tender. Instead, it is a digital representation of value – a digital asset. For purposes of the Income Tax Act, the CRA generally treats cryptocurrency like a commodity and will tax income from cryptocurrency transactions as business income or as a capital gain, depending on the circumstances.   

3. Transfer Pricing Transactions

The federal government wants to ensure that the appropriate amount of profit is reported in Canada and plans to strengthen transfer pricing legislation. The CRA is ramping up transfer pricing audits and scrutinizing Canadian taxpayers who buy or sell goods or services with another entity within the same multinational group to determine if these transactions are priced properly. These types of transactions are required to occur under arm’s length terms and conditions and Canadian taxpayers are required to keep all relevant records. Taxpayers engaged in non-arm’s length cross-border transactions should be vigilant in determining appropriate pricing and maintaining supporting documentation.    

4. Transactions Involving Treaties

Over the last decade the media has spotlighted the use and misuse of international treaties to reduce or avoid taxes. The international tax community has been working to close loopholes and tighten up treaty language to reduce aggressive tax avoidance and evasion. The CRA is increasing its scrutinization of cross-border transactions involving the application of treaties that result in distorted and questionable tax positions. 

5. GST/HST Avoidance and Evasion 

The CRA is looking for unwarranted and fraudulent GST/HST refund and rebate claims. It is increasing its audits of large businesses identified as having a high risk of non-compliance and others operating in industries considered high risk, such as the real estate development industry. The CRA has consistently been actively auditing with respect to the GST/HST New Housing Rebate.

6. Tax Evasion Involving Trusts

The CRA is enhancing its abilities to identify tax evasion involving trusts, particularly in non-arm’s length transactions, cross-border activities, and transactions involving low/nil tax countries.

7. Shareholder Benefits

Recently, there has been an uptick in the CRA auditing the use by officers and employees of corporate assets, such as private jets and yachts.  If business is being conducted on these assets, the taxpayer needs to gather contemporaneous documents and maintain accurate log books to support their filing positions.   

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