November 23, 2024
|
Service Areas
|
Tax Tips
In recent years it has become increasingly difficult to deal with Canada Revenue Agency (CRA) field and desk auditors. It seems that auditors are no longer following their internal operations manuals. For example, assessment of gross-negligence penalties that are clearly not warranted has become a regular problem that taxpayers and their advisors have to deal with. It seems that the CRA hires co-op and summer students who have short tenure and, as a result, cannot see a file through to a logical conclusion. Even full time auditors are not given enough time to work on each file properly. In a recent client situation, the gain on the sale of a condominium in which the taxpayer lived was assessed as business income (fully taxable), and gross negligence penalties were assessed. Unlike some condominium sales which may warrant this type of assessment, the taxpayer's situation was as clear as any fact situation could be. On further enquiry, we learned that the assessment had been submitted for processing on August 28, one day before the summer student auditor had to go back to school but well before the appropriate information could be provided by the taxpayer. Frustrating scenarios are common and largely due to the lack of the CRA's accountability for its actions. This reality creates unnecessary anxiety, costs and, in some cases, misguided frustration towards tax practitioners. Unlike in the private sector, auditors do not seem to be evaluated based on the competence of their performance. In particular, the fact that an auditor’s assessment is later overturned on objection or appeal does not count “against” the auditor in any way, and is not recorded by the CRA as part of the evaluation of the auditor. In the recent Federal Court of Appeal (FCA) decision of Ereiser v. the Queen, the FCA confirmed the Tax Court's decision that it can only review the validity of an assessment, not the process that led to the issuance of the assessment. This principle has been well established for many years. In the Ereiser case, it was clear that the assessment arose as the result of a flawed audit and process. The FCA essentially concluded that even if an auditor acts outside of documented guidelines and authority, the assessment or reassessment is subject to the same process for appeal as any other assessment. The FCA commented that the taxpayer may have the right to sue for damages through other courts. Unfortunately, the only options for a taxpayer assessed by a "rogue auditor" are to incur additional professional fees to challenge the reassessment, to live with the reassessment, or to try to appeal the matter on their own (something most taxpayers cannot manage). It seems that accountability will arise only if civil action is taken against the CRA, successfully, in enough cases to cause a change of internal policies. One such route is to bring a claim in Small Claims Court (where, depending on the province, the limit for damages may be $25,000), claiming negligence on the part of the auditor. Unfortunately, some of the case law to date has held that auditors do not have a duty of care to the taxpayers they audit. Your TSG representative is available to commiserate with you. TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes. |