Shareholders’ Personal Information
In a June 18, 2015 Technical Interpretation (2015-0572151C6, Bogdan, John), CRA was asked about the perceived increase in requests of personal financial information of the shareholders of Canadian corporations selected for audit. Further, questions were asked with respect to information that is requested in relation to the shareholder’s spouse, children or other related parties. In some situations, the shareholders are asked to essentially complete statements of net worth.

these in-depth audits

CRA noted that the personal information from the shareholder and related parties is requested to ensure that business transactions are reported within the business and not in personal accounts. It was noted that internal controls and the segregation of duties are generally weak for such organizations. Therefore, indirect tests of income may be used to ensure the completeness of income reported. Indirect tests may include:

• bank deposit analysis;
• rough net worth calculations; and
• analysis of sources and applications of funds.

Where Indirect Verification of Income tests are necessary, it is standard practice to request that a taxpayer complete a questionnaire detailing their personal expenditures.

Editors’ Comment
While conducting the 2015 and 2014 Tax Update seminar series across Canada, the following was noted based on the experiences of numerous practitioners:

1. In some cases, agents have reduced the scope of documents requested to only those living in the house of the shareholder.
2. Where the scope is not reduced, CRA may request documents directly from the related parties, in some situations citing the fact that the information is being requested in relation to another person’s audit.

Subsection 231.1(1) governs CRAs right to request information. This provision is very broad, giving the Minister wide powers to collect information.

reviewing your client acceptance and retention policies

CRA has confirmed that obtaining personal financial information for shareholders and their family living in the same household is a requirement in small and medium enterprise audits.

Tax Evasion
The October 5, 2015 case of Cromwell and 3020636 Nova Scotia Limited vs. H.M.Q. (2365376-2365484, Provincial Court of Nova Scotia) provided an example of why personal records are reviewed. In this case, the Auditor noted unusual activity in the individual’s personal account which lead to tax evasion charges for this hairstyling business. The audit was considered a “core” audit whereby taxpayers are randomly selected within an industry that CRA has chosen to target.

The case details the methods that CRA used to determine the hairstyling tips and other income that should have been included. The Court also examined the relationship with the accountant and the related responsibilities under a Notice to Reader engagement. It concluded that the accountant was not responsible and found the taxpayer guilty on several charges.

being selected for audit may mean CRA considers you higher risk

Editors’ Comment
CRA audits are now generally selected by CRA’s Business Intelligence Units. Selection for audit usually means that CRA has already identified the taxpayer as being at higher risk of non-compliance. At a recent forum, CRA indicated that, since the implementation of their focus on higher risk taxpayers, 33% of audits have discovered unreported income.

CRA information requirement overturned
In a May 13, 2015 Federal Court case (M.N.R. vs. Lee, T-1616-14), the CRA sought a Compliance Order to obtain information that appeared to be similar to the personal shareholder information discussed above (bank accounts, real property listings, other asset listings, a net worth statement with completed schedules etc.)

The taxpayer was also asked to provide information on these items “whether or not registered in your name”.

Taxpayer wins – Sort of
This request indicated that there was uncertainty as to whether the Requirement was served on him personally or on the Respondent in his capacity as a director or officer of the corporations. The Court also noted that “comingling personal tax obligations with corporate tax obligations through a single requirement offends the certainty which this Court requires before it will consider granting the Minister a Compliance Order under Subsection 231.7(1) of the Act”. As such, the Compliance Order was denied.

the legal costs to challenge information requirements

Editors’ Comment
This may not impact CRA’s approach to these audits, other than changing their procedures. The case also notes that a similar request for a Compliance Order against Mr. Lee’s marital partner, Ms. Clarry (T-1615-14), was deferred due to a heath concern and remains to be heard.