Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: Can CRA comment on auditors requesting personal financial information and/or furnishing statements of net worth of the shareholders of Canadian corporations?
Position: Response provided by CPB - General comments provided
Reasons: See below.
Author: Bogdan, John
Section: 231.1(1), 241
STEP CRA Roundtable – June 18 2015
Question 15. Tax Audit and Net Worth Statements
Can CRA comment on the following:
a) It has come to our attention that CRA is increasingly requesting personal financial information of the shareholders of Canadian corporations which are selected for audit. In some cases, the information is requested for all members of a household (for example husband, wife and children) even though only one of those persons is the owner.
b) In addition, CRA auditors have requested individuals to furnish statements of net worth, even in circumstances where this would not have to prepared, and is not readily available (most people do not routinely compile and maintain statements of net worth).
When small businesses are selected for audit, the CRA seeks to gain assurance about the completeness of the income reported in their tax filings. In these businesses, internal controls are usually weak and segregation of duties is generally absent. The use of indirect tests in these situations is a generally accepted means of gaining assurance about the completeness of the income reported.
Indirect tests that are undertaken by the CRA include bank deposit analyses, rough net worth calculations, or analyses of sources and applications of funds. In order to undertake these tests and assess risk of unreported income effectively, auditors must obtain complete financial information of the individual taxpayer or corporation whose business is under audit.
Where the business is carried on in a sole proprietorship, or in a corporation with a sole shareholder or that is closely held, there is potential co-mingling of business and personal funds. As such, when performing indirect tests, auditors will also request personal financial information of the spouse (or common law partner), the shareholder of a corporation and his or her spouse (or common law partner), and other contributing individuals living in the same household. The authority to request personal bank statements of the shareholder, spouse (or common law partner) and other contributing individuals is outlined in subsection 231.1(1) of the Income Tax Act. This provision permits the CRA to inspect, audit or examine records of other persons where information in those records may relate to information that is or should be in the books and records of the taxpayer who is under inspection, audit or examination.
All personal information of the taxpayer and other persons is requested at the start of the audit enabling auditors to confirm, at the outset, that business transactions are reported within the business and not in the personal bank accounts of the proprietor, shareholder or their family members.
Note that the privacy and confidentiality of taxpayer information is protected and managed under the strict confidentiality provisions of section 241 of the Income Tax Act, and we are also obliged to protect personal information under the provisions of the Privacy Act. Please be assured that the CRA respects these obligations when we obtain from taxpayers in the course of our audits.
When conducting an audit where Indirect Verification of Income tests/techniques are necessary to verify the completeness of reported revenues, it would be a standard practice for an auditor to request that a taxpayer completes a questionnaire detailing his/her personal expenditures. While the questionnaire is quite detailed, it does not constitute a statement of net worth; a statement of net worth would include an exhaustive list of all assets and liabilities. It is not a standard audit procedure to request that statements of net worth be prepared by a taxpayer.
John Bogdan (for CPB)
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