2018-0779961C6 2018 CTF - Q8 - RPI and Risk-Based Audits

Principal Issues: Update on the Related Party Initiative and Risk-Based Business Audits.

Position: General comments provided.

Author: Bilodeau, Patrick
Section: -

2018 CTF Annual Conference
CRA Roundtable

Question 8: Related Party Initiative and risk-based business audits update

The Related Party Initiative (RPI) and Risk-Based business audits are significant CRA initiatives that have been running for some time. Can CRA provide an update that includes statistics of interest and comments on the future direction of these initiatives?

CRA response

The Related Party Initiative is the primary CRA audit program that focuses on high net worth individuals (other programs and projects such as the High Income Earners and Postal Code project may also cover some of the population for differing reasons).  The RPI program has been in place for many years but has undergone some changes recently and has grown as a result of Federal Budget funding to CRA.  High net worth individuals and their related entities have always been subject to CRA’s compliance programs however a key change in recent years is that compliance action related to individuals and their related entities are grouped and risk assessed and audited by a team for a holistic approach for the economic group; previously compliance measures were more likely to focus on only one specific entity at a time by a single auditor.

The origins of the current program began with pilot audits in 2005 and the CRA later increased focus on this initiative in 2009 based on a report from the OECD called “Engaging with HNWI on Tax Compliance”. This report produced a number of conclusions and recommendations on how tax administrations might deal with this segment of the population - creating a dedicated unit was one of the recommendations. Given the size of some of the economic groups and similar compliance approaches to that in the large file program, the HQ unit responsible for the Related Party Initiative is currently in the International, Large Business and Investigations Branch.

The scope of the program generally includes those with net worth of C$50M and while previously the number of entities was considered, it is no longer a factor. As of March 31, 2018, the program has identified more than 800 groups that meet this criterion and thus are part of the RPI population. We are building up the program both in size and in operational effectiveness, this includes fully utilizing the data available from tax filings, other jurisdictions and public information to risk assess the population and identify entities to include in audit work plans.

Dedicated RPI workload development teams perform an extensive review of the population. Their work to risk-assessing the HNWIs also examines the role of personal trusts, private foundations, partnerships, offshore activities, as well as corporations, both domestic and foreign, in the organizational structure.  Risk assessment, which includes advanced analytics, is extensive due to the complexity of business, investment and estate planning structures inherent in these groups. The workload development process includes sending and evaluating the responses to an RPI questionnaire and developing organizational and relationship mapping of the entities in the population prior to determining what might be assigned to an audit team. There are over 30 audit teams across country.

The RPI audit approach is a team approach, generally this means a case manager with a team of auditors is assigned to the RPI group to develop and carry out an audit plan. The workload is portable, meaning that a file may be audited by any of our teams nationally.  RPI audits are complex and as a result can be lengthy; and the work done by the audit team may span a number of years. The level of taxpayer cooperation will impact the length of an audit and as with other CRA audit programs in the Branch may impact the tax years and entities under review. The audit team is supported by a variety of experienced and senior advisors in the Branch on domestic, avoidance and international compliance issues, Competent Authority for information from other jurisdictions, as well as Rulings and Legal Services on interpretation issues and Department of Justice for assistance in obtaining records to ensure that CRA staff have a full understanding of the facts and tax compliance issues which come within the scope of the audit.

As RPI is a component of the Agency’s overall compliance strategy the results are included in the Agency’s Annual Report to Parliament as a component of the “International and Large Business” overall results.

The International and Large Business Directorate (ILBD) is the CRA’s centre of expertise in the compliance management of the large business taxpayer segment. The CRA uses an integrated risk-based approach to large business compliance to identify and address the highest risk cases nationally, referred to as the Approach to Large Business Compliance or ALBC. The approach allows the CRA to focus its audit resources on the highest-risk cases of non-compliance within the large business population, and reduce the compliance burden for businesses that are considered low risk. Taxpayers that do not engage in abusive transactions, maintain an effective Tax Control Framework (TCF), and are open and transparent with the CRA are considered low risk. Large businesses are generally defined as an entity having annual revenue in excess of $250 million with multiple legal entities within the economic group. There are approximately 20,000 legal entities within the large business population.

On an annual basis the large business population is subject to a comprehensive integrated risk assessment process using CRA’s Integrated Risk Assessment System (IRAS). This automated system applies risk algorithms that run on the CRA’s databases to identify risk issues and generate a risk ranking of the large business population. This is known as Tier I risk assessment.

The Tier I risk issues are then pre-populated in an audit case within the CRA’s audit case management system for those taxpayers that are considered to be high risk. Subject to review by regional and national calibration committees at a Tier II stage, the highest risk taxpayers/cases form the basis of regional and national work plans.

Those taxpayers that are considered high risk per the work plan will be selected for a full compliance audit starting at the Tier III – Risk Assessment and Validation stage. The Integrated Large Business Audit Teams will contact the taxpayer, and conduct the audit planning and governance document review process. The Integrated Team will take into consideration whether the taxpayer has an effective TCF in place. Taxpayers that are open and transparent about their tax risks/uncertain tax positions will enable the Integrated Team to more quickly determine whether the taxpayer remains high risk or is in fact low risk. To the extent the taxpayer is low risk the Tier III case will be closed thereby providing the taxpayer with earlier tax certainty, and the CRA with a level of assurance that the taxpayer is compliant and has paid the correct amount of tax.

The Integrated Teams are led by the International and Large Business Case Manager. The Domestic, International, and Abusive Tax Avoidance auditors within the teams all contribute to the risk assessment and audit process based upon their respective subject matter expertise. The Case Manager is responsible for the overall audit case and acts as a single point of contact between the CRA and the taxpayer thus supporting the concept of “One Team - One Voice - One Audit”. The assignment of workload and the composition of the Integrated Teams is based on risk, complexity, and capacity.

For those taxpayers that remain high risk and less than transparent about their tax risks/uncertain tax positions, the CRA will proceed with the full compliance audit. In some cases, depending on the number of high-risk legal entities within the economic group, and/or lack of cooperation by the taxpayer, a second Integrated Team may be assigned to examine the other high risk legal entities within the group to ensure compliance. This may increase the level of compliance burden and tax uncertainty for the taxpayer. The CRA will communicate to the taxpayer the significant tax audit issues in the case and the reasons for assigning more resources if applicable. This may take place during an ALBC face-to-face meeting.

The CRA will continue to conduct face-to-face ALBC meetings towards the conclusion of the audit of the highest risk and least cooperative taxpayers to communicate to the entity’s senior management the unresolved compliance issues, and where it exists, the lack of openness and transparency experienced by the audit team. These face-to-face meetings will be used to achieve more compliant behaviour from the highest risk and least cooperative taxpayers within the population. The CRA will continue to promote voluntary compliance by increasing transparency and strengthening mutual trust and cooperation with Canada's largest business entities. The CRA’s overall objective is to promote voluntary and cooperative compliance.

Response prepared by:
Len Lubbers
Abusive Tax Avoidance and Technical Support Division
International and Large Business Directorate
2018-077996
November 27, 2018

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