One area of focus for CRA audits is aggressive tax planning in the high-net-worth population.Justin Tang/The Canadian Press
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Every year, thousands of taxpayers are selected for an audit by the Canada Revenue Agency (CRA), but some areas are more likely than others to be on the tax authority’s radar this tax season.
While the focus for audits is different from year to year, some areas remain priorities over multiple years, CRA spokesperson Nina Ioussoupova said in an e-mail.
As outlined in the CRA’s departmental plans for each fiscal year, recent areas of focus for audit activity have included aggressive tax planning in the high-net-worth population, unwarranted GST/HST refunds and real estate transactions.
Tax experts say they have already seen audit activity trending in these and other areas, including scrutinizing business expenses and cross-border assets and income. Advisers who know which areas are in focus can ensure clients maintain proper documentation, seek specialist advice and remain compliant.
Here are a few trends tax specialists have noticed in recent audits.
Foreign transactions:
Armando Minicucci, a partner in Grant Thornton LLP’s tax practice in Mississauga, says cross-border activities are the CRA’s current top focus in audits or requests for information.
That includes cross-border business transactions as well as how individuals report foreign investments. “Anything to do with foreign transactions [has] a very high probability of being audited,” he says.
For example, this could involve a request for support and backup documentation for foreign tax credits claimed by a Canadian client with foreign investments in their portfolio who has already paid foreign withholding taxes.
In other cases, individuals are being asked to provide support for foreign tax credits that are the result of having paid income taxes in another jurisdiction.
Business account expenses:
For clients with privately held businesses, Mr. Minicucci is also seeing increased CRA scrutiny on business expenses claimed in case personal items have been included.
“The one common audit request we get on a regular basis is when a business takes a deduction for professional fees paid,” he says. “We often get requests to provide the support for the professional fees because they’re looking to see if there are professional fees that have been deducted in the corporation that should actually be personal expenses.”
Related-party audits:
Since the CRA announced its intention to focus on aggressive tax planning in the high-net-worth population, Jenny Mboutsiadis, partner and tax litigator with Fasken Martineau DuMoulin LLP in Toronto, has noticed more related-party audits of high-net-worth individuals, with a view to ensuring they’re reporting foreign assets and income.
Ms. Mboutsiadis says the CRA is sending out queries to individuals or family members asking for information on the assets, shares, companies and trusts they own in Canada and other jurisdictions.
“The CRA is using that information to then commence an ordinary audit, where they will examine the structures [and] the transactions more closely to see if there’s been any unreported income or unreported transactions or shareholder benefits,” she says. “I’m seeing a lot of that.”
The platform economy:
In its 2023-24 departmental plan, the CRA said it was “performing more audits to better understand the platform economy” – which includes economic activity driven by digital platforms – to ensure taxpayers are complying with their obligations.
In this sector, the CRA has focused on education, says John Waters, vice-president, director of tax consulting services with BMO Private Wealth Inc. That includes outreach aimed at informing individuals – such as rideshare operators and social media influencers – of their income tax or GST/HST requirements and how to report.
He says advisers can also play a role in educating these clients, who “may not be too up to speed on the tax filings,” about their obligations.
“Advisors can have a general awareness and at least point them in the right direction if they fall into these categories, where there’s a bit of a grey area or CRA often does reviews or audits,” Mr. Waters says.
Real estate transactions:
The real estate sector has seen several legislative changes in the past two tax years – from the underused housing tax to the residential property-flipping rule, which considers profits on a home bought and sold within a year as business income rather than eligible for capital gains treatment or the principal residence exemption. As such, the area has come under renewed focus for the CRA, Mr. Waters says.
Indeed, the agency has publicly noted that it’s expanding compliance activities regarding real estate transactions, including “more widely disseminating and applying real estate data across the CRA.”
“This also is a way for the CRA to see where these real estate flips have been happening and people could be audited very easily,” says Debbie Pearl-Weinberg, executive director of tax and estate planning with CIBC Private Wealth.
New disclosure rules:
Some tax experts say more audit activity may arise from a proposal to expand the general anti-avoidance rule and from new enhanced mandatory disclosure rules. The latter rules require taxpayers to report certain transactions – for example, some transfers relating to the 21-year deemed disposition rule for trusts.
As a result, advisers need to be aware of a client’s involvement in these types of transactions to ensure they look into their reporting requirements and speak to tax specialists.
“If an advisor sees a client who’s entering into a transaction that is clearly tax-motivated and it’s not a normal, ordinary-course transaction such as end-of-the-year tax-loss selling … recommend that they speak to a tax adviser to find out if they are subject to the mandatory disclosure rules on this and … if there’s an increased chance of an audit,” Ms. Pearl-Weinberg says.
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