To ensure compliance and accuracy on tax returns, the Canada Revenue Agency (CRA) has a number of special review programs. We have seen increased activity over the past few years by the CRA, particularly as it relates to two of these review programs – Pre-Assessment Review and Processing Review. In particular, we wish to address the difficulties and challenges faced by Canadian taxpayers – and cross-border tax firms like CATA – as we attempt to navigate the often complex and convoluted processes in responding to these programs to support claims for various deductions (such as foreign tax credits).
Why My Return?
Of course, most taxpayers are not concerned so much with the kind of program under which they are contacted so much as they are with why their return was singled out for review. Many taxpayers assume that it’s because there is something wrong on their return, or that the letter is a precursor to an audit, but that’s not necessarily the case. Returns are selected by the CRA for a number of reasons. For example, where a taxpayer has filed a return containing information which does not agree with the corresponding information reported on a T-slip filed by the payer/issuer, it’s likely that the CRA will want to follow up to find out the reason for the discrepancy. As well, Canada’s tax laws are complex and, over the years, the CRA has determined that there are areas in which taxpayers are more likely to make errors on their returns. Consequently, a return may have an increased chance of being reviewed if it includes claims in those areas (such as medical expenses, support payments, and foreign tax credits). Finally, some returns are picked for review simply on a random basis.
Foreign tax credit claims are an area that continues to attract the CRA’s attention. Over the past few years, we repeatedly saw an increasingly large percentage of foreign tax credit claims come under review by the CRA.
Regardless of the reason for the follow-up, the process is the same:
1.Taxpayers whose returns are selected for review will receive a letter from the CRA, identifying the deduction or credit for which the CRA wants documentation or the income or deduction amount about which a discrepancy seems to exist.
2. The taxpayer will be given a reasonable period of time (unreasonable in our opinion given that CRA is taking up to 120 days to simply process returns) — usually 30-days from the date of the letter — in which to respond to the CRA’s request. That response should be in writing, attaching the receipts or other documentation (if needed) which the CRA has requested. It’s important to remember, as well, that it’s the taxpayer’s responsibility to provide proof, where requested, of any claims made on a return.
3. Taxpayers who have registered for the CRA’s online tax program ‘My Account’ (or whose representative is similarly registered for the CRA’s Represent a Client online service) can submit required documentation electronically.
4. Irrespective of how requested documents are submitted, it’s possible that the CRA will send a follow-up letter, or the taxpayer (and/or their representative) may be contacted by telephone, with a request from the CRA for more information. Our experience is that CRA RARELY will employ this technique and instead will issue a snap assessment that is more often than not incorrect. CRA will then send a letter to advise whether they have accepted the support for the item under review.
5. Where a taxpayer does not respond to a CRA request and does not provide such proof, the CRA will proceed on the basis that the requested verification or proof does not exist, and will reassess accordingly.
Patience is (sometimes) a virtue.
Due to excessively long processing times and other unreasonable delays by CRA, patience is key. Dealing with these responses can be stressful, time consuming and daunting. It is also COSTLY, it takes time and skill to properly respond to these notices and ensure that CRA is carefully guided on the file – most preparers of tax returns are now finding that their time spent on responding to CRA often exceeds the time spent on return preparation and clients are sometimes surprised by the fee to support the return as filed.
Whatever the reason a particular return was selected for review by the CRA, one thing is certain. A prompt and complete response to the CRA’s enquiry, providing them with the information or documentation requested will, in the vast majority of cases, help your chances in bringing the matter to a speedier conclusion. If you receive a letter or notice from CRA that you believe is issued under a review program, wherein CRA is requesting supporting documentation with regard to a foreign tax credit, or other claim for a credit or deduction, please feel free to contact us so that we can help you better navigate the process and reduce potential delays by the CRA.