cra income tax audit manual (may 2015) highlights for tax
TRANSCRIPT
October 26, 2016
The Canada Revenue Agency’s Income Tax Audit Manual –
Highlights for Tax Practitioners
The Canada Revenue Agency’s (CRA) Income Tax Audit Manual contains a wealth of information
that may be useful for tax practitioners in representing their clients in tax audits and appeals.
Spanning over 1,200 pages, the audit manual consolidates in one volume the CRA’s operational
policies and procedures for the administration of income tax. Essentially, the book sets out an end-
to-end road map for CRA auditors to follow in selecting, planning, conducting and finalizing an
income tax audit.
As a single reference for audit policies, procedures and technical application guidelines, the Income Tax Audit Manual includes:
Examples of audit checklists and working papers
Specific audit techniques
Sample letters
Technical information to apply legislation administered by the CRA
Sector profiles that describe business operations
References to court cases
For tax practitioners, knowing the CRA’s audit standards can help in a variety of ways. The
information can help you understand what to expect during an audit. You can find out what factors
CRA auditors are expected to consider when assessing, among others, taxpayer risk, fairness
requests, penalties, the handling of late-filed elections and the opening of statute-barred returns.
You can learn what types of reports you can request from the CRA’s audit files and what guidance
CRA auditors are expected follow when requesting tax information from taxpayers, their advisors
and other third parties. Knowing these standards may help you manage the audit process.
Most importantly, the manual offers an extra level of transparency, enhancing relationships
between tax advisors and CRA auditors by improving their mutual understanding of the CRA’s
formal tax audit process.
Given the volume and level of detail in the manual, using it as a tool to support your clients on audit
can be daunting. To help you get started, the table below highlights selected portions of the manual
that may be of special interest to tax practitioners. The manual’s complete table of contents is
reproduced in Appendix A.
As a note of caution, the CRA updates its audit manuals regularly, so you should confirm that the
version you have consulted is the current one. The links in this document connect to the May 2015
edition of the Income Tax Audit Manual.
Further, due to its size, chapters of the Income Tax Audit Manual are being added to the CRA
virtual reading room as soon as they become available. The links to Chapters 3.0, 4.0, 6.0 and 8.0
point to the CRA’s website directly. However, the links to the other chapters listed below (marked
with ) point to a .pdf version of that chapter on CPA Canada’s website and may not represent the
CRA Income Tax Audit Manual (May 2015)Highlights for Tax Practitioners 2
CRA’s latest version. (Direct links to additional chapters will be added as the chapters are posted to
the CRA website.)
Please also note that some section numbers are omitted in the table. In order to avoid renumbering
cross-referenced material, when it has become necessary to delete or relocate information in the
manual, the CRA has marked the section or chapter “for future use” or “section removed.” We have
omitted these sections from the table below. In particular, Chapters 2.0, 5.0, 7.0, 14.0, 17.0, 18.0,
21.0, 22.0, 23.0, 25.0, 26.0 have been removed and marked “for future use”.
CRA Audit Manual – Table of Contents
Chapter 1.0 The Income Tax Audit Manual – Organization, Purposes, and Uses (!)
Chapter 3.0 Taxpayer Rights and Taxpayer Relief
Chapter 4.0 Auditor's Standards of Conduct, Authorities, and Responsibilities
Chapter 6.0 Organization of the Audit Division in the Tax Services Office
Chapter 8.0 Business Intelligence and Quality Assurance
Chapter 9.0 Audit Planning and Preparation (!)
Chapter 10.0 Conducting the Audit (!)
Chapter 11.0 Completing the Audit (!)
Chapter 12.0 Specific Audit Guidelines and Checklists (!)
Chapter 13.0 Audit Techniques (!)
Chapter 15.0 International Audit Issues – Under Review (!)
Chapter 16.0 Clearance Certificates, Estates, and Trusts (!)
Chapter 19.0 Objections and Appeals (!)
Chapter 20.0 Valuation of Inventory (!)
Chapter 24.0 Transactions Involving Related Persons, Corporations and Shareholders, Dividends, etc. (!)
Chapter 27.0 Income (!)
Chapter 28.0 Penalties (!)
Chapter 29.0 Losses (!)
Appendix - Laws and Corporate Policy Instruments
CRA Income Tax Audit Manual (May 2015)Highlights for Tax Practitioners 3
Canada Revenue Agency Income Tax Audit Manual (May 2015 edition)
Highlights for Tax Practitioners
Chapter Page Topic Notes for tax practitioners
Chapter 3.0 – Taxpayer rights and taxpayer relief
3.1.0 17 Overview Guidance on: o conditions for taxpayer relief o obligations to keep taxpayer
information confidential and exceptions
o the access to information program
o audit information that may be released to the taxpayer
3.2.0 17 Taxpayer relief provisions 3.3.0 21 Voluntary Disclosures
Program 3.4.0 22 Privacy and confidentiality 3.5.0 28 Appeals – formal review
Chapter 4.0 – Auditor's standards of conduct, authorities, and responsibilities
4.1.0 30 Introduction
Guidance to auditors in conducting their usual auditing activities.
4.2.0 30 Auditor’s standard of conduct 4.3.0 30 Rights and obligations 4.4.0 32 Auditing CRA employee-
owned business 4.5.0 33 Legislative authority to audit 4.6.0 34 Auditing under unusual
circumstances 4.7.0 39 Security of information and
assets 4.8.0 45 Laptop care and security 4.9.0 49 Use of personal devices
Chapter 6.0 – Organization of the Audit Division in the tax services office
6.1.0 51 Introduction
Information in this section is useful for understanding the tax services office audit organization.
Team member’s description of duties and responsibilities may be useful in directing questions or escalating issues in dispute.
6.2.0 51 Organization of the audit team
6.3.0 52 Assistant director – Audit 6.4.0 53 Audit manager 6.5.0 54 Team leader 6.6.0 59 Electronic data support
specialist 6.7.0 59 Auditor 6.8.0 61 Audit support team
Chapter 8.0 – Business Intelligence and Quality Assurance
8.4.0 62 Audit Quality Review Information on CRA’s audit quality review processes that are 8.4.1 62 Introduction
CRA Income Tax Audit Manual (May 2015)Highlights for Tax Practitioners 4
Chapter Page Topic Notes for tax practitioners
8.4.2 62 Audit Quality Review Standards
designed to improve audit targeting and the quality of audit files. 8.4.3 63 Audit Quality Review Process
Chapter 9.0 – Audit planning and preparation
9.1.0 64 Introduction
Guidance on the planning and preparatory work necessary to conduct the audit.
The work contemplated in this section is similar to the standards for conducting a financial statement review engagement.
9.2.0 65 Preliminary review 9.3.0 71 Ratio analysis and review of
financial statements 9.4.0 71 Analytical review 9.4.1 71 Introduction 9.4.2 71 Review of returns as filed
and analysis 9.4.3 72 Reconciling books and
records 9.4.4 72 Changes in accounting
policies 9.4.5 73 Gross profit ratio 9.4.6 74 Inventory turnover 9.4.8 76 Comparative analysis of
financial statement 9.5.0 77 Unfiled returns Information on filing an arbitrary
return under subsection 152(7) of the Income Tax Act (ITA) where no return has been submitted.
9.5.1 77 Introduction 9.5.3 78 Pro forma returns
9.6.0 78 Audit plan Factors to consider in developing
the audit plan from the preparatory work and the involvement of the team leader in approving the plan.
9.6.1 78 Preparing the audit plan 9.6.2 79 Factors to consider 9.6.3 80 Team leader involvement 9.6.4 80 Time budget
9.7.0 81 Audit tools
Instructions on the laptop software and template that should be used in the tax audit and the templates that should be used.
9.7.1 81 Audit Laptop System
9.7.3 81 Audit templates
9.8.0 83 Working papers Detailed information on what should be in the auditor’s working papers and the schema of the working papers
9.8.1 83 Purpose and content of working papers
9.8.2 85 Working paper specifications 9.8.3 86 Working paper
documentation
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Chapter Page Topic Notes for tax practitioners
9.8.4 88 Working papers as “government information holdings”
9.8.5 89 Transitory records and section 67.1 of the Access to Information Act
9.9.0 89 CRA mainframe as a source of information
Guidance on information in CRA’s mainframe that the auditor should review
9.10.0 91 Determining the need for computer-assisted audit techniques (CAAT)
Guidance on the use of CAATs.
9.11.0 91 Audit scope The audit workload development section (not the auditor) determines the audit’s scope
Guidance on the auditor’s decision to modify the scope.
9.11.1 91 Introduction 9.11.2 92 Reliance on books and
records 9.11.3 92 Types of audit adjustments
9.12.0 92 Audit period policy
Information on the one-plus-one audit policy, conditions that could justify extending the period under audit, approvals required and guidance on re-auditing a period.
9.12.1 93 Purpose 9.12.2 93 Legislation 9.12.3 93 The common audit period
(one-plus-one) 9.12.4 94 Re-auditing a previously
audited period 9.13.0 94 Workload referral procedures Instruction on referring audit
workload to other divisions, i.e. specialists, excise, etc.
9.15.0 96 Concurrent audits: associated, affiliated or related corporations
Guidance on when a concurrent audit should be considered, including cost-benefit considerations and the scope of the concurrent audit.
9.15.1 97 Circumstances that may warrant concurrent audits
9.15.3 97 Restricting the audit scope
9.16.0 98 Continuing risk assessment
Emphasizes that the audit plan is ‘evergreen’ and the need to engage in continuous risk assessment.
9.16.1 98 Introduction 9.16.2 98 Risk assessment during
preliminary review 9.16.3 99 Risk assessment during audit
planning 9.16.4 99 Components of risk
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Chapter Page Topic Notes for tax practitioners
9.16.5 100 Reviewing risk while the audit is in process
9.17.0 102 Assessment of materiality
Guidance on points for the auditor to consider regarding materiality.
9.17.1 102 Introduction 9.17.2 103 Determining materiality 9.17.3 103 Materiality and the
taxpayer’s operations 9.17.4 103 Costs vs. benefits 9.17.5 103 Reason for the audit 9.17.6 104 Tax status of the item
9.18.0 105 Contacting the taxpayer
Instruction for initial taxpayer contact and scheduling meetings, etc.
9.18.1 105 Initial contact 9.18.2 107 Taking the necessary steps to
begin the audit 9.18.3 107 Communicating with the
taxpayer by letter 9.18.4 109 Scheduling 9.18.5 110 Audits delayed at the
taxpayer’s request
Chapter 10.0 – Conducting the audit
10.1.1 116 Introduction
Guidance on applying the audit pre-planning to initial interviews, tour of premises and evaluation of internal controls.
10.1.2 116 Interview query sheet 10.1.3 117 Templates and interview
working papers 10.1.4 117 Summary of initial working
papers 10.1.5 118 Tour of premises 10.1.6 119 Evaluation of internal
controls 10.2.0 120 Books and records
Guidance on the books and records evidence that the auditor is expected to examine, including: o what a record is, o the legislative authority to
examine it o taxpayer obligations to keep
adequate records o handling of taxpayer books and
records
10.2.1 120 Requirement to keep books and records
10.2.2 124 Authority to examine 10.2.3 125 Requirement to keep
adequate books and records 10.2.4 126 Location of books and
records 10.2.5 127 Retention of books and
records 10.2.6 129 Borrowing books and
records
CRA Income Tax Audit Manual (May 2015)Highlights for Tax Practitioners 7
Chapter Page Topic Notes for tax practitioners
10.2.7 131 Copying books and records o penalties the auditor should consider for inadequate books and records
10.2.8 132 Penalties for inadequate books and records
10.2.9 132 Electronic transfer of accounting data
10.3.0 133 Maintaining records and/or audits outside Canada
Information on points to consider for: o approval of a taxpayer’s
request to keep records outside of Canada
o competent authority requirements
o IRS notification/permissions o exchanges of information
10.3.1 133 Approvals 10.3.2 134 Conducting audits outside
Canada
10.4.0 138 Conducting audits at branches Guidance on extending the audit at
a taxpayer headquarters to a branch in another location
10.4.1 138 Introduction 10.4.2 138 Selecting branches for audit
10.5.0 139 Audit evidence
Guidance to auditors on the evidence they assess to determine what their conclusions should be on the audit.
10.5.1 139 What is audit evidence? 10.5.2 139 Weighing the audit evidence 10.5.3 140 Reliable audit evidence 10.5.4 140 Type and source of audit
evidence 10.6.0 143 Information from third
parties
Guidance on the auditor’s legal authority, policies and procedures for obtaining the information they need for the audit.
10.6.1 143 Introduction 10.6.2 144 Auditor’s authority to obtain
information 10.6.3 145 Types of third parties 10.6.4 146 Methods of obtaining
Information 10.6.5 146 Procedures for obtaining
Information 10.6.6 147 Obtaining information from
financial institutions 10.6.7 156 Obtaining information from
accountants 10.6.8 157 Obtaining information from
lawyers and notaries 10.6.9 158 Public sources of information
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Chapter Page Topic Notes for tax practitioners
10.7.0 159 Information-gathering techniques Guidance on the limitation on the
auditor’s information gathering in the case of solicitors, their legal authority to inspect information, and the legal processes for compelling the supply of information through requirements letters and compliance orders.
10.7.1 159 Solicitor-client privilege 10.7.2 161 Inspection 10.7.3 161 Requirements 10.7.4 162 Compliance orders 10.7.5 163 Procedures for gathering
information 10.7.6 163 Coding for compliance orders
and requirements 10.8.0 163 Requirement guidelines
More detail on issuing a requirements letter to compel the taxpayer to produce the information sought by the auditor.
Guidance on the circumstances that may require such a letter, the content of the letter, serving guidance, timing considerations and penalties for failure to comply.
10.8.1 163 What is a requirement? 10.8.2 164 Types of requirements and
Demands 10.8.3 164 Requirement to provide
information or documents 10.8.4 165 Authority to issue demands 10.8.5 167 Preparing requirements 10.8.6 173 Reasonable time to comply 10.8.7 173 Service by registered mail 10.8.8 173 Cross TSO service
requirements 10.8.9 174 Cost of Compliance
10.8.10 174 Timing of requirement issued
10.8.11 174 Requirement for specific records
10.8.12 174 Prosecution for non-compliance
10.9.0 174 Compliance order guidelines
Guidance to auditors on the use of compliance orders to compel the taxpayer to supply information.
10.9.1 175 Background 10.9.2 175 General comments 10.9.3 176 Case selection 10.9.4 177 Protocol 10.9.5 178 Guidelines
10.10.0 178 Research and analysis
Guidance on the repositories available to auditors on which to base their technical analysis when these types of issues arise on audit.
10.10.1 178 General comments 10.10.2 179 Research – Income tax 10.10.3 180 Public documents 10.10.4 182 Internal CRA documents 10.10.7 182 Remission orders 10.10.8 182 Jurisprudence 10.10.9 182 Other documents
CRA Income Tax Audit Manual (May 2015)Highlights for Tax Practitioners 9
Chapter Page Topic Notes for tax practitioners
10.10.10 183 Location of documents
10.11.0 184 Referral and consultations
Guidance on the many resources available to auditors to assist them in their work.
Of particular note to practitioners are the technical resources including: o technical guidance at HQ audit o tax avoidance resources o non-residents and criminal
investigations. Guidance is provided as to when
these referrals might be appropriate.
10.11.1 184 Introduction 10.11.2 185 Tax services offices and
regions 10.11.3 187 Referrals to other programs 10.11.4 187 Referrals for real estate
appraisal or business equity valuations
10.11.5 188 Referrals to SRED 10.11.6 188 Tax avoidance and GAAR 10.11.7 193 Revenue collections 10.11.8 196 Referrals to Criminal
Investigations 10.11.9 200 Referrals to Canada Border
Services Agency 10.11.10 202 Referrals to another tax
services office 10.11.11 203 Requesting assistance from a
tax services office 10.11.12 205 Film tax credits 10.11.13 205 Consultation and referrals on
non-residents 10.11.14 206 Referrals to Technical
Section and Valuation Section, Compliance Programs Branch, Headquarters (HQ)
10.11.15 212 Consulting with other federal government and agencies
10.11.16 215 Consulting with provincial and territorial governments
10.11.17 217 Requests for information – countries with tax treaties
10.11.18 217 Referrals from the Appeals Division
Chapter 11.0 – Completing the audit
11.0 227 Completing the audit Checklist of material that
should be a part of a completed audit.
11.1.0 227 Completion checklists 11.1.2 227 File completion checklists
11.2.0 232 Communications and negotiations with taxpayer
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Chapter Page Topic Notes for tax practitioners
11.2.1 232 No change audits
Guidance on ending the audit, explaining the findings, issuing a proposal and attempting to get concurrence on the proposal letter.
11.2.2 232 Downscreened audits 11.2.3 233 Negotiation of settlement at
conclusion of field work 11.2.4 233 Audit completion – Proposal
letter 11.2.5 235 Final interview/meeting 11.2.6 236 Accepting payment
11.3.0 236 Normal reassessment period Guidance on adjustments to tax
payable as a result of loss carry forwards, tax credits and revisions to permissible deductions such as CCA.
Guidance on factors to consider in reopening statute-barred years and considerations where the taxpayer is thought to have misrepresented the facts
11.3.1 236 Income tax reassessment period
11.3.3 238 Application of losses 11.3.4 242 Tax credits 11.3.5 244 Revisions to permissive
deductions 11.3.7 246 Assessment after the normal
period and false statement/omissions penalties
11.4.0 247 Waivers Guidance on when a waiver is
appropriate, its validity, and filing and revocation procedures.
11.4.1 247 Overview 11.4.2 248 Filing a waiver 11.4.3 250 Revocation of a waiver 11.5.0 251 Assessments
Guidance on assessments and re-assessments:
o mandatory vs. discretionary
o assessments based on pro forma returns
o priority assessments based on statute-barred considerations
o jeopardy assessments based on a perceived risk of loss, etc.
11.5.1 251 General policy 11.5.2 252 Priority reassessments 11.5.3 254 Assessments under
subsection 157(2) 11.5.4 255 Additional assessments 11.5.5 256 Jeopardy assessments 11.5.9 257 Nil assessments –
notification 11.5.10 258 Loss determination 11.5.11 261 Joint liability assessments 11.5.12 262 Consequential assessments 11.5.13 262 Collection stall code
procedures – Form T718, Memorandum to Collections Section
11.6.0 263 Auditor’s reports 11.6.1 264 Form T20, Audit Report
CRA Income Tax Audit Manual (May 2015)Highlights for Tax Practitioners 11
Chapter Page Topic Notes for tax practitioners
11.6.2 272 Penalty Recommendation Report
Extensive information and guidance about the contents of the audit report, including separate reports.
11.6.3 277 Capital vs. Income Report 11.6.4 277 Reasonable expectation of
profit 11.6.5 277 Restricted Farm Loss Report 11.6.6 278 Income Tax Audit Division
Internal Taxpayer Relief Recommendation Form
11.7.0 281 Supporting forms for assessments
Instruction on the forms that must be completed in the process of finalizing various types of re-assessments
11.7.2 282 Forms for competing an audit 11.7.3 284 T1 Reassessments 11.7.4 286 T2 Reassessments 11.7.5 286 T3 Reassessments 11.7.6 287 Pro-forma assessments
11.8.0 287 Audit completion – storage of working paper and other documents
Instructs the auditor on how and where audit files should be retained.
11.8.1 287 WinALS – Audit file 11.8.2 288 Retention of hard copy
(paper) documents 11.8.3 288 Documentation not stored at
the tax centre 11.8.4 290 Permanent documents
11.9.0 291 Assembling the audit file
Instruction for ensuring the audit file is complete.
11.9.1 291 Assembling the file for an income tax assessment
11.9.2 292 Checklist for assembly of the audit file – T1 and T2
11.9.3 295 Documents sent to HQ
11.10.0 296 Processing the audit file Contains mostly administrative information but the appendix does contain forms/reports that may be useful in understanding what is in the audit report
11.10.1 296 Routing of completed audits A11.1.0-A11.3.5
298-373
Chapter 12.0 – Specific audit guides and checklists
12.1.0 384 Taxpayer requests Instruction and guidance on processing many types of taxpayer change requests including issues
12.1.1 384 Introduction 12.1.2 384 Taxpayer requests
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Chapter Page Topic Notes for tax practitioners
12.1.3 390 Audit procedures for taxpayer requests
to consider when evaluating requests.
12.1.4 391 Issues to consider when processing requests
12.2.0 394 Auditing employee benefits Guidance on some employer benefits that may arise on audit and provides information on research resources and consultations available.
12.2.1 394 Overview 12.2.2 394 Common taxable benefits 12.2.3 395 Consultation on employer
audits 12.3.0 397 Applying proposed legislative
amendments
Guidance on situations where a change in the law has not yet received Royal Assent and the taxpayer has filed based on the proposed amendment.
12.3.1 397 Background 12.3.2 398 Prospective vs. retroactive
law 12.3.3 398 Grandfathering provisions 12.3.4 398 Effect of amendments on
audit adjustments 12.3.5 398 Guidelines to deal with
proposed legislative amendments
12.3.6 399 Presenting assessment details to taxpayers
12.3.7 399 Taxpayer agrees to pay amendment-related assessment
12.3.8 399 Application of penalty 12.3.9 399 Application of interest
12.3.10 399 Taxpayer does not agree to pay amendment-related assessment
12.3.11 399 Application of penalty and/or interest
12.3.12 400 Advise Taxpayer Services and Debt Management of amendment-related assessment
12.4.0 400 Auditing elections and applications
Insight into the verification processes for elections and other applications including decisions on late filed elections.
12.4.1 400 Introduction 12.4.2 400 Audit procedures – elections 12.4.3 400 Verifying elections 12.4.4 401 Audit action 12.4.5 401 Late filed elections
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Chapter Page Topic Notes for tax practitioners
12.6.0 401 Specific income tax elections 12.7.0 401 Situations requiring an
amended audit 12.7.1 401 Situations requiring a follow
up audit 12.7.2 402 Statute-barred concerns 12.7.3 403 Processing an amended audit
12.13.0 403 Dispositions of taxable Canadian property
Instruction on the disposition of taxable Canadian property by a non-resident
Includes informative checklists for auditor guidance.
12.14.0 413 Multiple jurisdictions, income allocation
Guidance to auditors on the allocation of income among multiple jurisdictions
12.14.1 413 Introduction 12.14.2 413 Definitions 12.14.3 414 Permanent establishment 12.14.4 415 Gross revenue, salaries and
wages 12.14.5 416 Risk assessing policy 12.14.6 416 Exceptions 12.14.7 417 Dispute resolution with non-
agreeing partners 12.14.8 417 Documentation and
processing 12.15.0 419 Offsetting adjustments
Information to the auditor on adjustment that offset the tax owning.
12.15.1 419 General information 12.15.2 419 Revising CCA and other
permissive deductions 12.15.3 420 Unrelated downward
adjustments
12.16.0 421 Requesting a Real Estate Appraisal or Equity Valuation
Guidance for the auditor when considering a business equity valuation or real estate appraisal.
12.16.1 421 General comments 12.16.2 423 Business equity valuation 12.16.3 424 Real estate appraisals 12.16.4 425 Referral procedures
12.17.0 429 Consultation with excise tax/duty
Chapter 13.0 – Audit techniques
13.1.1 447 Introduction
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Chapter Page Topic Notes for tax practitioners
13.1.2 448 Computer-assisted audit techniques (CAAT)
13.1.3 448 Assistance from Electronic Data Support Division specialists
13.1.4 450 Preparing the taxpayer’s information for CAATs
13.1.5 450 Procedures using CAATs 13.1.6 456 CAAT software 13.1.7 458 Systems evaluation 13.1.8 460 Examples 13.2.0 463 Audit of non-taxable income
Guidance on the audit of income claimed as not taxable.
13.2.1 464 Overview 13.2.2 464 Interviewing the taxpayer 13.2.3 465 Audit of cash-on-hand 13.2.4 465 Opening and closing cash-on-
hand 13.2.5 465 Analysis of bank accounts 13.2.6 466 Audit of gifts, loans, and
inheritances 13.2.7 467 Audit of lottery and other
winnings 13.2.8 468 Audit of non-taxable foreign
sources 13.3.0 470 Indirect verification of
income (IVI) Policy and guidance on how to
assess: o whether the auditor should
employ an IVI audit technique o the legislative authority if
challenged o the taxpayer’s burden of proof
to refute the reassessment.
13.3.1 470 General comments 13.3.3 476 Inadequate, inaccurate,
unreliable books and records 13.3.4 476 Legislative authority 13.3.5 476 Burden of proof
13.4.0 476 Assessing net worth
Information and guidance to auditors on the net worth technique, which measures changes in estimated net worth over time as the basis for assessing the tax liability.
13.4.1 476 Introduction 13.4.2 476 Definitions 13.4.4 477 Principles of assessing net
worth 13.4.6 477 Circumstances supporting a
net worth assessment 13.4.7 479 Unreported or understated
income
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Chapter Page Topic Notes for tax practitioners
13.4.9 479 Circumstances not supporting a net worth assessment
13.4.10 479 Indicators warranting a net worth assessment
13.4.11 481 Net worth overview 13.4.12 481 Net worth audit period 13.4.13 481 Exceptions to the normal
period 13.4.14 481 Basis of the net worth
assessment 13.4.17 482 Application of penalties 13.4.18 483 Personal expenditure review 13.4.19 487 Tour of premises 13.4.20 487 Audit of business records 13.4.21 488 Audit of taxpayer’s personal
expenses 13.4.22 488 Lack of supporting
information 13.4.23 488 Third-party sources of
information 13.4.24 489 Banking information 13.4.25 490 Preparing the statement of
changes in net worth 13.4.26 493 Summary of personal
expenditures 13.4.28 495 Testing of personal
expenditure estimates 13.4.29 497 Calculation of discrepancy 13.4.30 499 Analysis of discrepancy 13.4.34 500 Multiple business and
multiple year-ends 13.4.35 500 Net worth of a partner in a
partnership 13.4.36 501 Partner’s investment in a
partnership 13.4.38 501 Shareholder’s investment in
a corporation 13.4.39 501 Fiscal year and assessment
period 13.4.40 502 Adjustments for fiscal year-
ends 13.4.41 502 Base year
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Chapter Page Topic Notes for tax practitioners
13.4.43 502 Shareholder’s investment 13.4.44 503 Reason for the discrepancy 13.4.45 503 Analysis of the discrepancy 13.4.46 503 Completing the technique 13.4.47 504 Working papers 13.4.48 505 The audit report
13.5.0 505 Assessing unidentified deposits
Guidance on the work that auditors should do to ensure that unidentified deposits are suppressed income.
13.5.1 507 Audit evidence 13.5.3 507 Penalties
13.6.0 508 Assessing projections technique
Guidance on the application of projections to create sufficient and appropriate audit evidence when the books and records are unreliable, inadequate or missing.
13.6.1 508 Overview 13.6.2 508 Audit evidence 13.6.4 508 Indirect vs. direct verification 13.6.7 508 Projections to determine
income 13.6.8 509 Circumstances warranting a
projection technique 13.6.10 509 Reasonable projections 13.6.11 510 Assumptions 13.6.12 511 Assessing: projections or net
worth 13.6.13 511 Circumstances that do not
warrant a projection technique
13.6.14 511 Sample selection 13.6.15 511 Type of projection 13.6.16 512 Gross Profit Cost of Goods
Sold Ratio 13.6.17 512 Inventory turnover 13.6.18 513 Completing the audit 13.6.19 513 Jurisprudence
13.7.0 514 Testing and sampling
Guidance on the use of audit tests to gather the information to support a conclusion on the taxpayer’s tax liability.
13.7.1 514 Overview 13.7.2 514 Direct testing 13.7.3 515 Statistical sampling 13.7.4 515 Appropriateness of tests 13.7.5 515 Audit assertions 13.7.6 517 Designing and selecting audit
tests
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Chapter Page Topic Notes for tax practitioners
13.7.7 518 Compliance testing 13.7.8 518 Supporting indirect
verification of income 13.8.0 524 Auditing the balance sheet
Guidance on common audit steps for an audit of asset, liability and equity accounts
13.8.1 524 Introduction 13.8.2 524 Auditing asset accounts 13.8.3 530 Auditing liability accounts 13.8.4 533 Auditing equity accounts
13.9.0 533 Auditing the income statement
Guidance and instruction on the audit of the income statement, with particular focus on detecting unreported income and inflated or fictitious expenses.
13.9.1 533 Introduction 13.9.2 533 Detailed analytical approach 13.9.3 534 Analysis and observation 13.9.4 534 Testing and sample selection 13.9.5 535 Third party information 13.9.6 535 Auditing cash vs. accrual
methods 13.9.7 535 Adjusting: cash to accrual 13.9.8 536 Internal controls 13.9.9 536 Auditing sales types
13.9.10 536 Sales on account 13.9.11 537 Cash sales 13.9.12 538 Auditing electronic records 13.9.13 540 Auditing conditional,
instalment, lay away sales 13.9.14 540 Auditing sales recording
systems 13.9.15 541 Sales summary 13.9.16 542 Audit of cash registers 13.9.17 557 Forms of payment 13.9.18 559 Methods of suppressing
income 13.9.19 562 Unidentified deposits 13.9.20 564 Auditing purchases and
expenses 13.9.21 564 Auditing records of expenses 13.9.22 565 Claiming expenses
13.10.0 578 Auditing bribes, kickbacks and similar payments
Guidance to auditors when they encounter suspicious payments in their audit of the income statement.
13.10.1 579 Introduction 13.10.2 579 Income tax implications
CRA Income Tax Audit Manual (May 2015)Highlights for Tax Practitioners 18
Chapter Page Topic Notes for tax practitioners
Chapter 15.0 – International issues
15.1.0 612 Introduction
Provides an interesting introduction to international tax and may be valuable for small practitioners who handle these issues only occasionally.
The “audit considerations” section may be of particular interest.
15.2.0 612 Income of a non-resident 15.2.1 612 Overview 15.2.2 612 Part XIII tax 15.2.3 612 Part XIV tax 15.2.4 612 Income earned in Canada
from office or employment 15.2.5 613 Income from business
carried on in Canada 15.2.6 614 Common law factors
connecting business to a particular place
15.2.7 614 Carrying on business “with” vs. “in” Canada
15.2.8 614 Extended meaning of “carrying on business in Canada”
15.2.9 614 “Agent or servant” vs. “independent contractor”
15.2.10 615 Treaty-protected businesses 15.2.11 616 Withholding of Part I tax –
Income from carrying on a business in Canada
15.2.12 616 Disposition of taxable Canadian property by a non-resident
15.2.13 617 Treaty-protected property 15.2.14 617 Waivers of withholding tax 15.2.15 617 Tax calculations 15.2.16 618 Audit considerations 15.2.17 620 Assessment procedures 15.2.18 620 References
15.3.0 621 Part XIII tax on income from Canada of non-resident persons
Guidance on the reporting of and the payor’s part XIII withholding obligations on payments to a non-resident, including options to elect to be taxed under Part 1 and certain treaty reductions of tax.
Audit guidance is also provided.
15.3.1 621 Legislative authority 15.3.2 622 Income taxed under Part XIII 15.3.3 622 Withholding obligations of
the payor
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Chapter Page Topic Notes for tax practitioners
15.3.4 622 Treaty reductions of Part XIII tax
15.3.5 623 Election by a non-resident to be taxed under part I
15.3.6 624 Non-resident beneficiaries of trusts
15.3.7 624 Audit considerations related to Part XIII tax
15.3.8 625 Other Interpretation Bulletins related to Part XIII tax
15.4.0 626 Residency
Information for auditors on residency, including emigration and audit considerations.
15.4.1 626 Overview 15.4.2 628 Residency of corporations 15.4.3 628 Trusts 15.4.4 628 Immigration – Becoming a
resident 15.4.5 629 Emigration – Ceasing to be a
resident 15.4.7 631 Audit considerations
15.5.0 631 Foreign based information and documentation
Useful for practitioners faced with CRA requests for information that is held by a non-resident.
Guidance on the CRA’s legal access to such information and remedies for non-compliance.
Overview of jurisprudence supporting the rights to access.
15.5.1 631 Overview 15.5.2 632 Potential conflict with
foreign laws 15.5.3 633 Definition of “foreign based
information and documentation”.
15.5.4 633 Requirement to provide foreign based information
15.5.5 634 Judicial review of foreign information requirement
15.5.6 635 Consequence of failure 15.5.7 636 Documents submitted after
the requirement date 15.5.8 637 Jurisprudence
15.6.0 638 Permanent establishment Guidance for the auditor on
whether a business’s income can be attributed to a “permanent establishment” in Canada and certain audit considerations when considering an opinion.
15.6.1 638 Permanent establishment for income tax purposes
15.6.3 640 Supplies between permanent establishments
15.6.4 640 Audit considerations 15.6.5 641 Examples
CRA Income Tax Audit Manual (May 2015)Highlights for Tax Practitioners 20
Chapter Page Topic Notes for tax practitioners
15.6.6 641 References 15.7.0 642 Foreign reporting
requirements
Information and guidance on the reporting required by Canadian residents who own property or interests in foreign property or trusts and have foreign-sourced income.
Guidance on audit consideration, penalties, required disclosures and the attribution rules may be quite useful for practitioners.
15.7.1 642 Overview 15.7.2 643 Rationale for foreign
reporting rules 15.7.3 643 Form T1134 15.7.4 643 Required disclosures and
related tax issues 15.7.5 644 Penalties 15.7.6 645 Audit considerations for
T1134 15.7.7 647 Form T1135 15.7.8 648 Audit considerations for
Form T1135 15.7.9 648 Form T1141
15.7.10 649 Audit considerations for form T1141
15.7.11 649 Non-resident vs. offshore trusts
15.7.12 649 Application of foreign accrual property income (FAPI) rules to trusts
15.7.13 650 Application of attribution rules to trusts
15.7.14 650 Audit steps to verify compliance with foreign reporting requirements
15.7.15 652 Procedure for requesting foreign reporting returns
15.8.0 653 Non-arm’s length transactions with non-residents
Guidance on the T106 form, the reason for its introduction and auditor’s use of the form when considering non-arm’s length transactions with a non-resident.
15.8.1 653 Form T106 overview 15.8.2 654 Form T106 contents 15.8.3 655 Form T106 as an audit tool 15.8.4 655 Form T106-risk assessment
15.9.0 656 Transfer pricing
Introductory information on transfer pricing goods service and intangibles and the arm’s length principle.
15.9.1 656 Overview
15.9.2 657 The arm’s length principle 15.9.3 657 The taxpayer’s responsibility 15.9.4 657 Transfer pricing penalties –
reasonable effort
CRA Income Tax Audit Manual (May 2015)Highlights for Tax Practitioners 21
Chapter Page Topic Notes for tax practitioners
15.10.0 658 Tax havens
Overview of compliance problems with “tax havens”.
Insight into international efforts to identify such havens and audit them for compliance.
Much of this section is devoted to drawing the auditor’s attention to internal manuals that provide more explicit guidance.
15.10.1 658 Tax haven audit guide 15.10.2 659 Tax haven grids 15.10.3 659 International tax alerts 15.10.5 659 Auditing in a tax have
environment 15.10.6 660 Taxpayer specific knowledge 15.10.7 660 T106 Audit Guide and
Reference Manual 15.10.8 661 Foreign Reporting Audit
Guide 15.10.9 661 Form NR4
15.10.10 662 International Audit Guide and Reference Manual
15.10.11 662 Other tax administrations
15.11.0 662 Tax treaties
Information on Canada’s tax treaties, their purposes and some key audit considerations.
15.11.1 662 Overview 15.11.2 663 Income Tax Conventions
Interpretations Act 15.11.3 664 General anti-avoidance rule 15.11.4 664 Relief from double taxation 15.11.5 664 If no treaty exists 15.11.6 664 Permanent establishment 15.11.7 665 Income from real property 15.11.8 665 Business profits 15.11.9 665 Capital gains 15.12.0 665 Other international tax
services
Information on the film services unit and the taxation of passive income under the FAPI rules, noting that the auditor can get some highly specialized help in these areas.
15.12.1 665 Film services unit 15.12.2 666 FAPI and foreign affiliates
15.12.2.1 667 Questions related to foreign affiliates
15.12.3 667 Foreign investment entity 15.12.4 667 Competent Authority
Services Division 15.12.5 668 Exchange of information and
simultaneous audit programs Chapter 16.0 – Clearance certificates, estates and trusts
16.1.2 671 Processing requests-deceased taxpayers and trusts
Basic information on tax clearance certificates that must be obtained from legal representatives before 16.1.3 673 Corporations with leave to
surrender charter
CRA Income Tax Audit Manual (May 2015)Highlights for Tax Practitioners 22
Chapter Page Topic Notes for tax practitioners
16.2.0 677 Estates and Trusts Program the distribution of property to beneficiaries.
Audit considerations are included. 16.2.1 678 Introduction
Information on the taxation of trusts and estates including audit considerations.
16.2.2 679 Estate of a deceased person 16.2.3 689 Income allocated and
designed to beneficiaries 16.2.4 690 Preferred beneficiaries 16.2.5 696 Bare trusts 16.2.6 700 Mutual fund trusts 16.2.7 701 Real estate investment trusts 16.2.8 709 Designation under 104(2)
ITA Appendix 714 Letters, checklists
Chapter 19.0 – Objections and Appeals
19.1.0 738 Introduction
Basic information on the taxpayer’s objection time limits and appeal processes.
19.2.0 738 Objections
19.2.1 738 Time period to file 19.2.2 739 Filing the notice of objection 19.2.3 740 Review process 19.2.4 740 Restrictions 19.2.5 740 Further recourse 19.3.0 740 Appeals
19.3.1 740 Introduction
Information on the taxpayers’ right to appeal to the courts.
19.3.2 740 Tax Court of Canada 19.3.3 743 Federal Court of Appeal 19.3.4 743 Federal Court Trial division 19.3.5 743 Supreme Court 19.3.6 744 Other references and related
topics