Part of the GST webinar series - CCH

Part of the GST webinar series

Presenter

Sheila Wisner, CASW Consulting

Advisor and Trainer, Author- CCH Suite of GST Products

SESSION OBJECTIVE

Familiarize participants with information resources available concerning GST Audits in CRA’s The Audit Manual

AGENDA1. T.O.C. - The Audit Manual2. Audit Selection & Planning3. Conducting The Audit4. Assessments5. Mid-Webinar Break6. Working For The Taxpayer7. Issue Specifics8. Industry Sectors9. Questions

The Audit ManualSection I -Audit Policies and Procedures

Section II - Technical Issues

Section III- Sector Profiles

The Audit Manual Table of Contents

Section I - Audit Policies and Procedures:

Chapter 1 – The Audit Manual – Organization, Purposes and Uses Chapter 2 – The Canada Revenue Agency Chapter 3 – Fairness and Client RightsChapter 4 – Auditor’s Standards of Conduct, Authorities and ResponsibilitiesChapter 5 – Human Resource Issues Chapter 6 – Organization of the Audit Divisions in the Tax Services OfficeChapter 7 – Compliance Programs BranchChapter 8 – Audit Selection – Risk AssessmentChapter 9 – Audit Planning and Preparation


Section I - Audit Policies and Procedures (cont’d)

Chapter 10 – Conducting the AuditChapter 11 – Finalizing the Audit Chapter 12 – Specific Audit Guidelines and ChecklistsChapter 13 – Audit TechniquesChapter 14 – GST/HST Prepayment ReviewChapter 15 – International Audit IssuesChapter 16 - Clearance Certificates, Estates and Trusts Chapter 19 – Objections and Appeals


Section II – Technical IssuesChapter 20 – Valuation of InventoryChapter 21 – Administration Chapter 22 – Bankruptcy, Receivership and Insolvency Chapter 23 – Capital Property Issues Chapter 24 –Related Persons, Corporations and Shareholders, DividendsChapter 25 – Future use Chapter 26 – Expenses / Input Tax Credits Chapter 27 – Income / SuppliesChapter 28 – Penalties Chapter 29 – LossesChapter 30 – Future use Chapter 31 – Import / Export Issues

Section III – Sector Profiles – Chapter 40

The Audit Manual in CCH Online

Audit Selection &

Planning

Risk AssessmentSources

• Industry Risk • CAAS (8.2.3)• Financial Statements (8.2.5)• Referrals (8.2.3)• Ongoing Audits

Risk Assessment ProcessFile Review (8.3.5)

– Matching– Reasonableness– Expectation of Profit

Revenue Risk

Audit SelectionFinal Audits

-GST / HST Deregistration

Areas of Risk-Disposition /Seizure of Property-Supply of Business Assets

- Insolvent Registrants- Change in

Ownership/Legal Status

Audit SelectionNon-Compliance Projects• Homogenous Group of Taxpayers

(Industry Association Consultation)• Non-Registrants• Unfiled Returns• Specific Sectors

Repeat Audits (9.12.4)

Refund-Audit Risk Assessment Variables

• Nature of business• Reporting history / account status• Audit history• Local TSO / Auditors knowledge• Amount of Refund/Thresholds (14.3.0)• Maturity of Business• Economic Conditions• Type of claim / rebate(14.5.5)

Refund-Audit Selection Criteria (14.2.7)

• Claims by non-residents• Registrants without GST collectible• Exceeds threshold limits• Exceeds cumulative limits• Even dollar / previous match

Refund-Audit Selection Criteria (14.2.7)

continued

• Non-registered accounts• Statute barred• New Registrant• Netfiled / Telefiled and Over Threshold• Revenue Quebec rejects

Audit Planning-Preliminary Review Sources

• Prior Audit Information• Collections Information• Historial Information / filing history• Sector Profiles• TSO Specialists

Financial Statement Review

• Ratios (9.4)– Gross Profit Ratio– Inventory Turnover– ITC to GST/HST Ratio

• Comparative Analysis/prior years (9.4.8)

Putting The Audit PlanInto Action

• Review Registrant File• Meet with Team Leader• Contact Taxpayer• Confirm in writing with Taxpayer• Time Budget• Scheduling

Audit Selection & PlanningMiscellaneous

• Unfiled Returns• CRA audit codes / action codes• Non-disclosure agreement• Rules of Audit• Combined Audits

CONDUCTING THE

AUDIT

The Audit Period

• Legislation• One-plus-One• Prepayments• Extended Audit Period• Re-Auditing a Period• Waiver (11.4)

Audit EvidenceTypes of Evidence•Circumstantial•Documentary•Expert Opinions•Affidavits•Hearsay (not evidence)

Third Party Evidence•Supplier/Clients/other•Financial Inst.•Accountants (10.6.7)

•Lawyers (10.6.8)

•Solicitor-Client Privilege

Demand For Information

Chart at 10.8.4

Consultation vs. Referral

Referrals•Collections•Customs & Excise•Other TSO•Income Tax

Consultation•Other Federal depts•Provincial Gov’ts•Countries w Treaties•Dept of Finance HQ

Section 10.11 of The Audit Manual

Testing

• Reasonableness Tests• Net Worth Audit• Computer Assisted Audit Techniques

(CAAT)

Computer Assisted Audit TechniquesExample 2 – Sales to Provincial GovernmentsExample 3 – Export SalesExample 4 – Zero-Rated SalesExample 6 – Review Expenses for Possible

BenefitsExample 7 – Review Numerical Sequence of Work

Orders

Section 13.1.8 of The Audit Manual

Auditing Expenses / Input Tax Credits

• Internal Controls• Cut-Off Techniques• Documentary Evidence - Testing Invoices• Purchase Adjustments/Discounts• Volume Rebates / Returns• Personal Expenses• Travel & Entertainment• Non-Arms Length acquisitions

Auditing Expenses / Input Tax Credits• Prorated / Allocated Expenses• Journal Entries / Audit trail• Bad Debts• Collection ExpensesCatch-all accounts:• Miscellaneous • Advertising Expense


Auditing The Financial StatementsBalance Sheet (13.8)

•Asset Dispositions•Bank Accounts•Sale of Receivables•Inventory turnover•Investment volume / exempt income•Goodwill

Income Stmt (13.9)•Accrual vs. cash basis•Types of Sales, T,E,Z•Black market / Cash sales•Conditional / Instalment Sales•Bad Debt Expense•Servicing of receivables

Note…auditors read the notes to financial statements

Exempt Supplies Checklist


Zero-Rated Supplies Checklist


Auditing Rebate Claims• Registrant vs non-registrant rebates• Tax Centre Processing procedures

– Verification of Information– Tax Centre reviewer– Referral to TSO

• Contacting the Claimant• Types of Rebates


Conducting The AuditMiscellaneous

• Auditing using proposed amendments (12.3)• Elections & Applications (12.4)• Amended Audit (12.7)• Tax-Included vs. Tax-Extra (12.10)• GAAR & Tax Avoidance (10.11.6)

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ASSESSMENTS

Finalizing The Audit• Checklist• Negotiations (11.2)

• Off-setting Adjustments (12.15)

• Proposal Letter• Final Meeting

File Completion Checklist (11.1.1)

1. Review all working papers and ensure that they are properly cross-referenced and that findings are clearly summarized.

2. Have all the audit concerns been addressed? Where a previous audit indicated that follow-up was required to ensure that the registrant was in compliance, have these issues been addressed?

3. Discuss and resolve any contentious issues with the team leader prior to the final interview with the registrant.

4. Is there a need to assess additional penalties?….cont’d

File Completion Checklistcontinued

5. Discuss the proposed adjustments with the registrant and provide a copy of the SAA and supporting working papers. Determine whether the registrant concurs. Allow 30 days for the registrant to review the adjustments and provide additional information.

6. ….7. …8. Complete the collection report if required.9. Have all significant issues raised by the registrant been

clearly answered?

Audit Agreement

• No Change Audits• Accepting Payment• Compliance Letters• Waiver of Right of Objection or Appeal

Assessment Based on

Estimate & Projections (13.6)

• Legislative Authority• Circumstances That Warrant Projections• Reasonable Projections• Circumstances That Do Not Warrant Projections• Types of Projections

Assessment Period (11.3.2)

• Normal Assessment Period• When assessment prohibited• Exceptions to normal periods

Interest & Penalties

• General Rules of Application• Failure to file return or Provide Information• False Statements or Omissions• Failure to Remit / Pay

Chapter 28 of The Audit Manual

Legislative Authority


S. 285 Gross Negligence PenaltyForms of Gross Negligence

• the taxpayer/registrant was negligent • the taxpayer/registrant is not credible • the taxpayer/registrant's explanations about how the errors and omissions occurred

are not reasonable • the taxpayer/registrant's explanations are incompatible with the facts of the case • the taxpayer/registrant should have been more careful and should have known that

the returns and statements included irregularities • the taxpayer/registrant did not make an honest mistake • if a penalty under subsection 163(2) of the ITA and/or section 285 of the ETA is not

recommended, a penalty under subsection 163(1) of the ITA should be considered


Objections & Appeals

• N.o.O. Time Period• N.o.O. Extension of Time to File• Appeal to Tax Court• Informal Procedure

Chapter 19 of The Audit Manual

Working For the Taxpayer

Working For The Taxpayer• Access to Information• Voluntary Disclosure• Wash Transaction• Ruling & Interpretations• Taxpayer Requests & Amended Returns• Positive Adjustments• Waiver of Interest & Penalties

Access To Information

• Formal Requests• Informal Requests• Information that may be release• Information not released• Instructions to process


Voluntary Disclosure Program

• Purpose• Conditions• Process• Benefit• No-Name Disclosures


Wash Transactions

• What is a Wash Transaction?• Situations that Qualify• Situations that do not Qualify• I & P Concession• Audit Considerations


Rulings & Interpretations• Advance GST/HST Rulings• Application GST/HST Rulings• GST/HST Interpretations• Rulings Centres• Business Window• Rulings Requested by Audit


Ruling Request LettersShould include:• name and address of the person making the request• registration number of the requester where applicable• third party authorization where the request is made by a third party on behalf of their client• a complete description of the facts and the transaction or proposed transaction• for advance rulings — a statement of purpose of the transaction, the person's interpretation

of the application of the ETA and a description of the concern• a description of significant transactions completed before the request for ruling• a summary of relevant facts in supporting agreements or documents• confirmation that the ruling will not result directly or indirectly in misuse of the provisions of

the ETA in respect of the general anti-avoidance rule• other relevant information or material


Taxpayer Requests&

Amended Returns

• General Adjustment Forms (12.1.4)

• Audit Procedures

The Audit Manual on CCH Online

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Issue-Specifics

Employee Benefits

• Auditing Employee Benefits (12.2)• Technical details, calculations• Jurisprudence & guidance references

Section 27.10.3-7 of The Audit Manual

Taxable Benefits Checklist•Automobile Allowance•Parking provided by employer•Interest Free / Low interest loans•Stock purchase options•Incentives / Prizes•Gifts•Relocation Expenses•Personal expenses

•Insurance plan payments•Wage Loss Replacement plan•Rent-free or low-rent housing•Retirement payments •Termination payments•Employer contribution to RRSP•Extraordinary travel and meal allowances•Tuition Fees

Agents/Reps/Direct Sellers• Agents (27.1)

• Auctioneers (27.2)

• Direct Sellers (27.22)

• Purch & Sales Reps to non-residents (27.29)

• Lots of references• CCH Commentary [¶4200] Agents,

Auctioneers, Artists, and Direct Sellers

•Lawyers Disbursements•Coin-Operated Devices•Re-supplies•Damage Payments•Professional Income•Foreign Currency Exchange•Trade-Ins

•Combined/Mixed/Multiple Supplies•Warranty Claims•Employed vs Self-Employed•Lease Inducements•Farming / Fishing / Feed / Fertilizer•Promotional Allowances

Chapter 27

Industry Sectors

Industry Sectors Chapter 40

40.1 Accounting and Bookkeeping Services40.2 Architects40.3 Barbers/Hairdressers40.4 Dentists40.5 Excavation Contractors40.6 Florists, Lawn and Garden Centres40.7 Jewellery Stores 40.8 Management Consulting Services 40.9 Restaurants40.10 Pharmacists40.11 Healthcare Professionals – Physicians and Surgeons 40.12 Veterinary Services 40.13 Drywall Contractors40.14 Hospital Authorities 40.15 Education Sector Profiles40.16 Charities

40.4 Dentists– Introduction,Overview, Industry Structure– Accounting Practices– Taxable Revenues & Supplies– Books and Records– Specific Audit Checks

• Associations with universities, etc for additional income• Substitute for other dentists – ie, inter-office payments• Rent of parking space• Management or Admin company used?• Part of practice sold, shared with other dentist?

Public Sector

Bodies

Chart at 40.14.3 of The Audit Manual

Public Sector Bodies

• Legislation• Plannning The Audit• Common Audit Issues• Chapter 40 - 40.14, 15, 16

• Games of Chance (27.3)

• Exempt Supplies Checklist (12.8)

• CCH Commentary [¶45-000] Charities, Non-Profit Organizations, Governments


Charities - Legislation

Public Sector Bodies

Sale of real property by school authority, public college or university

Chart at 40.15.2 of The Audit Manual

Summary

1. Industry Sectors2. Issue Specifics3. Working For the Taxpayer4. Finalizing The Audit & Assessments5. Conducting the Audit6. Audit Selection & Planning7. The Audit Manual Contents

Thank-you, from

Sheila Wisner&

CCH Canadian Limited

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Part of the GST webinar series - CCH