This article was originally published by the Lawyers Daily on November 16, 2021.
As businesses worldwide invest in data science, so do the tax authorities. The Canada Revenue Agency has made significant investments in advanced analytics that would allow them to gather data and perform audits. It is safe to assume that tax audits of the future will be designed to analyse accounting data, not boxes of paper documents or PDF copies.
At least eight countries around the world have implemented mandatory, standardized, digital file requirements for indirect tax audits. More countries are considering it. Canada is not far behind.
There are reports of the CRA working with business owners to advance thinking on using real-time data from electronic invoicing to speed up GST/HST collections. According to the CRA’s Departmental Plan for 2019-2020, the current focus is on the analysis of external data (i.e., real estate transactions, luxury purchases, large bank transfers). However, finding a way to analyse the taxpayer’s internal accounting data appears to be within the reach of the CRA. There would be no need to enact new law, since the CRA auditors’ power to “inspect, audit and examine” under the Income Tax Act (“ITA”) and Excise Tax Act (“ETA”) already includes requiring a taxpayer to provide electronic accounting data in any form.
This was recently confirmed by the Federal Court in Tellza Inc. v. Canada (National Revenue), 2021 FC 853 released on August 19, 2021. The decision examined the scope of audit powers of the CRA within two different provisions of the ETA. Tellza, a telecommunications company, was undergoing an HST audit. The auditors sent a letter requesting all Tellza’s electronic accounting data for the audit period, including, where applicable, the username and passwords of the system administrator, and referencing subsection 288(1) of the ETA.
Tellza questioned the nature of the CRA’s letter; if it was a “requirement” to provide documents, subsection 289(1) of the ETA governed and a senior CRA official should have issued the letter. Furthermore, Tellza argued that the CRA auditors had no general power to require electronic or other documents under subsection 288(1). Only when the auditors inspect business premises can they request assistance in locating documents. The Minister argued that the letter was a “request” under subsection 288(1), not a “requirement” under subsection 289(1). As such, the letter did not have to be issued by a senior CRA official. Tellza then brought a judicial review application to the Federal Court.
In very general terms, subsection 288(1) of the ETA gives the CRA auditors the power to “inspect, audit or examine” documents that may be relevant in determining someone’s tax obligations under Part IX of the ETA, or any rebate or refund. For these inspection purposes, the auditor may enter the business premises and require the owner or another person on the premises to provide assistance, or to answer questions. The parallel provision in the ITA is subsection 231.1(1).
Subsection 289(1), however, provides the CRA with powers to issue a Requirement for Information (“RFI”) for any purpose related to the administration or enforcement. The CRA can issue an RFI for “any information” or “any document.” Only specified CRA officials have the power to issue an RFI and there are service requirements. Special rules and enforcement limitations apply to RFIs for foreign-based information. The parallel provision for RFIs in the ITA is subsection 231.2(1).
The Court considered whether the CRA auditors’ letter was a “requirement” or a “request,” and concluded that it did not matter. The letter was within the Minister’s power to inspect, audit and examine in subsection 288(1). The Minister’s “inspection powers” relate to the person who has documents, property or processes that can be inspected, and are not limited to the person’s physical office or warehouse. In the modern digital world, the Minister does not need to enter the taxpayer’s physical premises in order to carry on its inspection powers. The Court also noted that the definition of “document” in the ETA includes a record, and a “record” is defined as including any other thing containing information, whether in writing or in any other form (subsection 123(1) of the ETA).
If the Court’s broad comments on the format of the CRA request in Tellza are any indication, we may see in the future fewer requests for PDFs and Excel spreadsheets, and more audits of accounting data systems. Currently, we see requests for electronic data in audits involving large volume of information, but the practice may expand to more routine audits.
Of course, it’s already crucial to keep accurate accounting data, but it will become even more important. Tax audits will get faster, less expensive, more targeted, and more accurate. But, at the same time, they will become more invasive for taxpayers.
We are always happy to hear our readers' questions and comments. If you are dealing with an unusual demand for information from the CRA, please email us at email@example.com.
Please note that this post is only as current as its publishing date indicates, but the relevant rules change constantly.