Tips, guidance for navigating audits of Canada Emergency Wage Subsidy claims
Wednesday, June 09, 2021 @ 11:06 AM | By Paul Lamarre, Marie-France Dompierre and James Trougakos
1. Pre-emptive beats passive every time
Document everything from the start!
The CEWS was adopted quickly and modified multiple times. The administrative positions on which a claim for a given qualifying period is based may have changed over time: for instance, the CRA’s “Frequently Asked Questions” webpage makes notable administrative concessions, but has gone through several iterations since its inception.
It is therefore important to properly support and document your claim contemporaneously, including with archived copies of relevant published government documents and online resources as they appeared at the time.
The CRA has a comprehensive history of taxpayers’ reported revenues and a wealth of other information it will use to detect discrepancies in a CEWS claim. Business intelligence data will be a useful tool for the CRA to identify ineligible recipients in the course of a CEWS audit. Accordingly, the consistency of information provided to the CRA should be kept in mind.
A well-prepared employer will have immediate answers for an auditor at the inception of an audit and will thereby demonstrate, both subjectively and objectively, that its claim was prepared diligently and with care. This may help reduce the scope of an audit and increase the claim’s credibility.
Also, it is possible to argue the “due diligence” defence against certain penalties that may be assessed under the Income Tax Act (ITA) in respect of a CEWS claim. The defence of due diligence is based on an objective standard: it requires consideration of what a reasonable person would have done in similar circumstances.
2. Segregate documents protected by solicitor-client privilege
Tax authorities are not entitled to access documents that are protected by solicitor-client privilege. Broadly, solicitor-client privilege applies to confidential communications between a lawyer and client relating to the research, development or provision of legal advice. A taxpayer must be careful not to accidentally waive privilege by delivering privileged documents to tax authorities.
To avoid mistakes, documents protected by solicitor-client privilege, such as legal opinions discussing an employer’s eligibility for the subsidy, the computation of qualifying revenue, or even whether it’s reasonable to conclude that one of the main purposes for entering into a transaction was to increase the amount of CEWS, should be stored separately from other documents prepared in support of the CEWS (or any other COVID-19 support) claim.
3. Designate a single contact person
It is important to identify a single person as the employer’s contact person with the CRA. Any other person not identified as the primary contact person should refrain from communicating with the CRA, either formally or informally.
Limiting the number of persons in contact with the CRA will allow questions to be answered in a consistent manner while reducing the risk of conveying erroneous, incomplete or even conflicting information. (Note: The CRA recently stated that CEWS audits will be similar to other audits conducted under the ITA and they will likely begin with a call or a letter.)
Whenever possible, all exchanges with the CRA should be in writing. This could be important if the primary contact person or any other person involved in the claim should leave the company in the future. Furthermore, since an audit could take place several years from now, these records will help refresh these individuals’ memory at a later stage.
Challenging a CRA determination
Under the ITA, the CEWS is distributed by deeming an eligible employer that qualifies for a subsidy to have overpaid income taxes by an amount equal to the amount of the subsidy it is entitled to under the program. Therefore, the CRA will pay the deemed overpayment as a refund following its approval of a CEWS claim.
For claims submitted after Sept. 21, 2020, a notice of determination and/or notice of assessment will be issued if the claim is denied, in whole or in part. If an employer disagrees with the CRA’s determination, it may challenge such determination in accordance with the usual recourse in tax matters.
(Note: The CRA had announced that the administrative review process would apply to CEWS claims denied, in whole or in part, prior to Sept. 21, 2020, and for which a request for review was made within 30 days of the date of the letter setting out the CRA’s original decision. The decision following the second review will be communicated to the eligible employer in writing and subsequently a notice of determination or notice of assessment will be issued for the claim period.)
A taxpayer has 90 days from the date of a notice of assessment, reassessment or determination to file a notice of objection and 90 days from the decision of the CRA with respect to their objection to file a notice of appeal to the Tax Court of Canada.
A notice of determination may be issued “at any time” by the CRA. Thus, CEWS audits could continue for many years into the future. This is consistent with the minister of national revenue’s statements in March 2021 indicating that ongoing CEWS audits and compliance activities will continue over the next several years.
This is unusual, as the ITA does not contain many provisions that are not subject to limitation periods as is the case here. Moreover, for the time being, a taxpayer appears unable to request that a notice of determination be issued or that an audit of its CEWS claim be initiated, unlike, for example, a request for a notice of loss determination which can be requested by a taxpayer pursuant to the ITA.
This is part two of a two-part series. Part one: CRA commences comprehensive Canada Emergency Wage Subsidy audits.
Paul Lamarre is a partner at Davies Ward Phillips & Vineberg LLP. He advises multinational corporations on their domestic and international tax planning. Marie-France Dompierre, a partner at Davies, works with Canadian and international clients to avoid, manage and resolve all types of disputes with provincial and federal tax authorities. She represents clients before the Tax Court of Canada, the Federal Court, the Federal Court of Appeal, the Quebec Court of Justice and the Quebec Superior Court. James Trougakos is an associate at Davies who assists clients on a range of tax matters, including tax planning and dispute resolution before the tax authorities.
Photo credit / Nuthawut Somsuk ISTOCKPHOTO.COM
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