Canadian Tax Adviser
December 6, 2011

CRA’s Risk-Based Audits of Large Corporations — New Phase of CFO Interviews Begins

Paul Lynch
Ottawa, National Tax Centre

The CRA will begin interviewing senior executives in January 2012 to understand the types of tax governance structures that large corporations have for their tax function. The results of these executive interviews, which are a new phase of the CRA’s risk-based audit approach of large corporations, will be factored into these corporations’ risk assessment grades. Up until now, the CRA has graded large corporations using mainly internal information.

Background
The CRA announced a new risk-based audit process to determine risk categorizations for large taxpayers (defined as groups with more than $250 million in annual revenues) in the spring of 2010. Under this program, large taxpayer groups will generally be graded as low, medium or high risk. The CRA grade is intended to reflect the tax filing and compliance history and tax governance structure of large corporations. The CRA grade depends on several factors and the rating can change over time.  

Among other things, organizations that have a strong tax governance structure and a history of cooperation with the CRA may be assigned a lower risk grade, and will experience limited audit coverage and a faster disposition of issues. Higher risk groups will undergo more rigorous audits and additional demands for information.

CRA scheduling interviews
We understand that the CRA is currently contacting approximately 50 corporations about interviews, which will be held by March 2012. CRA officials will meet with senior corporate officials who are, or should be, responsible for overseeing tax matters to discuss tax risk management and corporate governance. Over the next several years, all large corporations in Canada will go through this process.

The results of these discussions with audit committees and senior executives, along with other criteria the CRA determines, will result in a low-, medium- or high-risk grade for the company. The CRA has determined preliminary risk grades for all large Canadian corporations, based on its own internal information, but is seeking information that it may not be aware of on tax risk management policies or other tax governance matters. Strong tax governance can reduce a corporation’s overall risk grade and therefore reduce its tax compliance burden.

Prepping for the CRA interview
Tax risk includes tax positions that may create uncertain or unplanned outcomes involving tax responsibilities. Exposure to tax risks involves all business operations. Audit committees and senior executives should be prepared to answer the CRA’s questions about:

• Who is responsible for issues that generate tax risk
• How tax risks are identified, assessed, evaluated, controlled and monitored
• How tax risks are reported and who they are reported to
• How tax risks interact with reputational and financial risks and corporate social responsibility.

The CRA will assess a range of corporate governance principles related to tax decision-making and discuss them with the taxpayer to ensure that all tax risks are properly identified and addressed on a timely basis. The CRA will be probing for the following kinds of information in the interview:

• Is there a sound framework to manage tax risks and comply with tax obligations?
• Is there a strong in-house tax capability?
• Are tax positions determined inside or outside the business?
• Are significant tax risks elevated to decision-makers such as the CFO, Chief Executive Officer, the Board or its Audit Committee?
• Are there appropriate review and sign off procedures for material transactions?
• Is there an effective tax risk mitigation capability including the corporation’s relationship with the applicable tax jurisdictions?
• Is there capacity to regularly evaluate the effectiveness of tax governance systems?

For more information, contact your KPMG adviser.

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