Today the CRA announced it will take a new approach to improving tax compliance among small and medium sized businesses. This approach is designed to help prevent errors in businesses’ tax returns up front rather than finding them in CRA audits after the returns are filed. According to the CRA, the new approach is intended to “reduce red tape” for businesses and make it easier for them to comply with their tax obligations.
The new approach has three parts:
- An enhanced focus on taxpayers the CRA considers to be at a high risk of non-compliance
- A Liaison Officer Initiative, which will provide small and medium sized businesses with in-person information and education on tax compliance
- A program to require paid tax return preparers to register with the CRA.
The CRA says it will enhance its focus on taxpayers it considers to be at a high risk of non-compliance. The CRA will use improved business intelligence, specialized audit teams focused on specific sectors, and letter writing campaigns to inform taxpayers about areas where they may not be complying with the tax law. The CRA will continue to use its traditional audit practices as well. This process is already underway, according to the CRA.
The non-compliance risk assessment of small and medium sized businesses is similar to the CRA’s approach to assessing non-compliance risk among taxpayers with annual revenue of more than $250 million that it started in 2010. The CRA’s new plan for smaller taxpayers is also intended to provide a better allocation of CRA resources.
The new Liaison Officer Initiative is intended to provide guidance on tax compliance to small and medium sized enterprises at key points in their business cycle, for example, on start-up or when they hire employees. The CRA believes this support will help small businesses better understand their tax obligations so they will avoid making mistakes in their tax filing and avoid costly and time-consuming interventions from the CRA after they file their tax returns.
The CRA says it will begin a pilot program in Ontario by February 2014 to be followed by a second pilot in Quebec in early 2014/15.
KPMG observation — “Right from the Start” audit approach
The new CRA audit approach for small and medium sized businesses, including the Liaison Officer initiative, is in step with the OECD Forum on Tax Administration’s 37-page paper entitled “Right from the Start: Influencing the Compliance Environment for Small and Medium Enterprises”, released in January 2012.
This concept of “Right from the Start” is a tax compliance approach that many tax administrations around the world have embraced. This approach places greater emphasis on the need to create an environment that supports what the tax authorities call “compliant” behavior while at the same time reducing opportunities for non-compliant behavior. This approach is based on the premise that “intervention at the start of the taxpayer’s ‘tax chain’ is more effective then checking individual tax returns afterwards.”
This new approach is in contrast to the traditional audit approach that tends to be after-the-fact and focuses on the audit of the tax return, which by nature targets events from the past. This traditional approach is not cost-effective because it involves costly audits as the primary measure of effectiveness. The use of Right from the Start strategies by tax administrators is designed to be cost-effective and save resources while at the same time creating benefits for the taxpayer through better service.
Under the Registration of Tax Preparers Program, tax preparers who prepare individual and corporate income tax returns for a fee would be required to register with the CRA. The CRA’s proposal to register tax preparers is intended to determine which preparers are making common and recurring errors in their clients’ tax returns and to address these errors proactively.
When it finds errors in returns prepared by a tax preparer, the CRA says it will take actions that may include follow-up visits, action plans or auditing the tax preparer’s clients.
The CRA has released a 12-page consultation paper on this proposed program and is seeking comments from stakeholders including the tax preparer community. The consultation process will conclude at the end of May 2014. The CRA expects to launch the program during the 2016-2017 fiscal year.
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Your KPMG adviser can help you assess the effect of the CRA’s new approach to small and medium sized businesses’ tax compliance on your business, and point out ways to take advantage of any benefits arising from the new approach or help mitigate its impact. For more details on this new program and its potential impact, contact your KPMG adviser.
Information is current to January 17, 2014. The information contained in this TaxNewsFlash-Canada is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG’s National Tax Centre at 416.777.8500.
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