Businesses can take steps ahead of time to help alleviate some uncertainty around audits and can take other steps during an audit to help with the final outcome.
Audit and risk on the rise
Tax authorities’ audit activities appear to be increasing across Canada in all areas of indirect taxes, including GST, HST as well as provincial sales taxes. This increased focus on indirect taxes appears to be consistent with the global trend.
Over the last few years, the complexity of Canadian indirect taxes has increased significantly and will likely continue to do so. The many recent changes to the GST/HST and the provincial sales taxes and new taxes such as provincial environmental levies are all contributing to this complexity and raising the risk of tax errors and potential assessments. Like many other jurisdictions, indirect tax audits by Canadian tax authorities and related appeals have various steps and can take several months or years to be completed.
In addition, the Canada Revenue Agency (CRA) is looking at large businesses and evaluating whether the businesses have implemented a framework to manage taxes – including indirect taxes. In the absence of proper processes and controls the organizational tax risk rating from the CRA is likely to increase, resulting in increased scrutiny.
Take action now
Facing an indirect tax audit without a strategy to respond and resolve potential tax disputes with tax authorities can lead to uncertainty and inefficiency, and also result in lost opportunities to recover overpaid taxes. While an audit can consume a lot of energy and resources, it is also a good time for a business to review its operations to look for opportunities. For example, the CRA is required by law to take into account most related GST/HST allowable credits or rebates when it raises an assessment for a particular assessment period, even when recovering these amounts would be statute-barred under normal circumstances. A recovery of overpaid taxes put against an assessment can reduce not only an assessment but also any related interest.
Companies can take some steps ahead of time to help ease the administrative burden of an indirect tax, including:
- putting checks and balances in place to actively manage and address indirect tax risks on a regular basis
- documenting tax transactions
- instigating a strategy for interacting with the tax authorities during an audit, such as planning how to deal with audit queries and allocating specific resources.
Once an audit has started, companies can again take additional steps to help with the outcome of the audit, including:
- quickly identifying unclaimed credits and rebates with the use of advanced programs
- challenging the methodologies used by the tax authorities, such as sampling sizes, extrapolations and error rates
- reviewing the tax authorities’ technical positions on some issues.
The thought of an upcoming indirect tax audit can be daunting, but it doesn’t have to be overwhelming. Planning ahead can save money and time.