As the United States wrestles with increasing income tax rates, the Canadian government is attempting to raise its revenue by compliance. The 2013 Federal Budget stated that the Canada Revenue Agency will be implementing transformational changes to its compliance programs with the goal of collecting an additional $550 million by 2014-15. At the same time, the CRA will be implementing over $60 million in cost savings by streamlining its services.
The leaner staff will accomplish the sizable revenue gains by greater use of advanced data analysis. Specifically, the implementation of filing your tax returns according to the General Index of Financial Information (GIFI) a few years back provides the CRA with a wealth of detection tools. If your filing for business promotion does not fall within the range of other similar filers, then you can expect a review as a possible high risk. If an expense is not within a consistent range of your prior filings, then a red flag will be raised by the computer for investigation.
Random audits have been replaced by risk profiling with particular attention to high wealth individuals, missed filing deadlines, amended returns, inaccurate filings, and those with a history of aggressive tax planning. Many of these attributes are common to law firms.
Canada is also a committed member of the Organization for Economic Co-operation and Development (OECD) that is seeking “tax morality” notably through their work on Base Erosion and Profit Shifting (BEPS). Base erosion being the underground economy and profit shifting resulting in lost tax in a global economy. The interchange of information, among OECD countries, now challenges those that thought they could escape taxes by going off-shore.
How do law firms adapt to this new tax trend? Assisting clients with compliance issues will be an expanding practice area. Tax planning should now be viewed through “tax morality” to limit the risk of impacting your client’s brand. Beware of common tax compliance failures such as automobile expense, shareholder loans, restricted expenses, unsubstantiated bad debt allowances, associated companies, and the many complexities of HST/GST client billings.
In most cases, the annual review by your accountant will not reveal your exposure to the wide range of tax issues (read your engagement letter). A separate tax review may be a worthwhile investment.