May 25, 2020
There has certainly been no shortage of new Canadian tax acronyms to learn over the past couple of months. Between mid-March and late-April, it felt like a new government program (or a change to an existing program) was being released every hour. On more than one occasion, I had sat down to write a short informative piece on a new program, only to find out that the program had changed before I could publish!
However, now that the initial rush to understand these various programs has partially subsided, it is important to start focusing our attention on the potential audit risk associated with participation in these programs.
I recognize that the Federal Government has put most audit activity on “hiatus”. Nevertheless, Canada Revenue Agency (“CRA”) has stated that all Canada Emergency Wage Subsidy (“CEWS”) applications will go through an automatic audit to check for possible discrepancies or errors, and applications that raise “red flags” or are requesting an amount over a certain (unnamed) threshold will go through a manual audit that could take a few extra days. The National Post reported that CRA has 3,000 auditors working on CEWS applications. (See: https://nationalpost.com/news/canada/online-calculator-to-help-businesses-determine-eligibility-for-covid-19-wage-subsidy-released-by-feds)
Anytime a taxpayer is applying for a benefit, or claiming a deduction, it is always prudent to have contemporaneous documentation to support the validity of the application. It is not advisable to play Russian roulette with CRA on the assumption that an audit might not occur. Not only does that fly in the face of the very foundation of our tax system (i.e., reliance on self-assessment and the effort by taxpayers to comply with the law), but it is also a very risky venture, given the change in audit process over the last few years. The CRA has overhauled its computer system and now has the ability to target taxpayers based on certain line items, or the results of a computer-generated algorithm.
Therefore, it is my advice that taxpayers should be keeping a file in connection with each application (either electronic or a paper copy) which includes (at minimum) the following:
- A summary of the relevant government program (including qualification criteria). At the end of this post, I provide a link to the government summaries for several programs.
- A short (point form) summary of why the taxpayer meets each of the qualification criteria.
- Supporting documentation to prove the calculations that led the taxpayer to believe they qualified for the program. (For all you folks who love spreadsheets, here is your big moment!)
- A copy of any forms, or declarations that had to be provided in support of the application.
- A copy of the confirmation of application (including the date of application).
- And finally, for those programs where there are parameters on the usage of the funds, the file should also contain tracking documentation for use of the funds (i.e., bank statements, relevant excerpts from the General Ledger etc.).
This type of file should be kept for each application that is made. For example, there should be a folder for the CEWS application, and a folder for the Canada Emergency Business Account (“CEBA”) application. This type of file will also be of assistance when the taxpayer is gathering documentation to file his/her/its 2020 tax return, as there is a taxable component to almost all of the programs.
Some may read this post and conclude that I am being over-dramatic. That is not my intent. On many occasions, I have been witness to the power of readily-available documentation that can be provided on request. I think it is important to raise awareness about this now, while applications are still ongoing.
Consider the following: CRA is known to conduct random compliance audits – in those cases, the taxpayer is contacted by an auditor and asked for documentation to support a certain position that was taken on the return. In these random compliance audits (which are usually started by a phone call), if the taxpayer responds by stating, “I have that documentation right here and can upload it this afternoon to My Business Account, or send it by fax”, the matter is almost always resolved immediately in favour of the taxpayer. However, if the taxpayer’s response is, “I need to consult my advisor. I need an extension of time to gather the documentation”, it raises a red flag at CRA – especially if the request is fairly innocuous, and the documentation should be readily available. In that case, the taxpayer runs the risk that the audit will be expanded, and that they will incur significant fees in resolving the matter.
Finally, for those advisors who are filing applications on behalf of their clients, consider your risk/liability in undertaking that activity. For example:
- Is the taxpayer relying on you to double-check their qualifications?
- Do you have enough information on your file to even be in a position to determine whether the figures you are being provided are accurate?
- Is this covered by your current engagement letter?
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For summaries of the relevant programs, and their qualification criteria, please see the following sites:
- Canada Emergency Business Account (“CEBA”) – https://ceba-cuec.ca/
- Canada Emergency Wage Subsidy (“CEWS”) – https://www.canada.ca/en/revenue-agency/services/subsidy/emergency-wage-subsidy.html?&utm_campaign=gc-fin-fin-covid-19economicemergplan-2021-0004-9968772463&utm_medium=search&utm_source=google-ads-100157175585&utm_content=text-en-433152654854&utm_term=cews
- Canada Emergency Response Benefit (“CERB”) – https://www.canada.ca/en/services/benefits/ei/cerb-application.html
- Canada Emergency Student Benefit (“CESB”) – https://www.canada.ca/en/revenue-agency/services/benefits/emergency-student-benefit.html