You may not be aware, but there is a Taxpayer Bill of Rights in Canada. There’s even a CRA Guide. I have to admit, I’ve rarely had occasion to look at it, until recently. Today’s post covers several key taxpayer rights that are likely to be trampled upon during an audit. This is especially true for audits of restaurants and bars.
I picked up a new client, while they were in the middle of a CRA audit. My client could sense that the audit was going to propose significant tax reassessments. As it turns out, my client was correct. The auditor proposed reassessments for GST, corporate income tax, and personal income tax on the auditor calculated “unreported sales.”
Invariably, these types of audit assessments result from incorrect assumptions regarding theft, over-pouring, and waste/spoilage. Typically, auditors apply “industry standard” allowance rates for each category of alcohol (liquor, draft, beer and wine).
Under the Taxpayer Bill of Rights, number 6 says, you have the right to complete, accurate, clear, and timely information. When I asked the auditor and the audit supervisor to explain the basis of the proposed allowances, I was told they were “industry standard” allowances and that they apply to all taxpayers. I knew this not to be the case, based on other client audits and case precedents. Neither auditor was able to tell me how the allowances were determined. One thought it was the CRFA, the other thought it was the LCBO!
Another Right, number 5, is to be treated professionally, courteously, and fairly. For the most part auditors are professional and courteous. Exercising fairness towards the taxpayer is another matter. Part of this right involves taking the taxpayer’s specific circumstances into account in making decisions. As we all know, there are many different business models for restaurants and bars. To argue, as CRA does, that there is one standard allowance for all taxpayers is ridiculous. At least in this client situation, the auditor spent almost no time at all trying to understand the client’s business and how it might affect the allowance percentages.
As part of my response to the proposed audit adjustments, I presented a number of case precedents. Most of the applicable cases are from Quebec taxpayers. I was shocked when the audit supervisor advised the auditor to see if there were any Ontario court cases. There initial position was that Quebec court cases are not applicable in Ontario! I had to remind them that there is only one Income Tax Act for all of Canada, and that under Right number 8, they had to apply the law consistently.
There were several other breaches of my taxpayer’s rights, mostly involving the consistent application of the law. We didn’t have to lodge a complaint, however, because we got the CRA auditor to completely abandon the proposed adjustments, saving my client over $40,000.