CRA Audits of Large Corporations - The view from ILBD

The following is a summary of oral remarks made by Alexandra MacLean, the Director General of the International Large Business Directorate in her presentation, "CRA Audits of Large Corporations - The view from ILBD" on November 27, 2018 at the Annual Conference of the Canadian Tax Foundation held in Vancouver.

We did not summarize her humorous introduction centred on two slides, showing an ideal CRA audit team from the taxpayer’s perspective (a small easy-going group) and from the CRA perspective (a massive group standing in wedge formation).

The summary below instead commences with her comments on TEBA, and then moves to her impromptu response to points raised by Nojan Abrary (Methanex), Douglas Powrie (Teck Resources), Michael Munoz (Suncor) and Nick Pantaleo (Rogers) in that morning’s session on CRA Audits of Large Corporations, before summarizing other points made in her presentation.

Objectives for ILBD

There is room for improvement and in our program area, as in other areas of government, and the private sector as well.

Reducing distortion from TEBA

Knowledgeable auditors are important, leading to faster resolution of files where possible. It is frustrating to see a lengthy audit that has taken a lot of work on both sides, and then to see that file ultimately amount to nothing. I’m interested in resolving things sooner, and in a logical way that is consistent with the tax rules – for example, reducing focus on TEBA [tax earned by audit].

The Auditor General’s most recent report has been out now for about a week, and it comments on TEBA as a performance metric. Traditionally, CRA has responded to criticisms of this nature, whether they are from the Auditor General or from practitioners and taxpayers, by saying that auditors are not individually measured on TEBA. That is true – TEBA is used more to measure the performance of Tax Services Offices, and different programs, and to decide where to allocate resources.

However, I am prepared to concede that TEBA as a performance metric has an impact on auditor behaviour, and it is not always the right impact. One of my priorities for the International and Large Business Program is for us to be making sustainable reassessments where appropriate, that can be defended on both the letter and spirit of the law.

Civility and objectivity

Finally, civility and professionalism are a widely held priority in Audit. Relationships can be important. We want to be objective. Having civil, polite relations really do make a difference.

But it is a tough environment in a large business audit – there is a lot of money at stake, particularly where things are coming as a surprise for the taxpayer and its in-house and external advisors. We understand that that is stressful.

Wish list from Large Corporation Audit session

Jumping ahead in the interests of time, I wanted to get to the wish lists from this morning. So, just quickly,

Nojan’s wish list

Enhanced certainty to the taxpayer

(The government can technically give certainty very quickly, but that’s rarely what the taxpayer wants!)

Quicker audits

I have mentioned these already.

Focused audit teams

The large business audit program is dedicated to businesses with revenues above $250 million. Traditionally in the agency, as auditors get more experienced, they may transition from small business auditing to large business auditing.

I would like to see more hiring within the large business program, thereby putting those junior auditors on teams with more experienced auditors so that they could focus more on the public company space from earlier in their career.

Expedited resolution [Audit Files Resolution Committee]

We have finished piloting, and have now made permanent, the Audit Files Resolution Committee, which has a mandate to try and resolve files at the audit stage. That’s much earlier in the process than other settlement opportunities.

It is loosely modelled on the GAAR Committee. It has representation from Justice, from Headquarters, as well as from the field office involved in the audit and another field office to promote consistency across the Agency, in order to resolve the files.

The Committee considers taxpayer proposals to resolve a file at the audit stage. As there are some volume constraints, these are material files. The Committee will examine the proposal, and make recommendations in terms of accepting, counter-proposing, or other possible courses of action.

Doug’s wish list

Commencing audits within 6 months of filing [s. 173 referrals]

That does sound logical, but unfortunately that is aspirational at this stage. There are a few filing deadlines in the system that are after six months and are well past the filing due date. The basic rationale for changing the T1134 filing deadline is directed at trying to get CRA to pick up files more quickly by getting the information in more quickly.

Section 173 has been talked about quite a bit. There’s some question as to whether this is an Audit or Appeals matter.

At any rate, facts are important, and a lot of the disputes are over the facts. There may be some reticence on the part of both parties to reduce things to a written statement of facts, because that might strip away some context and thereby lead to poorer decisions.

Nevertheless, it is something that we should look at, because there is a lot of pressure on the system currently.

Mike’s wish list

Unbalanced legislative framework

This is admittedly more of a Finance matter, but it’s worth mentioning.

The “unbalanced framework” refers to the asymmetry in the process. When you are starting an audit, the taxpayers have essentially all the information and CRA has very limited information, if in fact they got all the filings in the first place. A lot of the rules around requirements for information and so forth are directed at correcting that asymmetry. For example, I believe that the “50% of taxes in dispute” rule, while sometimes harsh, is important.

This is often the first stage in the process of a tax dispute where the taxpayer really wants to come to the table and discuss the issues. From our side of the fence, what I hear from auditors is that getting information is a constant struggle. Large corporations are rational actors, and thus concerned with the bottom-line. Some taxpayers have different risk tolerances and different levels of assertiveness in their filing positions, but there are certain financial or economic incentives to stall an audit so that a statutory time limit expires before CRA can reassess.

That is the reality for some taxpayers. It’s not necessarily the majority, but our perspectives do tend to be coloured by the experiences we have on different files.

Greater transparency in ultimate Agency positions

In my ideal world CRA would move to more of a whole-Agency approach on assessing positions, on important tax interpretive issues, and publishing them so that taxpayers have the information and they can make up their own minds.

Taxpayers can then follow CRA’s position or challenge it, but in a world like that you would then understand that, if you were filing contrary to CRA’s position, there would be consistency throughout the system and you would be essentially heading toward litigation.

CRA is clearly not afraid of litigation, having good resources in this space now, and we believe our positions to be defensible. The Federal Court of Appeal reversed four out of eight Tax Court decisions on GAAR. There just isn’t the certainty in the system at the audit stage. A lot of what we do relates to differences of opinion on legislative interpretation, so I do expect that pattern to continue.

Altered performance metrics

I have mentioned TEBA. It is probably here to stay. We are working to better understand the reversal rate at Appeals in dollar terms and by tax issue.

Auditors should receive positive performance assessments for good audit work. This is something we are working on in the large business audit program. The OECD has a performance metric called “tax assured,” which is about measuring value of a properly performed tax audit that doesn’t find any non-compliance.

I think that is important, just like food inspection is important, and doing it right (even when you are dealing with a compliant taxpayer or food producer) is an important function, and we want to try and measure the value of that.

It’s a little more subtle than just counting up the dollars on reassessments, but with our modern tools for documenting files, we are optimistic that we can make that work and better recognize that work.

Nick’s wish list

Engaged approach to compliance

I think it is really important to have that dialogue with the audit team at the beginning and at the end of an audit. Tax people in general tend to be somewhat introverted, so it is not the case that everyone at the Agency loves to reach out and contact the taxpayer. But I do think that those discussions can be very productive for resolving issues sooner.

Risk-based audits

Some clarification may be in order – when we say that we “risk-assess” 100% of the large business population, that’s an automated process. We have algorithms firing on the whole large business T2 population.

Risk-assessment within an audit is more of a subjective process, and something we should get better at. On the large business side, we try to focus on the most material issues. We are not going to audit each entity in a large legal group, and we are not going to get to all the little issues, so we do want to continue working on that.

Process where disagreements with file manager

If you disagree with your large file case manager, there is process that we like to see followed that makes things work in a more orderly fashion.

To elevate things, start with the Assistant Director of Audit from the TSO, and then move to the Director of the TSO. If you are still unhappy, that would be where Headquarters gets involved – you contact the relevant director – the Director of International Tax Division, Large Business Audit Division, or Abusive Tax Avoidance Division (i.e., the GAAR division), or me.

When a representative or a taxpayer contacts us, we listen, and we get that side of the story of the situation, and then we talk to the TSO and we can try to resolve the issue.

If the problem relates to legislative interpretation, you may find you are not going to get any joy out of this process. Sometimes there is an agreement to disagree. On the other hand, if the problem relates to whether CRA’s policies are being followed, or to consistency, then there may be something Headquarters can bring to bear to help out in those circumstances.

Responses to recent adverse decisions

I will briefly discuss what we call, on the government side, “adverse decisions.”


Cameco, is under appeal – CRA is still running its transfer pricing audit program. In other words, it is business as usual, despite the Cameco decision, for the time being.


Wild is a Federal Court of Appeal decision that I think no one is very satisfied with.

The decision holds that a tax benefit has to be realized. It’s really when you are saving cash taxes that GAAR would apply rather than earlier in the process at the tax attribute stage.

Our approach is that we are still auditing situations involving tax attribute issues, and we are still sending those to the GAAR Committee. However, at the end of that process, for now you are not going to get a notice of determination. You are going to get a letter that says, “we’ve concluded that if you realize the cash tax benefit in the future, we will have kept monitoring you and we will apply GAAR at that time.”

That might be a good time for the taxpayers and the CRA to sit down and see if they can resolve that, rather than at the perhaps somewhat unattractive promise of constant CRA monitoring going forward until the artificially inflated capital comes out of the company or comes out of a related company. That could be an awful lot of audit work.


The idea in Univar that you could look at what the taxpayer could have done versus what the taxpayer did do is fairly new, but we are looking at putting some parameters around that.

There is an infinite world of what the taxpayer could have done by way of alternative transaction. We are looking at things that are commercially reasonable, that the taxpayer could actually have done – do they have an arm’s length party in the structure that would have precluded them from taking a certain course of action? We are going to be putting some parameters around that.

Looking ahead/new developments

T2 Schedules

I just mentioned our continuing issues with obtaining information. Super-voluminous queries on areas that don’t seem to be particularly relevant are not very productive.

It’s a challenge – when you are auditing, you don’t know what you don’t know. So it’s quite true we might ask for 2,000 pages of documentation, and there might be $5,000 of reassessment potential in there - but we don’t know that until we review it. That’s a bit of a conundrum.

Where possible, though, let’s try to narrow it down, target it, and let’s commit to reviewing what we have asked for. On the taxpayer’s side, let’s try to get the information in as quickly as possible so we can avoid these multi- year audits and waiver requests, people retiring and the Tax Court not being able to have witnesses who know what was going on years later.

I would like CRA to eventually look at the Schedules to the T2s. It seems to me that the information there is not always well suited for the audit purpose. There is overlap and duplication, and ultimately we have a number of Schedules directed at the basic questions, “Who are you as a corporation? Who owns you? Who do you own? Where do you sit in your org chart?” That’s information that is widely available on the taxpayer’s side, with rare exceptions, so how can we get more efficient at getting that information in to Audit so that we can start determining the facts of what happened?

Increasing involvement of Justice counsel

We also want to work more closely with Justice counsel. When an advisor tells a client that they can save $300 million by implementing a particular transaction, CRA will often disagree, so a litigation perspective is often inherent in our work. Having Justice counsel involved earlier, to make sure our assessing positions are legally defensible and that we are not missing anything, and that the file is set up properly so that it can be well argued down the road, just seems like common sense.

I think taxpayers may see some benefit from that as well, arising from thoroughness and due diligence on our side. We are, therefore, providing more resources to the Department of Justice for that purpose.

New appointments

Just kind of a potpourri of what else is ahead, we have two new directors in International and Large Business, Venetia Putureanu who is the new Director of International Tax Division, a recent hire from the Department of Finance, Donna O’Connor is the new director of Competent Authority Services with International and Large Business, so we now have permanent Directors in all the positions, providing some continuity and stability that we have been lacking for a little bit. I’m happy about that.

Tax accrual working papers

Milled Azzi spoke about our “Communiqué” on access to taxpayer information, notably tax accrual working papers, and we hope to have that out very soon. Milled covered a lot of the content.

We think that BP does not stand for the idea that there is never an ability for CRA to access tax accrual working papers - but that there are some constraints and limitations in that space, and we are trying to articulate them.

CbC reporting

We had new guidance out last week on country by country reporting. So do take a look at that if you are just finalizing your country by country report.

And please, if you can, it would be very helpful if you electronically file. To electronically file, you need an e-file number. To get an e-file number, you have to jump through some hoops and it takes about three weeks. If you have trouble getting an e-file number, if you are interested in electronically filing, please contact us, the right contact info is in the Guidance that has recently been published, and in my materials. Send me an email, and we can work with the other Branch to get an e-file number to you.


For the T1134, the deadline has changed, there is an accelerated deadline for 2020.

We are taking this opportunity to look at the T1134 (similarly to the T2 Schedules, as mentioned.) Is CRA using the information that we are asking for? Are we asking for the right information? Can we streamline it a bit? Is there stuff that is missing? That’s in play right now.

If you have thoughts in that regard, if you have summer students coming to you and asking “Why are they asking this?” now would be the time to tell us about it.

Auditor General’s Report

I’ve talked a bit about the Auditor General’s report. It is worth a read if you have time. There are recommendations there for us, and we will be actioning.