Background

Where a subjective and material issue is involved in an audit (e.g. a valuation, reasonableness of expenses), the taxpayer's interest in an early, efficient, fair and final resolution of the issue through the waiver of their objection rights is factored into the final decision arrived at by the Canada Revenue Agency (CRA) regarding a reassessment. An agreement to resolve a file in this manner is referred to as an audit agreement^{Footnote 1} . In order to help ensure consistency and fairness in the resolution of these issues, the International, Large Business and Investigations Branch has established an Audit File Resolution Committee (AFRC) to consider proposals for audit agreements and similar proposals to resolve outstanding tax matters in certain cases. The Domestic Compliance Programs Branch (DCPB) is invited to participate in the meetings and refer files to the AFRC where appropriate.

Membership and Mandate

The Committee will meet on an as-required basis (generally every 4-6 weeks) and will consider cases referred to it under the mandatory procedure set out below. The AFRC will consist of the Directors General of the International and Large Business Directorate and the High Net Worth Compliance (HNWC) Directorate (formerly Offshore and Aggressive Tax Planning Directorate), the directors of the relevant divisions having an interest in the file, i.e. the Director of International Tax, Large Business Audit, Tax Avoidance, Competent Authority Services, HNWC Audit Program or Specialized Audit Support, the Assistant Director of Audit and other representatives from the TSO audit team on the file, one or more Assistant Directors of Audit from a different TSO, and a representative from each of the Legislative Policy and Regulatory Affairs Branch and Tax Law Services of the Department of Justice. If a DCPB file is being presented, the DG as well as the relevant program director will be represented at the meeting. Other officials may be invited as needed. Taxpayers do not attend AFRC meetings since they are in communication with the audit team about the issues and a copy of the taxpayer's response/offer is included in the materials sent out for the meeting.

The mandate of the AFRC will be to support the following:

• Reasonable application of the tax laws to ensure the protection of the tax base;
• Resolutions that provide consistency, predictability and fairness in the context of the income tax system as a whole;
• Consistent treatment of similar situations on a national basis;
• Timely and efficient resolution of disputes at the audit stage where possible on a principled and equitable basis; and
• Voluntary compliance.

In fulfilling this mandate, the AFRC will consider the overall merits of the taxpayer's original filing position versus the perspective of the audit team on the issues, and whether the proposed resolution, having regard to all the circumstances, achieves a fair outcome for both the specific taxpayer and for the CRA on behalf of the government and Canadians in general. While respecting the Minister's duty to administer and enforce the tax laws, the AFRC will be cognizant that the earliest possible resolution of disputes is generally in the public interest, as lengthy litigation is costly to all parties and the outcome of complex tax-related litigation processes is uncertain.

Mandatory AFRC Referral

The process and criteria below apply equally to reassessments and determinations. Before entering into an audit agreement and accompanying waiver of objection rights, proposed audit agreements must be referred to the AFRC where any of the following circumstances is present:

• A National Early Warning System (NEWS^{Footnote 2} ) referral on the file had previously been submitted to HQ or the NEWS criteria are currently met;
• The taxpayers are large corporations or HNWC taxpayers and the proposed resolution relates to a material issue in the audit;
• The proposed resolution would be used as the basis to resolve the same/substantially similar fact pattern in other cases (e.g. for a promoted tax scheme or a plan implemented for many clients of one firm or advisor); or
• Generally, in the opinion of the Assistant Director of Audit, the file is material or novel, could have implications in resolving files of other taxpayers, is unusual, has significant public interest or otherwise warrants review by the AFRC.

New Procedure

Where a file resolution (audit agreement) is being considered that meets one of the criteria above, the team leader or file manager will refer the file to AFRCCRDVG@cra-arc.gc.ca. The Assistant Director of Audit should be copied on that referral.

The referral should include a statement of the relevant facts, indicating those that are agreed and highlighting any known issues regarding the government's ability to establish those facts, the income tax issues raised by those facts, the taxpayer's filing and current position, the CRA's original position and a description of the proposed resolution. The referral should have the approval of the Assistant Director of Audit; in time sensitive situations, the cc. on the incoming referral to AFRC may serve as that approval.

Where any audit issues for which an audit agreement is sought fall under the mandate of another committee (e.g., GAAR, Transfer Pricing Review, Third Party Penalty), the referral procedures for those committees must be respected. The involvement of AFRC in such cases is discretionary.

Where the referral is lengthy, an executive summary should be included and where available, a copy of the proposal letter and any response from the taxpayer should be included as appendices.

Normally, there will have been HQ involvement in the audit agreement discussions; if that is not the case, the AFRC secretariat will send the referral to the appropriate program area for initial review. The secretariat will then circulate the referral to AFRC members and schedule the case for the next meeting. At the meeting, CRA representatives involved in the audit will present the facts and issues. This could be either representatives of the field audit team or HQ personnel who know the file well, or a combination of the two.

The AFRC may approve or reject the proposed resolution. If the proposed resolution is rejected, the AFRC will provide next steps, such as an alternative proposed resolution (such as a counter-proposal), a reassessment as originally contemplated by the auditors, or a resolution based on the original filing position of the taxpayer.

The AFRC will monitor referral volumes in its initial period of mandatory referral operations, and may adjust the referral criteria based on operational needs and resources.