International, Large Business and Investigations Branch (ILBIB)

Introduction

The Compliance Programs Branch (CPB) keeps current an Income Tax Audit Manual for its directorates. Presently, it can be accessed to through the Small and Medium Enterprises Directorate. The Income Tax Audit Manual was written specifically for audit staff involved in the audits of small and medium sized businesses.

Purpose

This Large Business Audit Manual (LBAM) is written as a supplement to the CPB’s Manual. It has distinguishing features of the Large Business audit process and provides the audit teams with a guide through the stages of the audit process and its policies, procedures and quality standards.

Structure

This manual contains three chapters, annex and a section on best practices.
Chapters 1 (mandate) and 2 (program) put the work of the audit teams in context. Chapter 3, the most important one, is about the flow of operations. The “Best Practices” section is intended as an opening to improvement; audit teams will discover practices that could be of help.

Chapter 1 - Mandate

Chapter 2 - Organization of Program 31

Chapter 3 - Large Business Audit Process

Annex

Best Practice

Acronyms

Appendices

Moving within the text

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Acknowledgements

This manual is based on the manuals of the Laval and Toronto centre TSOs, and initiatives of other TSOs. It is also based on "Large business program policy and procedures guide Québec".

Chapter 1 - Mandate

• 1.1 CRA - mission, vision, and values
• 1.2 Mandate of the International and Large Business Directorate
• 1.3 Objectives of the large business audit program
• 1.4 Planning Guidelines
• 1.5 Quality Assurance

Chapter 2 - Organization of Program 31

• 2.1 International and Large Business Directorate
• 2.2 Large Business Audit Division
• 2.3 Large File Case Managers

Chapter 3 - Large Business Audit Process

• 3.1 Responsibilities
• 3.2 Planning
  • 3.2.1 Large Business Section’s work outline
  • 3.2.2 Team workload
  • 3.2.3 Inter-Divisional relations
• 3.3 Development of issues and general audit plan
  • 3.3.1 Objective
  • 3.3.2 Opening the file
  • 3.3.3 Review of information sources
  • 3.3.4 Meeting with taxpayer
  • 3.3.5 Strategic file review
  • 3.3.6 Development of the general audit plan or protocol
• 3.4 Conducting the Audit
  • 3.4.1 Allocation
  • 3.4.2 Audit
  • 3.4.3 Consultations
  • 3.4.4 Documentation
  • 3.4.5 Periodic reviews
  • 3.4.6 Mid-term review
• 3.5 Communication of Results
  • 3.5.1 Drafts
  • 3.5.2 Submissions
  • 3.5.3 Discussions
  • 3.5.4 Final proposal
  • 3.5.5 Post-audit meeting
• 3.6 Finalization
  • 3.6.1 Procedures
  • 3.6.2 Audit reports
  • 3.6.3 Preparation of forms for issuance of reassessments
  • 3.6.4 Recording of results
  • 3.6.5 File review
  • 3.6.6 Document flow
  • 3.6.7 Quality control
• 3.7 File assembly
  • 3.7.1 Documentation functions
  • 3.7.2 Audit file
  • 3.7.3 Permanent file
  • 3.7.4 File update
  • 3.7.5 File location
  • 3.7.6 Electronic format

Annex

Annex A: Standardized Audit Process - Phase I

Annex B: Quality Assurance Standards

Best Practice

PE-1. Audit Process Quality Control List

Acronyms

Appendices

Appendix 1: Books and Records Required

Appendix 2: Books and Records Required and Related Dates

Appendix 3: Initially Identified Audit Issues for 2007, 2008 and 2009

Appendix 4: ITAS Input Sheet

Appendix 5: AIMS Coding for Requirements Issued

Appendix 6: Coding Chart for Exchange of Information Activities

Appendix 7: T7W-C

Appendix 8: Nil Assessment and year under objection

Appendix 9: Form T99A

Appendix 10: Priority Reassessments

Chapter 1 - Mandate

1.1 CRA - mission, vision, and values

1.2 Mandate of the International and Large Business Directorate

The ILBD mandate is to be the Agency's centre of expertise in the administration of large business, international tax and aggressive tax planning (ATP). The Directorate contributes to the Agency's overall mandate by ensuring Canada receives its fair share of taxes from international business and financial transactions. The ILBD provides functional leadership, policy development and program direction for international, ATP, large business and basic file auditors in Tax Services Offices and for servicing non-resident clients through the International Tax Services Office. The Directorate also performs the competent authority functions under Canada's tax treaties with respect to specific taxpayer requests.

1.3 Objectives of the large business audit program

The mandate of the LBAD aligns to the Agency’s mission, vision and values of contributing to the public trust in the fairness and integrity of Canada’s self assessment system of taxation.

The Division addresses non-compliance issues by large businesses and provides analytical services and guidance to all other programs within the International and Large Business Directorate (ILBD). The Division is responsible for analyzing large business audit results, developing and publishing strategic policies for large business, developing and maintaining partnerships with other tax authorities and providing guidance and support to staff engaged in the audit of large businesses.

1.4 Planning Guidelines

The Financial and Performance Management Division of the CPB publishes Program Business Plans for every audit program. For the International and Large Business Directorate these guidelines may include:

• Management agreement
• Message from the Director General
• Program overview
• Functional Program changes and impacts
• Program priorities and expectations
• Program monitoring

1.5 Quality Assurance

This is a link to the CRA’s internal reference system, where auditors can find information on Continuous Program Integrity Review (CPIR) and the quality standards for the Large Business Audit program including:

• Risk Assessment
• Audit Planning
• Audit Work Performed
• Legislation and Policies
• Audit Documentation
• Correspondence
• Confidentiality and Security
• Time Management
• Data Integrity

References:

Best Practice

Chapter 2 - Organization of Program 31

2.1 International and Large Business Directorate

This is a link to the CRA’s internal reference system, where auditors can find the most current information on the Directorate’s announcements, tools and resources, committees and working groups, divisions, topics, contacts and reference materials.

2.2 Large Business Audit Division

This is a link to the CRA’s internal reference system, where auditors can find the most current information on the Division’s sections and services, mandate, core compliance programs, communications, policy and legislation, international relationship management, contacts, ILBD reference material, income tax - Large Business (ILBD Topic), Ontario Aggressive International Tax Planning Initiative (Service Level Agreement II), approach to large business compliance, and CPB Memos.

2.3 Large File Case Managers

This is a link to the CRA's internal reference system, where auditors can find the most current list of managers across the country, by region and TSO.

Chapter 3 - Large Business Audit Process

3.1 Responsibilities

Objective

The purpose of this chapter is twofold. Firstly, it explains the respective responsibilities for large business staff in the large business audit process. Secondly, it ensures effective service delivery that meets the objectives and quality standards of the large business program.

Scope

This chapter reviews all stages of the audit process performed in TSOs, highlighting the directives for quality delivery based on the large business program's mandate.

Responsibilities

The Large File Case Manager (LFCM) of the large business program is responsible for managing operations that examine businesses with a view to discovering, identifying and dissuading the non-observance in high-risk sections. The LFCM uses a team approach to perform an audit. The audit team comprises a LFCM, one or more auditors assigned to the file and auditors from required specialized areas.

The LFCM actively participates in the audit of a large business file. As the leader, he/she must co-ordinate the work of all team members, regardless of which sector they belong to. He or she must ensure efficient use of available resources.

Specifically, the LFCM is responsible for developing the general audit plan as a team and ensuring its methodical implementation. He or she must also manage taxpayer relations and ensure that taxpayers understand the audit plan.

The Large File Section Manager (LFSM) or the Assistant Director of Audit (ADA) establishes the annual work plan of the section in regard to the objectives of the Large File Program that were specified and transmitted by the Regional offices.

It is also the LFSM's or the ADA’s responsibility to assign specific responsibilities to LFCMs and ensure they have the training and tools required to perform their tasks.

Overview of the Large Business audit process

The Large Business audit process is divided into two phases. The first phase ends in the creation of a list of audit issues filtered through a risk analysis, and preparation of a general audit plan. The second phase goes from the actual audit of issues selected to the file finalization.

Activities that have an impact on audit quality and effectiveness are grouped under six (6) headings:

Phase I:

• Planning
• Development of issues and general audit plan

Phase II:

• Conducting the Audit
• Communication of Results
• Finalization
• File Assembly

The directives and procedures as well as any relevant references are explained under each heading.

3.2 Planning

3.2.1 Large Business Section’s work outline

The work outline of a TSOs Large Business Section is based on the production and results objectives established by the Region (see 1.4 Planning Guidelines). These objectives are aimed at the highest risk areas and may be established by a team made up of the Regional Program Advisor together with either the Large File Section Managers or the Assistant Directors of Audit in the region. The Large File Section Manager or the Assistant Director of Audit, jointly with the Large File Case Managers, will identify the files or audit issues that bear risk.

According to these objectives the LFSM or the ADA, with the LFCM, will prepare the work outline of their section using the D.I.D. approach (detect, identify, deter non-compliance in high risks areas) and will:

• Set production objectives and priorities;
• Establish a workforce and other necessary resources; and
• Prepare the work outline using the D.I.D. approach.

3.2.2 Team workload

At the beginning of each year and within the section’s work outline, LFCMs prepare their budgetary planning based on ongoing and new audits.

Prepare team's work outline for the year

• Identify files and taxation years to be audited.
• Assess amount of time to be spent per file within the section’s work outline.
• Consider constraints (e.g. taxpayer availability, statute-barred date, employee training, etc.).

For new audits:

• Contact the taxpayer to ensure that an audit is possible, to agree on a field audit date and an initial meeting date, to identify the person that the Electronic Commerce Audit Specialist (ECAS) can contact, and to determine how to obtain annual reports, detailed financial statements and contemporaneous documentation.
• Make a service request with an ECAS to receive taxpayer information in computerized format.
• Submit annual production budget to the section head.

3.2.3 Inter-divisional relations

In order to facilitate an integrated large business audit approach, Large File Case Managers will share their planning with the sections involved, such as the Electronic Commerce Audit Section, International Audit, Aggressive Tax Planning, and SR&ED as per AD-98-07 and AD-97-03.

Once an audit start date has been arranged and scheduled with the representative, the first step is to identify how electronic data could be transferred to us (existing systems, format, media used, etc.) and put a service request to the ECAS (pre-questionnaires to taxpayers, where applicable).

For International Tax Audit, it will often be necessary at this stage to issue the contemporaneous documentation request letter (issued by the international auditor), which should be submitted to the representative on a set date.

3.3 Development of issues and general audit plan

3.3.1 Objective

The objective of this stage is to draw up a list of specific audit issues after performing a review and strategic analysis of the available information. Some information is already available at the office and a review of this information can generate a more general list of possible audit issues. A strategic risk analysis should include a comparative analysis of the detailed trial balances and taxpayer's documents that support the T2s and their schedules. This task, usually performed at the taxpayer's location, makes it possible to select a list of specific audit issues generated through the risk assessment. The second stage of the audit process will be based on this list plus the general audit plan.

References:

Annex A, Standardized Audit Process - Phase I

3.3.2 Opening the file

At the start of the audit process, the LFCM makes sure that the list of information sources is complete, that all required information is entered (screen 1 and Supp) and that he or she has the necessary information filed by the group's corporations (financial statements, trial balances, computerized records of detailed transactions, T2, T106, T1134, T1135, etc.). The manager must also arrange the audit team, including representatives from required specialized sections.

• Opening of Audit Information Management System (AIMS) screens,
• BFICS update,
• Service request to International Audit and Aggressive Tax Planning to include them in issues and general audit plan development,
• Gathering of financial and tax information filed by the taxpayer. Prepare a letter requesting required documentation either prior to or at the start of the field audit,
• Opening of AIMS screens according to the Ontario initiative,
• Corporate Tax Administration for Ontario: CTAO Project.

Requesting assistance from Ontario Region in respect of CT23 return.

References:

AD 98-14R, Annex A

3.3.3 Review of information sources

The LFCM and auditors assigned to the file review both internal and external information that is available to them at the office, for both the primary and controlled files. This analysis will be continued at the taxpayer’s location with the information obtained from the latter (see 3.3.4).

• Review of the Agency’s programs and directives (Compass profile analyses, industry checklists, specific training courses, etc.)
• Review of permanent file and previous audit file,
• Review of public information sources (annual reports, organizational charts, Internet sites, data retrieval software, etc.),
• Review of taxpayer’s affairs and those of its industry,
• Review of taxpayer’s financial information,
• Review of taxpayer’s tax information.

This review marks the start of the standardized risk assessment process. To facilitate this approach, the audit team will use the Standardized Audit Risk Assessment Template (“SARAT”) developed for this purpose.

References:

• Beforehand, send the representative a list of the books and records required (see Appendix 1), as well as desired turnaround dates that have been based on communiqué AD-98-29 Sample Audit Protocol - section 6, Books and records required (see Appendix 2)
• Inform the representative of the facilities required (offices, filing cabinet, premises security, and internet line). Set up dates to introduce the audit team (initial interview) and start field work

3.3.4 Meeting with taxpayer

The LFCM must set up a meeting with the taxpayer to focus on the audit work to be done and create effective work conditions for both parties. Depending on the circumstances, this meeting may be held prior to or at the start of the fieldwork.

On the agenda, introduce the team, take note of any developments and major transactions of the group since the last audit, agree on the conduct and administrative aspects of the audit with the taxpayer, and indicate that a list of specific audit issues will be submitted to the taxpayer at the end of the first audit phase.

• Ensure the team understands the taxpayer's needs, constraints and expectations,
• Confirm entities and years targeted in the audit,
• Define responsibility of the respective team members,
• Set an implementation schedule,
• Arrange some facilities for the team (office, telephone, filing cabinet, fax, remote access, etc.),
• Make sure required information is available at the planned time,
• Ask the taxpayer if they plan to submit requests for adjustments for the years audited,

3.3.5 Strategic file review

The audit team continues its review work at the taxpayer's location. It performs a more in-depth analysis of financial and tax data using the basic documentation requested at the start of the fieldwork.

An information review, carried out in the strategic framework of the risk analysis, brings out the key tax issues, given available resources and deadlines.

• Gather relevant information,
• Assess risk elements (AD-98-25),
• Select or reject potential audit issues (AD 98-14R).

Once this step is completed, we have a list of specific issues that will serve as a reference point for all staff involved in the audit and will be a key point for the general audit plan.

This work must be documented accordingly (AD 98-13).

To facilitate this task, a standardized risk assessment process model (SARAT) has been created. Using it promotes quality (see 3.3.3)

References:

3.3.6 Development of the general audit plan

A general audit plan must be prepared for any audit. This plan is an audit roadmap. It contains all of the information relevant to the proper conduct of the audit and was discussed previously with the taxpayer.

• Prepare the general audit plan jointly with auditors from the specialized audit areas according to usual procedures (Part A, which will be submitted to the taxpayer and Part B, a more detailed risk analysis)
• Define each team member’s responsibilities, including auditors from the specialized audit areas, asking questions at each audit phase of who does what, how, and when it must be reported. Establish and maintain at all time a cooperative environment among those who are involved in the audit. Risk analyses from specialized audit areas will also be reviewed and added to the general audit plan.

The topics identified in the audit plan must be numbered; this numbering could also be used to monitor the audit query sheets (T-997) - see Appendix 3

• Submit the audit plan (Parts A and B) for review and approval by the Manager, Large Business Audit, the Assistant Director, Audit or the designated replacement.
• Present the audit plan to the taxpayer with the audit team present and explain its content.

References:

• Audit plan review (AD-98-10)

References:

3.4 Conducting the audit

The key elements in this process involve the orientation and control that the LFCM must constantly exercise on audits in order to complete the general audit plan and follow the quality standards for the conduct of operations.

3.4.1 Allocation

A large business audit involves many stakeholders.

• Define the responsibility of each team member, including auditors from specialized areas. Asking questions at each audit phase on who does what, how and when it must be reported. Establish and maintain at all times a co-operative environment among those who are involved in the audit.

References:

AD-97-03: The involvement of Specialized Audit Areas in the on-site identification of audit issues for the audit of corporations in the large file program

AD-98-07: Large File Case Managers and their relationship with specialized audit areas, including Revenue Collections

AD-98-16: Guidelines with respect to consultation for tax avoidance issues

3.4.2 Audit

The efficiency of an audit is based on obtaining information in a timely manner. Actions taken in that regard include the use of statutory compliance tools where appropriate.

An audit uses a set of measures, processes and techniques.

• Refer to directives and other instruction manuals regarding the conduct of review, analysis and research;

Here are elements that should always be considered for every large business audit:

• Provincial Income Allocation (PIA): because the Agency is mandated to protect the interests of the agreeing provinces, an audit of the provincial income allocation formula is mandatory for any compliance audit of income tax under our program and should, insofar as it is possible, be performed at the beginning of the tax audit (there may be delays where proposed adjustments are made to non-agreeing provinces). Bear in mind that the time spent on auditing this topic must be identified using specific code 156.

The provincial income allocation audit procedures can be found in AD-02-03R and a specific worksheet to complete an Ontario PIA - see Appendix 4.

• Requirements for information/Compliance Order: Please consult the official requirement guidelines available in the CRA Electronic Library, Section 10.8.0 of the Audit Manual (Operations Manual), which set out the criteria for serving the requirements and provides other helpful information. See Appendix 5 for the coding to enclose in screen 1 of the AIMS if you do issue a requirement.

The decision to issue these formal requirements will always be made as a team with all the personnel involved in the file and with the Large Business Audit manager. When the information is not given by the taxpayer a compliance order could also be considered.

All requirements for information must be approved pursuant to the Income Tax Act (Act) according to the Delegation of Ministerial powers, duties and functions.

We must identify the person in charge of financial services or an equivalent corporate executive before serving the taxpayer a Requirement for information. If the information or documents are not provided, we would serve that individual with a Compliance Order or with a Requirement for information.

References:

3.4.3 Consultations

Large business auditing is complex work that is only possible through the sharing of knowledge and the integration of the specialized audit areas.

• Make sure that the specialized areas are consulted as soon as the auditor gets information that affects their field of jurisdiction.
• Where the team sees fit, forward requests for technical and legal assistance from appropriate areas (e.g. Industry Specialists, Justice, Headquarters, Technical Interpretations, Technical Applications).

References:

See Appendix 6 for Coding for exchange of information.

3.4.4 Documentation

Given the duration of any large business audit, plus the number of stakeholders and the scope of work complete, good documentation is essential. The quality of documentation is often indicative of the quality of the work performed.

• Follow audit conduct in its major events (e.g. log, T2020).
• Identify audit steps for a given issue.
• Organize documentary evidence of proposed adjustments (e.g. working papers, analysis reports, reference documents, correspondence, opinions, etc.). Each page of the working paper must be indexed.

References:

AD-98-13: Documentation on issue selection, audit steps, and issue disposition for large file audits

3.4.5 Periodic reviews

The LFCM is responsible for monitoring and following up on the conduct of the audit. This role includes:

• Making schedule adjustments;
• Reviewing quality control sheets of large file auditors;
• Assessing and approve work performed and in progress;
• Agreeing on items to drop and those to add;
• Reminding audit support areas of work agreed on and scheduled deadlines;
• If necessary, reviewing and amending the audit plan;
• Informing the taxpayer's representatives of audit progress and implementing call-back measures necessary to gather information required;
• Establishing the status of controls and follow-ups;
• Documenting the periodical reviews;
• Meeting regularly with the team members and the taxpayer's representatives.

References:

AD-98-07: Large File case managers and their relationship with specialized audit areas, including Revenue Collections

3.4.6 Mid-term review

Halfway through the audit phase (phase II), there should be an independent assessment of the work completed and of the work yet to complete. Usually, the Large Business Section Manager or the Assistant Director of Audit is in charge of this review in the same way that he or she reviews and approves the general audit plan (see 3.3.6).

References:

AD-00-05: Mid-Point Review of Large File Audit Plans

3.5 Communication of results

While communication plays an important role throughout the audit, it is of utmost importance when it comes time to communicate the audit results to a taxpayer, especially when discussing points at issue or when responding to the taxpayer's submissions. Clarity, precision and relevance are key factors to effectiveness. The LFCM should prepare and lead these communications including the ones from specialty audit sections.

The objective is to arrive at a well-documented final proposal based on the ITA. There may be an agreement reached and documented when an audit issue relates to the interpretation of the facts as opposed to the interpretation of the law. It is important to explain the difference between an audit agreement and a waiver of a taxpayer’s right to object. The following procedures issued by the Appeals Division should be reviewed and applied to a waiver procedure.

References:

AD-05-02B: The Audit Agreement and Waiver of a Client’s Right to Object

3.5.1 Drafts

• Identify the time and manner in which to communicate the points at issue and proposed adjustments.
• Indicate the basis of our position (facts, sections of the ITA, technical opinions, policies, etc.) to ensure that our position is understood.

References:

3.5.2 Submissions

Even with the best conditions and communication, it is possible that taxpayers will want to make representations following the communication of results. Therefore, you must:

• Study the taxpayer's submissions and respond appropriately in a timely manner.
• As applicable, seek the support of qualified areas (Justice, Technical Interpretation, etc.).
• Alert Headquarters to the discovery of weaknesses or anomalies in the ITA or policies and suggest possible corrective action. (Forward this information to the Large Business and Program Integration Division, International and Large Business Directorate)
• Structure meetings to discuss points at issue in such a way that the parties have the attention and time required to explain their positions and disagreements.
• Use the Audit Agreement and Waiver of a Client's Right to Object, as required (see section 4.4)
• Determine whether relief provisions are applicable to reach an agreement, according to IC07-01R1 Taxpayer Relief Provisions

References:

3.5.3 Discussions

• Structure meetings to discuss points at issue in such a way that the parties have the attention and time required to explain their positions and disagreements.
• Use the Audit Agreement and Waiver of a Client's Right to Object, as required.

References:

AD-05-02B: The Audit Agreement and Waiver of a Client's Right to Object

• Determine whether fairness provisions are applicable.

References:

IC07-01R1 Taxpayer Relief Provisions

3.5.4 Final proposal

One of the last steps in communicating with the taxpayer will be to communicate all of the proposed adjustments for all of the large business audit areas (domestic, international, aggressive tax planning, etc.). For each, you must:

• Give the taxpayer (or mail) a letter informing them that the audit is complete, and include the final proposed adjustments.
• Obtain a written response from the taxpayer indicating their position and their elections concerning discretionary deductions and loss carryovers, as applicable.
• Advise the manager of the Large Business Audit Section, in HQ, when there are material or controversial adjustments.

References:

3.5.5 Post-audit meeting

At the end of an audit, it is customary and appropriate that the audit team and the taxpayer hold an assessment meeting. Everyone who was involved may, at that time, report strengths and weaknesses and make suggestions to improve efficiency for the benefit of both parties.

3.6 Finalization

The most important thing at this stage is to properly document all audit results and to issue reassessments, as applicable. The LFCM and LFSM or ADA must exercise certain controls and give approval. Below are the key components of this process.

3.6.1 Procedures

To finalize a large file business audit, it is important to take the following steps.

• Draft the required reports: T20 report, penalty report, capital gains vs. income report, fairness report, provincial income allocation report, etc.
• Obtain the T-20 reports from the specialized areas involved and ensure closure of their screens.
• Prepare the assessment documents and any documentation required internally (T7W-C, T99A, coding, conciliation).
• Send the file to the AIMS co-ordinator, who forwards the documentation to the Taxation Centre.
• Check reassessment status in CORTAX and follow up with the Taxation Centre to ensure that reassessment notices were sent prior to the statute-barred date.
• Review the complexity rating and send it to Head Office. Update the BFICS database.

References:

3.6.2 Audit reports

The preparation of reports is a very important step in the audit finalization process. These reports are a means of communication, and they should therefore be clear, complete and concise. These reports provide a summary of the work performed and any resulting assessment actions.

In most cases, the reports should satisfy the users’ needs without requiring them to examine the detailed working papers.

The auditors report (T20) should use the standard template (section A to J) and include at the beginning of Section E, “Explanation of all changes”, and a summary of the adjustments by fiscal year. See section 11.6.1 of the CPB Audit Manual for more details pertaining to the T20.

References:

3.6.3 Preparation of forms for issuance of reassessments

• Prepare T7W-Cs and T2 schedules in collaboration with the taxpayer. Here is a copy of the Audit Manual procedures for special cases (amalgamations, wind-ups, etc.), see Appendix 7.

Since a nil reassessment cannot be subject to an objection and given that a year already under objection requires special mention on the T7W-C, see Appendix 8 for some additional explanations to consider for these particular cases.

• Prepare the other forms required for the reassessments. The T99A is also very important. See Appendix 9 for an excerpt from the Income Tax Audit Manual about this form.

References:

OMoR

3.6.4 Recording of results

Screen 5, coding and reconciliation of changes

References:

AIMS Screen 1, 5, E, L, etc.
AD-98-17: Instructions for Processing Real Time Audits

3.6.5 File Review

It is up to the audit team to perform a quality review of the closure and reassessment documentation. In fact, many Large File Sections have developed a checklist to make this task easier.

3.6.6 Document Flow

• In a folder on top of the file submitted to the AIMS co-ordinator, the documents should be arranged as follows:
  1. For the taxpayer: - T7W-C and revised T2 schedules
  2. For Headquarters:
     Screens
     T7W-C and schedules
     T20 and other reports
     Coding and explanations
  3. For non-participating provinces:
     T7W-C and schedules, T20 report
• Priority assessment:

  The signed T287 form must always be attached to a priority reassessment. According to the procedures, these files will be assessed only when the adjustment to the taxable income exceeds $10,000 or if tax adjustment exceeds $3,000. In addition, two copies of form T287 must arrive at the AIMS work section thirty (30) days before the statute-barred date (stapled to the front of the file), as the taxation centre must receive the form between 7 to 10 working days before the file is sent. See Appendix 10 for an excerpt from the Income Tax Audit Manual, which deals with priority reassessments. Note that we can now also send the reassessments documents beforehand to taxation centre officers, via the Entrust e-mail system or via protected fax.

• Provincial Income Allocation Report

  All PIA audit packages (both change and no change files) should be mailed, via internal mail, to the designated PIA Specialist for the TSO.

  The list of designated specialists is located at the following address:
  Communiqués - Addendum to Communiqué AD-02-03R2

• BFICS update

  Send to International and Large Business Directorate, Large Business Program Section, 344 Slater Street, 6th Floor, Ottawa, Ontario, K1A 0L5, attention: Manager.

3.6.7 Quality control

A checklist is a good tool to assist in quality control

PE-1: Audit Process Quality Control List

3.7 File assembly

3.7.1 Documentation functions

An audit creates many documents that have different values and functions. All files generate two types of documentation: specific and general.

• Specific documentation provides an understanding and explanation of what occurred in an audit cycle for various purposes (appeals, courts, next audit cycle, review of program). Logically, this information belongs to a first group called "Audit file" (see 3.7.2).
• General information provides details on the corporate group as such (organization and operations) and on its tax matters. This information goes beyond the current audit cycle. According to procedure, this group is found in the file called "Permanent file". (see 3.7.3) For practical reasons, some elements of the audit file also appear in the permanent file. It should be noted that the relevant information continues to be created daily and the permanent file—with all of its appropriate subdivisions—is the appropriate location to collect this information.

References:

3.7.2 Audit file

We need to recognize that various practices exist, depending on the TSO. In Large Business, there are two main ways to set up an audit file, both of which are acceptable. It is left up to each TSO to adopt a preservation structure that is conducive to future consultation and work.

• Method one: consolidate into one single file (called "Closure file") any information that is relevant to an audit cycle.
• Method two: Divide documentation into T2s and a separate file (called "Working paper file").

Method one: into one single file

Closure files structure:

(Tabs A-F are bound into one or more volumes; Tab G is in a separate volume)

Method two: in the T2s and in a working paper file

Bound in the T2s:

1. CORTAX print-outs based on the most recent reassessment.
2. Screens (5, 1, SUPP) and coding sheets.
3. T7WC and revised T2 schedules.
4. T99A and other required forms.
5. Memorandum to the Taxation Centre (loss identification notice, T67AM T67BM).
6. Reports: T20, Part XIII, provincial income allocation, fairness, penalty, etc.
7. Reports/memos from specialized audit areas.
8. Referrals to Head Office, Justice Department and other areas.
9. Correspondence in chronological order (with index, if applicable).
10. T2020 or log.
11. Index to trace documentation on adjustments, which is kept in the working paper file or in the permanent file.

Working paper file:

Any documentation that the audit team deems fit to keep (plus the Standardized Audit Risk Assessment Template) with respect to explaining work completed during the entire audit process as well as adjustments made. In this respect, several TSOs have set their own guidelines or procedures.

3.7.3 Permanent file

We should not mix up the permanent files that are stored at the TSO and the permanent documents envelopes (PDE) that originate from the Tax Center (TC). In a PDE, there are specifically elections made by the taxpayer and few key documents from audit.

According to the Compliance Programs Branch’s Audit Manual (AM), audit documents and other relevant information including permanent documents are stored at the Tax Center (TC). These documents are either attached to the T2 Return (T2) or placed in the Permanent Document Envelope (PDE).

However, the AM further states that because of the size and complexity of the operations of the large business taxpayer and because of the greater frequency of audit, it is preferable to maintain in the TSO a Permanent Audit File.

The permanent file stored at the TSO contains general information on a group's corporate organization, operations and major transactions, financial structure and accounting system. It retains the documentation that reveals the corporation's tax history, past audit results, and taxpayer's tax elections that may have future repercussions. It is also where one accumulates all information or data that may be used in a future audit.

For the time being, there is no mandatory permanent file structure. The list of categories below is given for illustration purposes though it generally corresponds to the one found in the TSOs. Each office is encouraged to complete it based on its needs.

3.7.4 File update

The files of the Large Business Program are specific files. The audit team is the most qualified to update these files as they are the most familiar with the content of the files. The LFCM is responsible for updating the files. In view of this, it is not justified to use retention or disposal rules for each piece of documentation.

• Audit files update
  At the end of each audit, the audit team determines which documents should be kept in the audit file (closure file or working paper file) or in the permanent file or in both files.
  
  At the end of each audit cycle, the LFCM determines whether the audit files from previous audit cycles should be retained. He must take into consideration the right of appeal of the taxpayers.
  
• Permanent file update (stored at the TSO)
  At the end of each audit, the audit team selects documentation that will be stored in the permanent file categories (see 3.7.3). Also, the team reviews the content of each category in the permanent file to identify the documents to be removed that are no longer relevant.
  
  During the year, the LFCM will use the permanent file categories to keep the incoming information that he judges relevant.
  
• Permanent Document Envelope update (stored at the TC)
  The current practice is to place in the PDE that is being returned to the TC a copy of T7W-C and revised T2 schedules along with a copy of the audit reports (T20, PIAR, etc.) indicating a retention period in excess of 5 years (cat. I).

3.7.5 File Location

Audit files and permanent files should be securely stored in the TSO in locked filing cabinets or room accessible only to the Large Business staff.

The Large Business Section Manager or the Assistant Director of Audit is responsible of these files.

3.7.6 Electronic Format

When documentation (worksheets or others) is kept on electronic media (CDs, diskettes), these CDs and diskettes should be stored in the « Next audit » category of the permanent file or in another suitable and secure place.

Annex A

The following illustrates the different components of the audit process - Phase I:

Standardized Audit Process - Phase 1

Input

• CRA’s directives and programs
• Previous audit files
• Tax payer’s filed documents, financial Information and business or industry characteristics
• Public data sources

Annex B

The following table list quality assurance standards (QAS) to consult:

Best Practice

Audit Process Quality Control List

FILE NAME:

LARGE FILE CASE MANAGER:

Appendices

Appendix 1

Books and Records Required

• Chart of accounts
• The grouping of the various accounts as shown in the financial statements
• Adjusting entries
• Analysis of accounts and reconciliation with the financial statements
• Trial balance
• Consolidated Public Financial Report (of the world business if none for the Canadian)
• Consolidated Financial Statement preparation working papers
• Financial Statements of foreign affiliates, if any
• Financial statements of foreign branches and joint ventures (whether foreign or domestic), if any
• Recent chart showing the structure of the company and its subsidiaries, if any
• Organization chart of management
• List of internal corporate reorganization and amalgamations and wind-ups, if any
• Legal closing documents on acquisitions or dispositions of subsidiaries and / or affiliated companies, if any
• Minute Books for the board of directors, all committees, and shareholders
• Share register
• All filings made pursuant to the incorporation Act
• Provincial tax returns and notices of assessment / reassessment
• Pension Fund statements
• Listing of foreign exchange rates used
• Management reporting letter from external auditor and management’s reply
• Internal audit reports
• Working paper files supporting Schedules 1 (former T2S(1)) items
• Contributed Surplus calculations
• Employee Benefit Manual
• Changes in accounting policies made during the years under audit

Appendix 2

Books and Records Required and Related Dates

1. Information Required 60 days prior to the start of the audit for the 1997 and the 1998 audit of SSL, ABC Ltd. and XYZ Inc.:
   • computer tapes of the General Ledger transactions and General Ledger Master in EBDIC format;
   • chart of accounts;
   • the grouping of the various accounts as shown in the financial statements;
   • adjusting entries;
   • analysis of accounts and reconciliation with the financial statements;
   • trial balance;
   • Consolidated Public Financial Report (SSL only);
   • Consolidated Financial Statement preparation working papers;
   • Financial Statements of foreign affiliates (other than those already included with Form T1134A or T1134B);
   • Financial statements of foreign branches and joint ventures (whether foreign or domestic);
   • recent chart showing the structure of SSL and its subsidiaries;
   • organization chart of management;
   • list of internal corporate reorganization and amalgamations and wind-ups;
   • legal closing documents on acquisitions or dispositions of subsidiaries and/or affiliated companies (ownership > 20%); and
2. Information required at the start of the audit for the 1997 and 1998 audit of SSL, ABC Ltd. and XYZ Inc.:
   • Minute Books for the board of directors, all committees, and shareholders;
   • share register;
   • all filings made pursuant to the incorporation Act(s);
   • provincial tax returns and notices of assessment/ reassessment;
   • Pension Fund statement;
   • listing of foreign exchange rates used;
   • Management Reporting Letter from external auditor and management’s reply;
   • internal audit reports;
   • working paper files supporting T2S(1) items;
   • working papers and documentation for SR&ED claims, including applicable information in electronic format;
   • working papers supporting GST returns;
   • Contributed Surplus calculations;
   • Employee Benefit Manual; and
   • changes in accounting policies made during the years under audit.

Additional records that are required after the preliminary review will be requested using query sheets.

Appendix 3

Initially Identified Audit Issues for 2007, 2008, and 2009

Appendix 4

Appendix 5

AIMS Coding for Requirements Issued

For example:

• A2 = A requirement was served to the taxpayer and it was complied with.
• C4 = A requirement was served to a lawyer and it was not complied with.

A further action is under consideration. Once the decision of prosecution is made, update to code 5, and when the outcome is known, enter code 6 or 7 as appropriate.

Appendix 6

Activity Codes:
532 Large Business -Income Tax Regular
580 Large Business -International Issues
156 Provincial Allocations

Appendix 7

T7W-C

General Instruction

The T7W-C sets out the taxpayer's revised taxable income and details of all changes to reported income resulting from the audit. It is also the primary source of information used by the Audit Support/Tax Cal unit to determine the revised income tax payable.

The narrative portion of the T7W-C should provide the following information:

• The taxpayer name and address.
• Detailed description of all adjustments to each source of income. The adjustments should be cross-referenced to supporting schedules, correspondence, notes of meetings held with the taxpayer or the taxpayer's representative.
• Revised Capital Cost Allowance, Loss Applications and other schedules that show the previous and revised figures with explanations of what changes have been made.
• The taxpayer will be provided with a copy of any revisions to Capital Cost Allowance claims for Class 24, 27, 29 and 34 assets.
• The T7W-C and any attachments should provide the details of any changed components of the tax calculation as listed on Forms T99/99A not otherwise evident.
• Following the "Revised Taxable Income" line, comments may be added, where applicable, regarding:
  1. amounts that are subject to penalties under section 163 of the ITA
  2. application of penalties under section 162 of the ITA
  3. number of days interest waived under subsection 220(3.1) of the ITA
  4. if the taxpayer's loss has been revised, a reference to subsection 152(1.1) of the ITA Notice of Determination is to be made where applicable.
• Where a penalty under Section 163 of the ITA has been levied on income that has been earned in the provinces of Quebec, Ontario or Alberta, an explanation should be provided on the T7W-C (Prov.) of the Amount of income subject to tax on which the penalty applies in those provinces.

Where changes are made to an initial assessment, a T7W-8 will be prepared for T1 individual returns and a T7W-9 for T2 Corporation returns.

T2

For T2 Reassessments, the auditor will prepare a T7W-C. It is essential that the explanation of changes be arranged in such a manner as to allocate the total adjustment to the following types of income, where applicable:

• Active Business Income
• Canadian Investment Income
• Foreign Investment Income
• Personal Services Business Income
• Specified Investment Business Income
• Other Adjustments - for example dividends deductible under sections 112 and 113 in computing taxable income.

Where there has been a corporate amalgamation and a return filed by a predecessor company is assessed, the T7W-C should be prepared in the name of new amalgamated company with a reference in the appropriate areas of the T7W-C of the name and income of the predecessor company:

• For example, where A Ltd and B Ltd amalgamate and become AB Ltd, T7W-C's should be addressed to the amalgamated company "AB Ltd" with reference in the "re" area to the income of the predecessor "A Ltd.".
• Similarly the account number of the amalgamated company must be used (a reference to the predecessor's account number should be included in the notice for greater certainty).

The same procedures will apply for re-assessed returns of wound-up companies amalgamated into the parent company, including those companies wound-up where a liquidator has been appointed but no clearance certificate has yet been issued. Note that the transferee or the liquidator has a responsibility only to the extent of the values of the property distributed.

Part 1.3 tax is payable by on every corporation whose taxable capital employed in Canada is in excess of its capital deduction of $10 million. The Part I.3 tax is filed with the T2 return and any changes can be included on the T7W-C provide revised Part I.3 tax information on T99A Special Instruction Area.

Appendix 8

Nil Assessment and year under objection

The Federal Court of Appeal previously ruled that no Notice of Objection can be filed for nil reassessments. The Appeals Division thus considers that any objection with regard to a notification that no tax is payable is not valid and the taxpayers are informed accordingly. For situations others than those where we modify a loss (the T/P can then ask for a notice of determination of loss on which he can oppose), the taxpayer has in theory no recourse for the year in question. To avoid that he asks then for a reassessment for the said year to generate tax payable to be able to restore his right to file a notice of objection (double work of issuing reassessments for the same year), it is suggested that the taxpayers be informed that they cannot file a valid objection (or an appeal to Court) if there is no tax payable. They will thus have the possibility of protecting their rights (by leaving a small balance of tax payable).

In the same order of idea, we may have to issue a reassessment for a year already under Objection. It is then necessary to indicate on the T7W-C standard sentences to inform the taxpayer in writing that its notice of objection is cancelled by the reassessment and that he has to file a new notice of objection to protect his right to appeal:

This(These) reassessment(s) nullify(fies) the earlier reassessement(s) and the related objection(s) filed in respect thereof. If you wish to object to the reassessment(s), you must file a new notice of objection.

Appendix 9

Form T99A

The purpose of form T99A is to provide the Tax Cal unit with information that cannot be included on the T7W-C and information required to complete various forms to update the T2 file.

In the event that no reassessment is being issued (e.g. where changes are for a statute-barred year) it is necessary prepare a T99A to update the file. A notation should be entered in area L "For update purposes only" or at the top right corner in red.

The auditor must complete one copy of form T99A by for each year reassessed, updated, or where a NIL Notice of Reassessment is to be issued.

If a statute-barred return is reassessed, indicate the reason on the top margin of the T99A, such as:

• T2029 Waiver filed
• Fairness legislation
• Any reason under subsection 152(4) of the ITA, e.g. fraud, misrepresentation attributable to neglect, carelessness or wilful default
• Illegal payments - subsection 67.5(2) of the ITA

Appendix 10

Priority Reassessments

General Instructions

Auditors are reminded that rather that processing a priority reassessment, consideration should be given to obtaining a waiver from the taxpayer/registrant for the particular year involved and the CRA policy regarding reopening prior year returns. For more information see 11.3.0 Normal Reassessment Period and 9.11.0 Audit Scope of the Income Tax Audit Manual.

It is generally accepted that "statute-barred problems" can be minimized through early identification and strict control. As it is not always possible to obtain a waiver, the identification and control procedures must be relied on to ensure that a notice is issued on time.

For adjustments requested by the taxpayer/registrant within the three-year period and being followed-up by audit, every attempt will be made either to obtain a waiver or reassess within the prescribed period.

Although the following procedures are outlined primarily to facilitate the processing of a return approaching statute-barred status, priority reassessments might be considered in other urgent or exceptional circumstances such as the taxpayer leaving the country.

Income Tax - To assist the auditor in processing a reassessment where a statute-barred deadline is approaching, procedures have been coordinated among the various sections involved. These procedures apply to reassessments to be issued by Tax Centres. Under some circumstances it may be necessary to issue a reassessment at the TSO, and each office should have local procedures in place to handle these situations.

While the following procedures provide that a priority reassessment may be processed in a short time interval, even on a "walk-through" basis if absolutely necessary, auditors must provide as much lead-time as possible to facilitate the processing in each section.

Processing Procedure

Categories have been established for the application of the different processing procedures. The reference to "days" is the period determined from the date that the file is forwarded to the responsible processing unit in the Tax Centre. Auditors should add an extra 10 days to the days specified to allow for processing of the file through the review and forms preparation stages. This extra 10-day period may be varied based on individual TSO's experience in processing files or the complexity of the case. Procedures vary depending on the circumstances as follows:

• over 120 days prior to the statute-barred date
• between 60 and 120 days prior to the statute-barred date
• between 30 and 60 days prior to the statute-barred date
• less than 30 days to the statute-barred date

Over 120 calendar days

A special processing procedure is not required if the statute-barred date is over 120 days from the date the file is sent to the responsible processing unit in the Tax Centre.

60 - 120 calendar days

Special control procedures are not required if the reassessment is between 60 and 120 days of becoming statute-barred. Process the file in the normal manner, placing it in a red folder with the statute-barred date clearly marked on the front cover. Also, enter the statute-barred date in RED in the top margin of the T99, T919 or T99A, using the YY/MM/DD format.

30 - 60 calendar days

If a return is to be reassessed and will be sent to the responsible Assessing unit 30 to 60 days prior to the statute-barred date, the following procedures apply:

• Enter the statute-barred date in RED in the top margin of the T99, T919 or T99A, using the YY/MM/DD format.
• The auditor will prepare a three-part Priority Reassessment Control form T287, which will be Assessments Control's method of ensuring that the priority return is adequately controlled while in the process. Note that a TC normally requires a minimum of 15 days to process a reassessment.
• The priority return, processing documents and all three copies of the control form must be placed in a red folder with the statute-barred date clearly marked on the outside. The files will be processed as manual reassessments.
• The control form will be submitted to the team leader for approval as a priority reassessment action.
• Once the auditor has completed the processing procedures the file will be forwarded with:
  1. Copy 3 of the T287 to Assessments Control and
  2. Copy 2 to Revenue Accounting.
• The file with copy 1 of T287 will be forwarded for processing to the responsible Assessing unit in accordance with established procedures in the TSO.
• When forwarded by an audit support clerk or other staff members, audit will direct using form T2003, that these files be forwarded on a priority basis and to the attention of the expeditor (liaison offices) where applicable.

The AIMS section will assign priority to each file relative to the respective "Notice to be issued" date on form T287.

Less than 30 Days - Walk-through

A return to be reassessed that is within 30 days of being statute-barred, will be processed in accordance with the procedures for the 30 to 60 calendar day statute-barred files

The auditor will complete the priority procedures and pass the file to the team leader, who will forward the file using express delivery or fax to the attention of the expeditor (liaison officer) in the Tax Centre.

The Tax Centre will treat the "walk-through" reassessment in the same manner to ensure that there is no undue delay in completing the reassessment.

Cancellation of a Reassessment on a Priority Basis

If a priority reassessment becomes unnecessary, for example when a waiver is received, record the "Date", "Authority" and "Reason" and notify the expeditor (liaison officer) in the Tax Centre to cancel the requested reassessment action.