Written by Nedgy Augustin
The report of the Auditor General of Canada states that close to two thirds of all notices of objection were decided in favor of the taxpayers. Readers may well be pleased with those results, but this statistic should not be taken at face value.
What do “objection files” mean for taxpayers?
First off, it is important to know that the objection process—including everything that is done before the objection is filed—is the cornerstone of a just and fair tax system. Notices of objection contain relevant facts and legal arguments. All citizens need to properly understand how the tax objection system works.
Step 1: The notice of audit is received
An audit generally starts with the sending of a notice of audit. CRA notifies the taxpayer in writing that they have been selected for an audit and specifies the extent of the audit.
Step 2: Preparing for the audit
The auditor provides their contact information and outline the scope of the audit. They also specify which tax years the audit covers and which documents and information taxpayers have to provide.
The auditor makes an appointment with the taxpayer for a first meeting at the taxpayer’s office. The Taxpayer can prepare for this meeting by himself, but it is advisable to retain the services of an accountant. Bear in mind, however, that the taxpayer’s rights must be respected while their tax compliance is being checked, in accordance with the Taxpayer Bill of Rights.
Step 3: The first visit and the tax audit
The auditor makes an appointment with the taxpayer for a first meeting at the taxpayer’s office. The CRA’s staff prefers to study accounting records on site, and the study may take several days.
Step 4: The proposed assessment is issued
The auditor is supposed to consider all of the taxpayer’s explanations before the closing of the audit. The taxpayer then receives a draft notice of reassessment containing the results of the audit and the auditor`s analysis of the taxpayer`s responses to the suggested readjustments. Throughout the audit there will be ongoing discussions to clarify information or concerns that either the taxpayer or the auditor may have. Before the final notice of assessment is drafted, all parties may review any points brought forth by the other side, and come to an agreement on a final outcome. That step is crucial, because it avoids the further step of filing a notice of objection.
In addition, when we look at the statistics, we realize that two thirds of all objection files are settled in favor of taxpayers. This could mean that those files should never have needed objecting to. Better communication between the tax authorities and entrepreneurs (or their accountants) would have meant settling those files much earlier. This is even more worrisome for society as a whole, because taxpayers’ money could have been put to better use and those entrepreneurs could have avoided paying extra professional fees. All of these resources could have spent their time doing more useful things.
Step 5: Closing the tax audit
The taxpayer then receives a final notice of re-assessment, which details the results of the audit and the analysis of the auditor`s response to the suggested readjustments.
If the taxpayer disagrees with the notice of reassessment, they have 90 days to file an objection with the CRA Appeals Division. They have to give their reasons for objecting and provide all relevant facts and documents. At that stage the burden of proof is on the taxpayer, who is presumed liable until the contrary is proved; this is particularly unpleasant because, once again, two thirds of the decisions turn out to be in the taxpayer`s favor.
Lastly, coming back to the Auditor General of Canada’s report, we do not find that statistic comforting. We are still wondering why close to 44,000 of 66,000 files needed to be objected to in the first place. Those 44,000 taxpayers were obliged to fight to assert their relevant facts and legal arguments. And it was the taxpayers’ money that paid for all those overturned draft assessments. A tax mediation process would have meant skipping the fifth step completely and would have avoided long and costly disputes for taxpayers.