Canada Revenue Agency (“CRA”) trust audits: An update

Our firm’s June 21, 2010 blog (yes, that’s over two years ago), discussed the CRA’s domestic trust audit project. Our February 9, 2011 blog discussed the CRA’s high net worth audit initiative (or what the CRA calls the “Related Party Initiative” or “RPI” for short). These are two very high profile audit initiatives undertaken by the CRA. What is the status of these projects? Good question.

It’s difficult to answer the above question with a lot of certainty. The CRA has previously announced that the RPI is targeted at private persons who have more than 30 entities in their corporate group (including corporations, trusts or partnerships) and appear to have a net worth of more than $50 million. A lot of questions arise as to how the CRA is identifying such people but the CRA has been tight-lipped. At the CRA Roundtable at the Society of Trust and Estate Practitioners recent National Conference held on June 12, 2012 in Toronto, ON, the CRA stated they have so far tentatively identified approximately 600 individuals that they intend to review. It seems like the CRA is still at the early stages of carrying out the RPI mandate but that is pure speculation. For anyone who meets the earlier mentioned criteria, the message has to be loud and clear… be ready! The process will be invasive, time consuming and costly. Early preparation for an audit will certainly help.

With respect to domestic trust audits, our firm has been involved in a number of these cases. Our cases generally involve plans where the residency of a domestic trust is planned to be in Alberta but the CRA asserts that the residency is in a province other than Alberta (generally Ontario or British Columbia where the tax rates on the subject trust income is usually greater than that of Alberta). Given the judicial history of the Garron decision and the recent Supreme Court of Canada decision in such a case, (see our blog dated April 12, 2012) the CRA would seem to have some momentum to further attack these types of cases. Our recent experience is that the CRA seems to be taking a very aggressive position with inter-provincial trust plans.

We have also seen recent CRA trust audit questionnaires and listened to other firms’ experiences with domestic trust audits. One trust audit in particular appeared to be very invasive with the CRA taking very aggressive taxable benefit positions for certain amounts paid by trusts on behalf of the beneficiaries. In discussions with these practitioners, many of the assertions by the CRA appear to be very defensible but it was interesting nonetheless to hear about the positions that the CRA was taking.

Finally, Tax-Free Savings Accounts (“TFSAs”) are still under the scrutiny of the CRA. This audit initiative has received recent media exposure and appears to be targeting TFSAs that have had large “wins.” The CRA also appears to be reviewing, as they have in the past, TFSA contribution room. One of our firm’s clients recently received a letter from the CRA that suggested that the client had exceeded their contribution limit. While the matter was easy to resolve, others may not be given the specific facts.

To summarize, domestic trust audits, the RPI and TFSA audits are not dead. Quite the contrary… they are alive and well. Be ready!