In the February 5, 2011 issue of the Financial Post, Jamie Golombek, Managing Director, Tax and Estate Planning at CIBC, reported on a new CRA audit initiative targeting “high net worth” individuals for audit or review. Mr. Golombek reports that this project, which is referred to as the “Related Party Initiative”, targets such individuals with a net asset value of $50 million and who have related groups of 30 or more entities. The goal of the project is to address high-risk compliance issues associated with such individuals and their related entities.

The audit project will require such individuals to provide extensive information to CRA concerning their finances and related entities. Mr. Golombek reports as follows:

As part of the audit process, the CRA is asking individuals to complete a T997 "Audit Query Sheet" as well as a lengthy 20-page questionnaire. In reviewing copies of both obtained by the Financial Post, it's clear the CRA is asking for information about a variety of related economic entities, including partnerships, trusts, corporations, joint ventures and private foundations.

On the last page of the questionnaire, the taxpayer is asked to provide both organizational charts showing the relationships among all entities along with a complete set of financial statements for all years under review.

This new audit project follows on the heels of the recent trust audit initiative by the CRA, the update to the CRA’s expansive policy on collecting taxpayer information and their new aggressive tax planning reporting regime that was introduced for consultation in 2010. Therefore, this latest audit initiative increases the likelihood that high net worth individuals may find themselves under audit by CRA. Such individuals should seek accounting and legal advice immediately if and when faced with a CRA audit or review.

A small measure of comfort can possibly be taken by lawyers and their clients from Finance Minister Jim Flaherty’s response to the Canadian Bar Association with respect to the aggressive tax planning reporting regime. The CBA challenged the requirement that every “advisor” report “reportable transactions” to the CRA on the basis that it would violate solicitor-client privilege. The response provided by the Finance Minister in January 2011 indicates that the regime was not intended to disclose privileged information. It remains to be seen what changes will be made to the regime, or any of the other initiatives, in recognition of the long history of legal protection normally afforded to communications between lawyers and their clients.

The new initiative targeting high net worth individuals has implications for organizations involved in transactions with such persons, which may include registered charities. These charities, and private foundations in particular, should be on alert that they may find themselves under an audit as a result of CRA’s review of individuals with whom the charity may have some connection (whether directly or through other organizations).

Given this possibility, charities should consider a review of their current tax compliance so as to have the opportunity to address proactively issues that might concern CRA on audit. In some cases, compliance issues can be eliminated entirely prior to the audit. However, even if compliance issues remain when CRA conducts its review, organizations that have acted proactively to review and improve their tax compliance on a going forward basis will generally receive more favourable audit treatment by CRA than those that have not.

Miller Thomson’s tax, private client and charity lawyers can assist individuals and organizations who face audits or review by any division of CRA.