Post Tax Season Audit Activity in Full Swing

Evelyn Jacks

CRA typically moves into a “post-payment” verification mode after tax season and this year they are well armed with new data collected electronically from 93% of all tax filers and new funding, too.  That means tax and financial advisors can expect to hear from clients for audit assistance and/or direction on the most appropriate savings account to tap to repay their refunds or benefits – all adding to the inflationary pain Canadians may already be feeling.  Here are the tax filing stats to August 27, 2023 and an insight into the audit plans that are coming.

From February 6, 2023 to August 27, 2023, just under 31 million personal tax returns were filed, of which only 7.4% came in on paper; that’s a new all-time low.  CRA processed $39.9 billion of refunds and $53.7 billion in balances due.

One of the reasons for such high tax filing compliance in Canada is that aside from processing refunds and collecting balances due, CRA has within its mandate the redistribution of refundable income-tested benefits like the Canada Child Benefit, the GST/HST Tax Credit, the Canada Workers Benefit and the new Canada Dental Benefit.  There are 5.7 million returns filed with neither a balance due or a refund, many of those for the purposes of collecting these refundable benefits. Audit activities will surround those payments, too, if CRA finds the taxpayer does not qualify; for example if marital status is incorrect and understates the family net income, upon which income-tested benefits are based.

For everyone else, though, tax filing amounts to one of two results:  the receipt of a refund or a balance due.

Balances Due Exceed $7,000.  Returns must be filed on time and for those who owe, balances due paid on time to avoid penalties and interest.  This year the average balance due reached a new high of $7,478 per tax filer who owes. These tax filers are often unincorporated self-employed people, who may feel additional pain this year due to  the repayment of the CEBA loan ($40,000) for those who qualified to receive all of it. This comes  due on December 31, 2023.  These are significant debt numbers that require planning now.

Refunds are at a record high. Canadian tax filers who have active employment income are also highly compliant, largely due to the fact that so much money is withheld from their pay cheques throughout the year. This year’s average refund is an astonishing $2,230, but that number can also include overpaid quarterly instalment remittances from pensioners, alimony recipients and others; or annual remittances in the case of farmers and fishers.

CRA is well funded.  Distributing social benefits and refunds, as well as collecting those amounts due requires a large workforce and funding for technology and distribution with tight security. In March 2023, the CRA asked the government to approve funding of $14.9 billion, an increase of $2.4 billion over the prior year.

Distributing the CAIP is a new cost Centre. The Climate Action Incentive Payment – now being paid in Alberta, Saskatchewan, Manitoba and Ontario as well in Newfoundland and Labrador, Nova Scotia, and Prince Edward Island starting in July 2023, accounts for $1.9 Billion of the increase the CRA was seeking. 

Pandemic Support Audits Ongoing. Important from an audit defence standpoint is the fact that the CRA is also still dealing with the administration of 12 discontinued pandemic supports, which are now in their “post-payment verification” stage. 

Aside from improving call centre performance, a further increase of $337 million was sought to administer new initiatives and taxes recently created by the government:

• The First Home Savings Account
• The Underused Housing Tax - modifications to CRA systems, publication and procedural changes
• The Luxury Tax;
• The Canada Recovery Hiring Program – a program introduced to encourage employers to rehire workers previously laid off as a result of COVID-19 - funding to perform validation reviews;
• Measures related to international tax reform, to reduce the incentive for multinational enterprises to shift profits into low-tax jurisdictions, and to limit the use of excessive interest deductions to reduce Canadian tax (EIFEL).

Microscope on Tax Avoidance. But aside from all of that, the rest of the new money CRA has asked for -  about half a billion dollars – would go to the following two focused initiatives, according to its departmental plan:

• To administer measures to combat tax evasion and tax avoidance;
• To ensure the post-pandemic sustainability of the CRA’s call centres;

Make a Difference.  The bottom line is that many taxpayers, perhaps millions, will receive a dreaded letter from the CRA this fall asking for verification of claims on the 2023 tax returns, and potentially, returns from prior years too.  It can make a big difference to wealth preservation, and financial peace of mind, when taxpayers and their advisors work together to decipher and defend CRA audit requests. 

Learn more about how to do this at the September 20 CE Summit.  Check out the agenda and register now to take advantage of a September 15 early registration deadline and tuition reduction.