If you and your family have a high net worth, the CRA may select your business activities and investment interests for audit as part of a recent project targeting wealthy individuals. This project appears to be in its early days and it’s not clear how quickly the CRA is acting or how it is choosing the individuals it wants to audit. If you are identified under this program, you may have a relatively short time to gather extensive information about your business and investment interests.

The CRA is targeting “high net worth individuals” for this audit project but since the CRA does not disclose its audit selection criteria, it’s not known exactly how the CRA determines who falls into this category. The information that is available seems to indicate that the CRA is focusing on individuals with complex affairs who may control or have broadly defined interests in a large number of entities. For this purpose, “entities” includes corporations both public and private, trusts, partnerships, joint ventures, private foundations and charitable bodies or funds, among others.

Detailed questionnaire on individual’s interests
As its first step in this audit process, the CRA is asking selected individuals to complete a detailed 21-page questionnaire. This questionnaire appears to be intended to help the CRA understand all the entities to which the individual has connections so it can decide where to direct its audit efforts.

The questionnaire asks individuals to disclose all of their interests in private companies, private trusts, partnerships and joint ventures, along with their personal bank accounts and investment holdings, both domestic and foreign. Individuals are also asked to provide an organizational chart portraying the relationships between themselves and these interests and investments. Individuals may be given as little as 30 days to complete the questionnaire and provide documents.

Follow-up questionnaires on specific entities
Shortly after the initial 30-day deadline, some individuals have received another CRA questionnaire asking for information about a specific entity, such as a corporation, in which the individual has an interest. This questionnaire asks for copies of material such as board of directors’ meeting minutes and minute books, copies of all correspondence with all legal and accounting firms used by the corporate group and copies of all tax planning documents.

Along with this questionnaire, the CRA sent another detailed list of questions intended to evaluate the company’s computerized accounting systems to identify the electronic files the CRA would request as part of the audit.

Background — Wealthy individuals face scrutiny around the world   Tax authorities around the world are focusing their attention on high net worth individuals, following an OECD report on ways to increase compliance among these taxpayers. 

The OECD considers “high net worth individuals” to broadly refer to individuals at the top of the wealth or income scale but does not otherwise define the term. Some countries have set specific thresholds, for example, Australia applies a particular assessment process to individuals who, with their associates, control AUS $30 million (about CDN $30 million) or more. Ireland has specialized authorities who deal with individuals with a net worth exceeding €50 million (about CDN $68 million).

 CRA’s research sources
To select files to audit, we understand the CRA is looking at lists of the largest public and private companies in Canada with substantial family ownership, along with other sources such as personal tax filing information, third-party databases and Internet research, including financial media sources and securities regulators’ databases.

We can help
While it is never pleasant to be subject to an audit, taxpayers who have adequately planned and executed their tax affairs should not be concerned. You may wish to contact your KPMG adviser to update your tax planning or confirm that it remains appropriate and can withstand scrutiny. Also, please contact your KPMG adviser if you receive any requests for information from the CRA. We can help you respond to these requests and guide you through the process as it unfolds.

Information is current to January 28, 2011. The information contained in this TaxNewsFlash-Canada is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG’s National Tax Centre at 416.777.8500.

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