Tax auditing:shifting the basis

Convenor:  Rhonda Lee

Participants:  Steve Wagner, Mark Ainsley, Vaj Banday, Ali Sultani

What if CRA was more involved in "educational" tax auditing to assist business financial accountability, rather than penalize businesses for their lack of knowledge of vague and sometimes absurd taxation policies and practices? 

Problem Defined:  The current adversarial approach to "auditing" businesses financial records takes the "what-are-you-hiding-from-us" perspective.  In some cases this is warranted, but many starting businesses or even those operating for many years, simply lack knowledge about the vague, complicated and often changeable taxation policies and record keeping required!

Most businesses have every intention of paying taxes, and contributing to their community (and some are even *penalized* for their charitable donations).  Most simply haven't been trained or adequately prepared for what CRA wants, or they do not have the necessary financial and taxation knowledge (in spite of bookeepers and accountants who may contribute to poor practices). What they do have is a viable business that is often put in jeopardy by CRA's audit processes.

Audits can reveal poor record keeping practices but often too late and with penalties that can cripple a business, rather than an effort to correct, re-train and improve businesses (many small and medium are also struggling to grow amidst competition)

Several examples were provided:

1. One case was where goods or services were donated for charity and it was expected that a tax be paid on the full value of the goods in spite of $0.00 charged for the donated goods.  In this case the community suffers (reluctance to donate to good causes) and also the manufacturer who must pay tax on goods that he never recovered his costs from.  BIZARRE CRA logic!

2.  Another example was of a pub in business 10 years in a community and having 10 cent beverages as a promotional happy hour event to generate community good will and more business.  In this case they were required to pay $60,000 in back taxes for the 10 years they were in business using this promotional practice that had become a community "icon", forcing them into bankruptcy.  One participant could not fathom the "wisdom" of gov't to close down an establishment that had only tried to generate customer goodwill and relations.

3.  Recently a restaurant in Toronto that would provide a complimentary meal to one "lucky" table each night in order to generate community good will and business, was told they had to pay taxes on the liquor that was served at the dinner, even if it was given away for free.  This only encourages stinginess rather than the generosity businesses are more than willing to share with a community.

4.  Another example involved a small but rapidly growing landscaping company that was audited in its 3rd year of business and had their business tied up for several months because of an out of date Health Tax recording software.  They lost business and had to terminate the employment of several employees, who undoubtedly had to access unemployment payments in excess of the tax penalty.  This was a miniscule infraction that the business could have been made aware of, corrected and moved forward from without penalty (unless it was repeated).

5.  Another example was that of a hand-truck pallet that was used in a manufacturing environment to assist employees in moving goods from one area to another for raw goods, packaging and shipping (likely to save them from strain and injury).  The business was penalized because they sometimes used the hand-truck to move materials for packaging and shipping, which they were told they had to pay TAX on its use!!

Proposed was a two-tier taxation system that would create more fairness so that manufacturers could better compete in a "taxing" environment that is not geared to assist business.  This would create domestic versus international tiers that would lower tax rates for businesses focused on growing internationally. 

While Federal and Provincial taxes are relatively insignificant (because you only pay if you are making a profit) by comparison Source Deductions are taken regardless if you are thriving or just barely surviving as a business.  A tax break in source deductions would be helpful, because you are employing a segment of the population that would otherwise not be working.

In Summary, it becomes increasingly important to have financial and tax education provided in schools as these are our future businesses and tax payers.  We cannot continue to penalize the lack of education in adequately equipping citizens to succeed financially. 

Businesses would most certainly benefit from an educational based tax audit designed to improve their practices, their financial accountability and sustainability. Taxpayers pay for CRA staff to provide a service - why not one that is beneficial to those from whom they take taxes?    For those businesses unwilling to improve over say, a 3 year period of educational audits, penalties should be forthcoming.

Educational tax audits should be available on request to all new businesses and to those who voluntarily wish to improve.

And finally, CRA needs to have greater transparency, clarity and consistency in their taxation policies and interpretations.  They need to adopt a more helpful rather than punitive role for everyone's benefit.  Financial education is critical to our economy's success!