Updated: Oct 5, 2022
The CRA has not made it easy for Canadian taxpayers to navigate its often complex and convoluted processes. In Part Two of this series, we highlight how the CRA handles foreign tax credits, supporting documentation, credit or deduction denial and address CRA "assumptions".
Increased requirements for proof of credits and deductions – especially foreign tax credits
The CRA casts their net wide and sends requests for supporting documentation to an ever-increasing percentage of taxpayers. As a tax firm specializing in cross-border and expat tax matters, we are seeing a growing list of documents required to support foreign tax credit for taxes paid in the US. Until relatively recent times, the CRA was satisfied with copies of the US tax returns. Now this is not sufficient to approve the credit – taxpayers also have to provide copies of other supporting information, such as employer letters, additional tax return schedules, payment confirmations, breakdown of foreign source income and copies of US tax transcripts. US tax transcripts are printouts of US federal or state tax records produced at taxpayer’s request. Unlike the CRA, the Internal Revenue Service (IRS) does not send notices of assessment each time they assess a tax return. We mention the US tax transcripts specifically because it is not easy to obtain them. A taxpayer or another authorized person must call the IRS or request them online. It is even more difficult in the case of state transcripts – the process is different in each state and some states require a POA and/or a written request to provide an equivalent of a federal transcript as well as a payment for such documentation. To help our clients navigate through the required documentation, we include this additional work in our fixed pricing package and have ongoing discussions regarding potential requests for additional information that may come from the CRA.
You provided supporting information in prior years yet the CRA is still not satisfied
It is difficult to explain this, but we often see that the CRA sends repeated requests for support of the same credits to the same taxpayers each year. The taxpayers’ files should not have any red flags and the CRA’s requests were fully satisfied in prior years – one may think that the CRA should not be demanding support for a similar credit again. Unfortunately, that is not that case and this only tells us that there is no logic behind the CRA’s scrutiny in many instances. They are requesting supporting information just because there was a certain credit claimed in the latest year, regardless of the history and outcomes of similar requests in the prior years. This can be frustrating for our clients and we work closely with them to ensure that each of these requests from the CRA are addressed in a timely manner, even if it is something that has been asked for many times prior. Fortunately, many of these requests come to us directly as tax return preparers and authorized representatives and our clients can choose to have the Trowbridge address in the CRA’s records so that all the requests are sent to us directly and we can action on them immediately.
Very formal approach taken by the CRA with burden of proof fully on the taxpayer
What happens if some minor document is missing from a package of supporting documents sent back to the CRA? Will they follow up to request it? Will they call to inquire, or will they accept the proof conditionally? None of the above. The CRA usually denies a credit or deduction entirely, despite all other documentation provided. There is always an option to submit another package, this time including the missing piece of information. However, due to the long processing times, a taxpayer may end up owing to the CRA and may start receiving demands for payment. Therefore, it becomes very important to ensure that all supporting information is provided in one package and nothing is missing. A good approach is to go through CRA requests very formally and to constantly check the list of documents requested to ensure that everything is included. And if something is deemed missing by the CRA, our advice is not to panic and to submit everything again with necessary adjustments and additions.
CRA makes assumptions – and never in taxpayer’s favor!
This is something very similar to the above but expands on the CRA’s way of thinking: imagine you file a tax return reporting significant amounts of foreign income. Due to the interplay of foreign tax credits and other factors, the tax return shows a significant refund due back to the taxpayer. However, we have seen cases where the CRA would process the tax return by using amounts submitted by the taxpayer and making adjustments to them because they believe that the tax return contained errors and the income amounts should have been treated differently. It is not that the CRA was unsure of something and required clarification. It is not because of errors on the tax return. It is simply a matter of disregarding a tax return and making adjustments based on their own assumptions and understanding of facts disclosed, with the only possible goal behind it – to reduce the tax refund. This becomes increasingly frustrating considering long processing times for the subsequent adjustments. We have never seen cases where the CRA would use the same approach resulting in a higher refund to the taxpayer, so it is a big question if such approach is fair. Usually in this kind of situation, it is not a problem to ensure a correct assessment in the end but the cash flow and/or balances owing in the interim may become a larger issue.
Dealing with the situations discussed above can be stressful, time consuming and daunting. It is recommended to seek professional tax advice and leave the conversations with us to ensure a fair and worry-free return.