_____REVENUE CANADA AUDITS____

-not a wise idea for your auditor to see on your desk read why...

If you operate a business in Canada you will be eventually be audited by the tax department. They were once called Revenue Canada but  have changed their name to the CCRA. I will refer to the rascals as Revenue Canada. 

At the very beginning you need to be reasonable about this. Nobody likes to pay taxes but we all do and we all need to share the expenses of Government because the benefits produced support our entire country and make Canada what it is. If you feel that you should go through life without paying any taxes and contributing to the country then I'll be plain about it. You are an idiot!  Now that leaves the rest of us. We are willing and even happy to pay our fair share. Well maybe happy is pushing it but you know what I mean. 

In Canada we have an exceedingly complicated Tax Act supported by thousands of regulations and interpretation bulletins and there is lots of confusion and a lot of grey areas. This means that even professional Accountants who have not specialized in Tax work will prefer to have their returns completed by a Tax Accountant specialist.  So the drill is that you submit your tax return to Revenue Canada and they process it and send you a refund or accept your cheque for the balance owing. So far so good. 

The problem is that some people cheat and then there is that grey area. Some people will claim expenses that they never really had or even revenue they never had or some will claim only some of the revenue or make a mathematical error or whatever and the bottom line is that there are errors in the tax returns which more often than not result in a refund to the taxpayer. Clearly there needs to be some quality control here. Nobody would argue that. So Revenue Canada employs an Audit Department to select returns and audit them for accuracy. When you consider it, this is an entirely reasonable process. The Auditors would then identify the incorrect returns and prevent taxpayers money from being expended on bogus refunds. That would help maintain the integrity of the entire tax collection system. 

Until this point everything is perfectly logical. But now we have some problems. Big problems. 

As the audit process became more refined it was discovered that it generated a very significant amount of revenue to the Federal Treasury. Since Revenue Canada collects money for both Federal and Provincial levels of government there were also significant funds for the Provincial Treasuries. The cost of the audits was small compared to the amounts collected and suddenly the government realized that they had a new revenue stream and it was significant. So the government put more and more Auditors on the job and collected billions of extra dollars. 

Not only did the Auditors collect the taxes owing they also applied penalties and interest and in fact the penalties were severe. This resulted in even more money flowing from the audit process. 

Auditors were appraised on how much they collected and we just need to understand one more fact before proceeding. 

In Canada we have a huge and oppressive tax load on individual taxpayers and business. The logic seems to be that the government will take our money and then dole out benefits to us like "free" health care, GST refunds and retirement benefits etc. rather than allowing us to keep more money and look after some expenses ourselves. This is how they do it in the USA. Taxes are much lower there but everyone needs to look after their own health care. When you buy products in the USA you always get better value than in Canada because fewer taxes are rolled up into the prices. 

So in Canada, what has happened is that disposable income has fallen and in the case of business some business people have gone underground in order to survive. Some Canadians work for cash only with no T4 slips and no records and they don't declare billions of dollars of income per year. Canadians are desperate and they look at any methods that promise to save them taxes. Hundreds of thousands of Canadians maintain off shore accounts in other countries. Financial services companies offer ideas to minimize taxes that operate in a grey area of the tax act. Lately banks have been charging high interest rates for loans then are paying only a few percent on deposits. After accounting for inflation often the depositor is not earning anything on their money. 

So that's the situation in a nutshell. Its likely that over a million Canadians are working in the underground economy for cash mainly because they have been forced into it by the circumstances they face. They are simply trying to put food on the table to feed their families and survive. They are not evil criminals. There is significant non compliance with our voluntary disclosure of taxes due. 

Enter the Revenue Canada Auditor. They have ONE objective and that is to generate revenue. You really need to appreciate this fact.  When you are chosen for audit your selection is often as a result of a red flag so there is already an expectation of revenue generation from the Auditor. The red flags are generated when a tax avoidance scheme is investigated, where your deductions or income are not in accordance with established models and when they have received tips from other taxpayers that your activities are suspicious. In business that "other taxpayer" could be a competitor. In private life that other taxpayer could be a bad neighbour or ex spouse. The tips often come from people who have an axe to grind -so to speak. You may also belong to a group which the Audit Department has decided is operating in the grey area where potential revenue exists. For example they may audit boat charter companies one year. They may audit taxi drivers for tips the next. Here are some things you need to know. 

1. You have no rights. Take the Canadian Charter of Rights and Freedoms, the Criminal Code, the laws of common sense and common decency and place them into a pile. Pour a litre of gas on the pile and set it alight with a flick of your bic. That's where you stand with regards the law. And toss onto the fire the Tax Payers Bill of Rights and the Taxpayer's Ombudsman too. Yes its a nice warm fire! Think the Gulag and the Gestapo and you are getting close to the real situation you are in. You are screwed!

2. The Auditor will have ALL the levers of power. They have a legal department, levels of protective bureaucracy which look after each other, a compliant political master who is more interested in the revenue collected and they have that righteous fervour that they are saving Canada from the big bad wolf and evil people. They will send you communications with the Canadian flag proudly waving on it.  They have the power to freeze your bank account at the stroke of a pen without warning. This can make it difficult or impossible to obtain the services of a professional Accountant or Lawyer to protect your rights. They know exactly what they are doing and the negative effect it will have on you. They can even go to your customers with a demand to pay any money owing to you and they can confiscate those funds. They can assess you a totally ridiculous arbitrary amount and then attempt to collect it. And they will list your name in the paper so your colleagues and business partners and customers know about it. Its the mouse and the elephant and guess which one you are? (you are the mouse eh!")

3. The Auditor will lie to you and ask questions in such a way to incriminate you. If for example you had a lawyer present they would be able to protect you from these questions but without one the auditor will build a file and they will leave out of the file ANY facts which support your case. 

4. This is particularly annoying but if the Auditor is investigating an expense category such as rent and asks for a receipt for June which you are unable to find they can and do refuse to accept the entire amount for rent even the receipts you have for the other months. (yes this has happened to me!) There is absolutely no logic to this at all but that's the way its done. They are out for Revenue not truth.

5. The Auditor already has a plan to go from the audit to the revision of your tax returns and the claim for more money. You don't know this. Yet. The Auditor had done this many times and knows the drill. He is familiar with the dispute resolutions steps on the way and you are not. The contest is loaded against you. Most Canadians have a spine and won't just roll over so they fight the tax man. But they usually fight him alone and this is where they loose. You  really need a good Tax Accountant and even a good Tax Lawyer to have a chance of winning. They know how the game is played and they do instil some fear or at least some caution in the tax man so that the tax department doesn't destroy you as they are then to play by the rules. The situation really is quite terrible. You NEED  professional help. 

6. The Auditor will do more that one year at a time. There is a reason for this. They can collect more revenue this way. The penalties and interest will be significantly higher. This is a very obnoxious way of doing business. Clearly if you knew there was a problem in year one you wouldn't do it in year two or three. But that's not how Revenue Canada Auditors work. They wait in the weeds until three years have passed and then nail you for all three years which can and does have catastrophic effects on your finances.

7. The Auditor and Revenue Canada realize they are despised by a huge number of Canadians and they take regular abuse. This has resulted in a vindictive attitude in the department where they ignore any vestiges of professional financial conduct and purposely strive to cause harm and pain to the taxpayers they audit. The taxpayer finds it difficult to understand how public servants who are paid by them to provide services could act like this. Nevertheless this is the way it is. 

8. The taxpayer is unaware that they cannot negotiate with Revenue Canada. This can only be done by a third party working for the taxpayer -an Accountant or Lawyer. This is not something that is immediately apparent to the taxpayer so they are at a considerable disadvantage. My theory is that the Auditor is loath to negotiate directly to the Taxpayer because they get so angry and emotional that often they will loose it and pound the Auditor to ratshit. That's just my theory but I have heard stories. So they insist on talking to your representative who will maintain the negotiations on a professional basis. 

9. The taxpayer may have prepared the returns themselves and understandably feels that they can deal with the taxman. Huge Mistake. The first thing you should do if audited is to arrange for a professional Accountant who is an expert in tax work to do all the talking for you. It will cost you thousands of dollars but will save you more. There is a timing problem here because you SHOULD have gotten the Accountant to do your tax return for you. It still may be possible that you could find one that will stand up for you during the audit but it is much better to have them involved at the beginning. One could snipe at the Accounting profession and say they are in bed with Revenue Canada and the complexity and problems with the Tax system generates billions of dollars of revenue for Accountants but what's the point. They are professionals and you need them. End of story. To live in Canada today you need a Doctor, Lawyer, Accountant and Priest. Get with the program.

10. When Revenue Canada investigates a tax avoidance scheme it usually takes them a few years to nail the operator. One could argue that it takes them this long because they are purposely dragging it out so that they can collect more revenue from the operator's clients. That would be difficult to prove. But it seems to happen that way!

In the press today there are two major investigations in which thousands of clients are involved and Revenue Canada will be claiming millions of dollars of revenue from these clients. The investigations are for the Banyan Tree Foundation and Synergy Group 2000 Inc.  

And here is the great evil. In both cases the organizations are clearly doing good work. I simply do not have any evidence regarding the relationship between good work and lets say bad work for lack of a better term. And the supporters were clearly focusing in on two factors -the good work done by the organization and the taxes they would save by contributing to them. One can appreciate that a normal person would conclude that since both organizations had been around for years that Revenue Canada had approved it via the normal audit and review activity that had taken place over the years. 

But now it looks like Revenue Canada is auditing clients and refusing their previously accepted deductions for participation in these companies. This is a monumental disaster not only for the clients and the company but also for those receiving assistance from these companies. Life savings and family homes and retirements are involved here. But from the Revenue Canada perspective its all about the revenue. There are millions of dollars of potential revenue here and that's how the Auditors are viewing it. They couldn't care less about the personal tragedy involved. 

I think this is bullshit. We have had cases in Canada where people have committed suicide over their tax audits. We have had families break up, family homes lost, wages garnisheed, reputations destroyed, businesses closed, jobs lost and faith in government destroyed all because of the antics of Revenue Canada Auditors. Occasionally a story will reach the media but more often than not people are embarrassed and do not wish to let their neighbours and friends know about it. 

It will be interesting to follow the Banyan Tree Foundation and Synergy Group 2000 Inc stories and see what happens. I have no evidence concerning these organizations and am not in a position to comment on their relative merits. I am not an investor in these groups. But I am very concerned with the welfare of those who did invest and the potential action that Revenue Canada may take based on my observation and experience with Revenue Canada to date. This website is our way of trying to improve the situation. Our theory is that if you get the story out and more people know about it the chances of solving problems are improved. People are reasonable -even Revenue Canada people and sometimes all it takes is to present the problem and reasonable people will work to solve it in a reasonable way. And we have a happy ending.  We also operate in the print medium. 

We decided to publish a book on business in Canada and in it we do make several suggestions on the best way of dealing with challenges to business in Canada including  the Revenue Canada problem. (pages 46 to 59). We are not anti-revenue Canada. We do not suggest that there are ways you can avoid paying taxes because there aren't any that are legal. But we do give you an entirely different perspective on business in Canada and provide you with information that will save you a lot of grief and money. This is a unique book -there has never been one like it! And there may never be one like it again. 

YOUR VERY FIRST BILLION -the Corporate Secretary has just been published and her book on business is one of the the best ever written on business in Canada and the world -not to put too fine a point on it- it's fantastic! And funny too! Includes lots (420 pages!) of secrets The Man doesn't want you to know. Oh the Man is going to be mad!

UPDATE Sept 20/2008 News today that the charitable status of Banyan Tree Foundation has been revoked by Revenue Canada. Question: 1. Will Revenue Canada attempt to backdate investor's tax returns to recover amounts now judged to be not qualified. 2. What is the total recovery Auditors are claiming and how many investors are involved?. 3. Why didn't Revenue Canada disqualify this investment earlier so that Investors would be protected as they audit Banyan Tree Foundation returns on an annual basis. I am not expressing an opinion on the propriety or legal status of the Banyan Tree Foundation simply because I do not have any access to the facts regarding the case. My concern here is that Revenue Canada treats the individual investors fairly. There have been "issues" in that area for many years since it was discovered how much money Auditors could recover and the now the Audit Branch is a Revenue Source rather than simply a department to keep taxpayers honest by ensuring the integrity of our voluntary tax collection system in Canada.

Here are some good books relating to Revenue Canada that you will find very interesting! Researching your situation will save you money and grief. There is no magic way to avoid your tax responsibilities but you can minimize your problems.

 

 

 

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Banyan Tree Foundation now under investigation by  Revenue Canada

Calgary Herald article about Banyan Tree Foundation 

Synergy Group 2000 Inc.  now under investigation by the Ontario Security Commission and Revenue Canada

Canadian Business discussion group re Synergy Group and related companies

DioGuardi Tax Law  Offices in Toronto, Ottawa and Vancouver. Its very interesting and a sign of how bad things really are that this type of very useful service is available to Canadians. Makes you think that just maybe the problem is much bigger that reported in the media.... 

11 Perfectly Legal Ways to screw the taxman People seem to fixate on reckless ways to screw the taxman and save money when in fact there are perfectly legal no risk ways to do it!

Operating a Small Business in Canada Surely you jest! Sharpen your pencils and lets look into this! Information you won't find anywhere else.

 

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