2021 SRI LANKAN GST HST UPDATE cover

2015

GST/HST

ISSUES

2021

GST/HST

AUDIT ISSUESISSUES

Copyright © 2015 Diane Gaudon, FCPA, FCGA

Copyright © 2021 Diane Gaudon, FCPA, FCGA

AUDIT ISSUES

Prepared for: Sri Lankan AccountantsAssociation of CanadaSeptember 18, 2021

Presented by: Diane Gaudon, FCPA, FCGA

Leading Your Way to Success

All rights reserved.

No part of this work may be reproduced or copied in any form or by any meanswithout the written permission of Diane Gaudon, FCPA, FCGA.

The material contained in the booklet is meant only as a guide. The intent of thisbooklet is to heighten awareness of issues and not to cover all issues in detail. Theinformation contained in this material is based on currently available legislation

S I M P L I F I E DSales Tax Training

information contained in this material is based on currently available legislationand administrative material supplied by the federal and provincial governments.Future changes to the Income Tax Act and Excise Tax Act, regulations, orinterpretative policy or provincial legislations could affect the informationcontained in this booklet.

This publication is produced with the understanding that the author is notresponsible for any errors or omissions or actions taken based on this information.

Should you require assistance with respect to GST/HST compliance, recovery or anyother sales tax issue, please feel free to contact me by email [email protected].

Presenters biography

Diane Gaudon, FCPA, FCGA specializes in Goods and Services Tax (GST), HarmonizedSales Tax (HST), Quebec Sales Tax (QST) and provincial sales tax training andconsultation for businesses of all sizes. Over the past 34 years as a professionalaccountant, she has gained extensive accounting and taxation expertise spanningmany industries.

For twenty years, Diane has been advising and training both Canadian and foreigncompanies on federal and provincial sales tax matters. During 2009 and 2010, Dianewas on the Ontario government HST Implementation committee.

Diane has her own practice providing sales tax training webinars and advisoryservices to practitioners and businesses of all sizes across Canada and the UnitedStates. Should you require assistance with respect to GST/HST, QST or provincialsales tax compliance, recovery or any other sales tax issue, please feel free tocontact Diane.

Currently, she is a very popular speaker who frequently presents commodity tax


Currently, she is a very popular speaker who frequently presents commodity taxrelated material to numerous professional organizations, including CPA Ontario andCPA Canada. In addition, Diane has authored numerous publications and GST coursesfor CPA Ontario and CPA Canada.

Diane Gaudon, FCPA, FCGA

Specializing in GST/HST/QST Training and Advice

[email protected]

Visit simplysalestax.com for information regardingupcoming training webinars and important sales tax announcements.

GST/HST: AUDIT ISSUESSeptem ber 18 ,2021

S IM P L IFIEDS alesT ax T raining

D ia ne Ga udon,FC P A ,FC GASpecializing in GST/HST/QST Training and Advice

dia ne@ sim plysa lesta x.com1

© 2021 Diane Gaudon, FCPA FCGAdistributed under license Diane Gaudon


2021Slide 1

Diane Gaudon, FCPA, [email protected]

Content @ 2021Diane Gaudon, FCPA, FCGA


GST/HST:AUDIT ISSUES

2021Slide 1



Seminar descriptionGST/HST AUDIT ISSUES

Even during a pandemic the Canada Revenue Agency continues to audit GSTregistrants to ensure compliance with the legislation. In this live two-hourwebinar, Diane Gaudon, FCPA, FCGA will provide an insightful discussion aboutwhat you need to know about a GST/HST audit.

Issues related to how to prepare for an audit will be discussed since the retentionof adequate documents, books and records are the key sources of informationbeing examined by auditor during the audit.

Diane will also discuss the voluntary disclosure rules, what to expect during anaudit and what to do if you receive an assessment. This webinar will be full ofGST/HST information for businesses of all sizes.


2021Slide 2





2021Slide 2



Agenda

• What’s New

• Audit issues

• Audit selection

• Types of audits

• Auditor’s responsibility and powers

• Areas of risk

• During the audit

• After the audit

• Voluntary disclosure and directors liability

• GST/HST overview







2021Slide 3





2021Slide 3



What’s new for 2021

• CRA update

• Large business restrictions completely phased-out

• Prince Edward Island – April 1, 2021

• Quebec – January 1, 2021

• Motor vehicle allowance limits

• $0.59 per KM for the first 5,000 KMs and $0.53 for eachadditional km

• Increase in the documentation requirements thresholds

• Billing agents are now treated as an intermediary for ITCpurposes

• GST New Housing Rebate condition revised

• Proposed change to primary place of residence for any one ofthe purchasers instead of all of the purchasers


2021Slide 4





2021Slide 4




• CRA update

• New registration rules for non-residents effective July 1,2021

• New simplified GST registration program offered

• Simplified reporting but no ITCs

• Cryptocurrency definition revised on July 1, 2021

• Revised definition of an exempt financial instrument includesa virtual payment instrument effective May 18, 2019







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2021Slide 5




• CRA update – other proposed amendments

• New luxury tax on cars and personal aircrafts over$100,000 and personal boats over $250,000 (GST/HSTincluded) – more information to be released

• Effective January 1, 2022, tax is the lessor of

• 20% of amount over $100K threshold or

• 10% of purchase price

• Digital Sales Tax

• Effective January 1, 2022, more information to be released

• Proposed 3% tax on gross income derived from digitalactivities


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2021Slide 6



Audit selection – why my company???

• Common audit flags

• Large or unusual changes creating refunds

• Revenue discrepancies

• Inconsistencies between third party information andtaxpayer filings

• Requests to amend GST returns

• Non-compliance

• CRA requests or third party information

• Discrepancies between taxpayer filing and similar businessfiling in the same industry

• Audit of a related party or client/customer

• Taxpayer’s industry (e.g., large number cash transactions)







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2021Slide 7



Auditors responsibilities

• Identify and select taxpayers to audit

• Refund audit

• Repeat audit

• Voluntary disclosure, broader audit, retroactive adjustment

• Non-compliance audit

• Issue based audit

• Research audit program – estimates non-compliance forspecific industries

• Final audit due to deregistration

• Establish tax liability

• Propose audit assessment

• Finalize assessment with taxpayer


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2021Slide 8



Types of audits

• Desk audit

• Very limited, generally one reporting period

• Review of sales invoices, supplier invoices and otherinformation

• On-site audit

• General review of books and records for a specifiedperiod of time

• Special or criminal investigation

• Surprise visit and review (or seizure) of books and records







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2021Slide 9



Auditor’s power

• Very broad under section 288 of the ETA

• Taxpayer is required to

• Provide books and records for review and examination

• Answer questions

• Obtain third party information


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2021Slide 10



Auditor’s goal

• Look for non-compliance

• Confirm taxpayer’s voluntary compliance

• Conduct audit is an effective, consistent and efficientmanner

• Conduct and perform a fair and uniform audit







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2021Slide 11



The audit period limitations

• Generally, four years from the later of

• The day the GST return was filed

• The day on which the person is required to file a return

• Other issues

• GST return never filed

• Audit period limitation does not apply

• Limitation period extensions

• Fraud, carelessness or misrepresentation

• Auditor must prove and present facts of fraud

• Waiver is signed


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2021Slide 12



The audit period

• Small and medium businesses

• Generally, audit period is 2 years

• Previous fiscal year plus the preceding year

• If exposures are discovered the auditor may assess for full 4-year period

• Large businesses

• Generally, 2 or 4 years

• May be able to negotiate time period and areas under audit







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2021Slide 13



Areas of risk

• Collection and remittance of tax

• Failure to collect or self-assess tax

• For example, taxpayer does not charge tax on a taxable sale

• Failure to remit tax

• For example, taxpayer charges tax but does not report orremit the amount in its GST return

• Over-claimed refunds

• Input tax credits

• For example, invoice to support tax paid does not meetdocumentation requirements

• Public service body rebates

• For example, no proof or incorrect calculation

• Other rebates or adjustments


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2021Slide 14



Areas of risk

• Non-compliance

• Industry related issues

• Change in legislation or administrative policy

• Misunderstood legislation or very aggressive tax planning

• Technology changes

• Software changes or upgrades

• Business changes

• Staff turnover and training

• New product offerings

• Business mergers or acquisitions

• Change in business practices







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2021Slide 15



Areas of risk

• Ways to find tax cheaters

• Auditors may request information about the taxpayerscustomers

• Additional way to verify tax compliance of unnamed persons

• For example, annual sales or purchases

• Examples of businesses who have released customerinformation

• PayPal Canada Co

• Rona Canada Inc

• Square Canada

• EBay Canada

• Etc. including charities, real estate companies andfinancial institutions


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2021Slide 16



Desk audits

• First contact is generally a letter

• Letter confirms GST return is selected for review

• Auditor introduction

• Request for information

• Very common

• Triggered by GST return with a net refund

• Auditor generally requires the following information

• Highest 5-10 sales invoices

• Highest 5-10 supplier invoices

• Other information may be requested

• Desk audit has authority to release or reject refund

• May trigger an onsite audit







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2021Slide 17



Onsite audits

• First contact is generally a letter

• Confirms taxpayer is selected for review

• Auditor introduction

• May include initial request for information

• Generally, auditor may request information to be sentelectronically (e.g., detailed sales and purchase sub-ledgersand GL details)

• Schedule date for audit to commence

• Create a space for auditor to work

• Communicate to staff auditor will be onsite


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2021Slide 18



Working with the auditor

• Be cooperative

• Respond to auditor inquiries in a timely manner

• Encourage communication

• Acquaint auditor with business operations, processes andprocedures

• Set guidelines

• Dress code, office hours, who to ask for assistance

• Discuss with auditor the general nature of business,accounting procedures, arrange a plant tour, etc.

• Ask questions

• Scope of audit

• Estimated duration of audit

• Ask for advise if exposures are discovered







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2021Slide 19



Working with the auditor

• Treat auditor as a guest and provide with a decentwork space

• Assign one person to deal with auditor

• All auditor requests should be noted and retained

• Ask auditor to make all requests in writing

• Keep a list of all information and records provided toauditor

• Requests should be addressed on a timely basis

• Depending on size of taxpayer it may be necessary toinform external accountants or others that an audit is inprogress

• Good communication is key


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2021Slide 20



During the audit

• Auditor will review books and records

• Audit testing required to determine with reasonableassurance information reported in GST returns iscompliant with the legislation

• Review of taxpayer's internal controls

• Test compliance

• For example, supplier invoices reviewed to ensuredocumentation requirements have been met

• Specific testing

• Representative testing







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2021Slide 21



During the audit

• Books and records

• Clear and organized audit trails

• Retain and maintain records to support transactions

• Must be reliable and complete

• May be retained electronically

• During an audit, third party bank or supplier statementsmay be required

• Retain for six-years from the end of the last tax year

• Longer if related to an objection or appeal

• Must be retained in Canada or approved to be situatedoutside Canada


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2021Slide 22



During the audit

• Books and records that may be requested by auditor

• Customer agreements

• Customer/sales invoices

• Supplier agreements

• Supplier invoices

• Bank statements

• Bank statements from owners, partners, shareholders

• Shipping and/or export documents

• Agency agreements

• Emails

• Employment contracts, etc.







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2021Slide 23



During the audit

• Sampling options

• Random sampling or computer assisted sampling

• Statistical sampling

• Stratified or systematic sampling

• Block sampling

• Sampling method based on

• Size of business

• Availability of records – manual or computerized

• Appropriateness of manual review using block orstatistical sampling method


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2021Slide 24



During the audit

• Results from sample

• Determine if there is a uniform error occurrence for alltransactions in the sample

• Auditor’s duty is to meet the minimum standard ofreliability when performing the audit

• Taxpayer may challenge auditor’s sampling method orwhat was included in the sample (such as unusual sales)

• Error factor may be extrapolated over a four-year period

• A small audit sample with a high error rate may inflate theassessment

• A statistical sample is supposed to be representative of theactual data







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2021Slide 25



During the audit

• Books and records

• Inadequate books and records

• Auditor required to estimate revenue or expenses

• Examples of methods to estimate revenue

• Net worth method

• Bank deposit method

• Mark up purchases method using industry average


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2021Slide 26



During the audit

• Waivers (ss 298(7))

• Extends the audit period for at least six-months sotransactions do not become statute barred

• Can be requested by auditor or taxpayer

• Must justify reason for a waiver

• This legal agreement may be used as a negotiating tool

• May include time or issue restrictions

• Signing a blank waiver at the beginning of an audit isunacceptable

• Form GST145, Waiver and Form GST146 is revocation ofwaiver







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2021Slide 27



Completing the audit

• Auditor prepares proposed audit assessment

• Audits to net tax

• Auditor must allow unclaimed ITCs/rebates to be applied

• Taxpayer generally has up to 30 days to review

• Recommended to ask for a meeting with auditor todiscuss proposed assessment on last day of audit

• After taxpayer review

• May be required to arrange another meeting with auditorto resolve any misinterpretations

• May require assistance from GST specialist, lawyer,external accountants, etc.

• Only chance to have assessments removed


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2021Slide 28




• Standardized accounting

• Introduced to simplify compliance

• All federal tax accounts treated the same

• No refunds issued if one account has an overdue balance

• Interest charges

• 90-day Government of Canada T-Bill rate plus 4%

• Interest refunds

• 90-day Government of Canada T-Bill rate plus 2%







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2021Slide 29




• Penalties for non-compliance

• Numerous penalties – GST Memorandum,16-2

• Failure to file a return on time

• Gross negligence

• Failure to make instalment payments, etc.

• Penalty relief for wash transactions

• Administrative policy

• Reduces penalty and interest to flat 4%

• Two conditions

• Supplier failed to collect tax from a GST registrant entitled toclaim full ITCs

• Within closely related group, wrong person claims ITCs


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2021Slide 30



After the audit

• Taxpayer will receive notice of assessment

• Recourse for unresolved issues

• Notice of Objection

• Must be filed within 90 days from the day of the Notice ofAssessment is mailed

• Extension may be made within one-year if there arecircumstances beyond the taxpayer’s control

• Use Form GST159

• Objections must be supported by ETA

• Describe in detail the facts for each issue and providesupport







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2021Slide 31



After the audit

• Taxpayer disagrees with decision for Notice ofobjection

• Notice of appeal

• This decision is final

• Must file within 90 days for the mailing date of the responseto the Notice of Objection

• Two hearing types

• Informal – quicker results and less costly

• Formal - Tax Court of Canada rules are followed


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2021Slide 32



After the audit

• Collections

• Reduce interest charges by making payments in advance

• Payment is not an admission the assessment is correct

• Variety of methods to collect outstanding amounts

• Best practice is to negotiate a schedule of payments

• Garnishments

• Bank account seizure

• Asset seizure

• Off-set amounts from other programs, such as income taxrefunds







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2021Slide 33



Voluntary disclosure rules

• Effective March 1, 2018, relief granted on a case-by-case basis

Category Types of non-compliance Relief

Category 1 -Washtransactions

GST/HST not charged/collected butrecipient could clam full ITC

Waive all interest andpenalties* (report: 4-years)

Category 2 -Regular non-compliance

- Reasonable errors- Failure to file returns- Over claimed ITCs, rebates, etc.Note: there is no definition of areasonable error

Waive 100% of penalties and50% of interest*(report: 4-years)

Category 3 -Limited program

- Tax collected but not remitted,- Intent to avoid detection,- Deliberate carelessness,- Gross negligence,- Failure to comply, etc.- Gross revenue over $250 million

- No criminal charges orgross negligence penaltiesbut other penalties andinterest will not be waived*(report: all relevant years)

* Estimated tax owing must be paid with application submission


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2021Slide 34



Voluntary disclosure rules

• File Form RC199 and include payment of estimatedtaxes owing or indicate setup of paymentarrangements

• Conditions

• Disclosure must be voluntary and person must be named

• Penalty or interest must be assessable on tax liability

• Error must be over-due for at least 1 reporting period

• No relief

• Exposure related to an election (such as, section 156 –related parties election)

• Disclosure will result is a tax recovery

• Person is in receivership or is bankrupt







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2021Slide 35



Directors liability

• Under section 323, joint and several liability

• Unpaid tax or wrongfully obtained refunds are theresponsibility of both corporation and director(s)

• Four-year time limitation does not apply after the CRAhas made a reasonable effort to collect from corporation

• CRA must issue assessment to director(s)

• Director may not be assessed after 2-years of ceasing orresigning as a director

• Director(s) must prove due diligence

• Degree of care to prevent failure to deduct, withhold, remitor pay tax

• Very difficult to prove


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2021Slide 36



Get ready for an audit

• Be proactive

• Prepare for an audit now

• Know your business and the processes

• Understand the common audit issues for your industry andbusiness

• Repair areas of weakness and/or risk

• Review the audit protocols

• Know your rights

• Know the audit period

• Do not be afraid to ask questions







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2021Slide 37



2021 tax rates

• Manitoba 1% rate decrease postponed until further notice


2021Slide 38





2021Slide 38



GST/HST overview

• How does GST/HST work?

• Taxable supplies

• Most goods and services

• Three categories

• Taxable (5% GST or 13% HST)

• Zero-rated (0%)

• Exempt







2021Slide 39





2021Slide 39



GST/HST overview

• Taxable supplies

• Involved in commercial activities

• Eligible for input tax credits

TAXABLE SUPPLIES

Taxable supplies5%, 13%, 15%

Zero-rated supplies – 0%

Defined as commercial activity

Input tax credits available to recover tax paid on inputs by registrants

Tax charged to final customer No tax charged to final customer

This table has been over-simplified for illustration purposes


2021Slide 40





2021Slide 40



GST/HST overview

• Exempt supplies

• Not a commercial activity

• Not eligible for input tax credits

• Charities and non-profit organizations may be eligible forpublic service body rebates

EXEMPT SUPPLIES

No tax applicable on sales

Not a commercial activity

Not eligible for input tax credits

No tax added on sales to final customer– tax is embedded in price to final customer








2021Slide 41





2021Slide 41



GST/HST overview

• Application of tax

• Determine tax status of the supply

• Supplies can be

• Taxable

• Zero-rated

• Exempt

• Place of supply rules for taxable supplies

• Supplies made available in Canada - GST

• Supplies made available in HST/QST provinces


2021Slide 42





2021Slide 42



GST/HST overview

• General recovery rules

Before an input tax credit can be claimed on a GST return,certain conditions must be met

• Must be a GST registrant or required to be registered

• Tax paid business inputs must be acquired or imported forconsumption, use or supply in a person’s commercial activities

• Documentation requirements - prescribed information (next slide)

• Recipient of the supply - generally, the “bill to”

• Time limitation - generally, 4 years (specified persons - 2 years)

• Restrictions and limitations - generally follows Income Tax Act








2021Slide 43





2021Slide 43



Documentation requirement rules

Information required

Sale

less than$100

Sale

$100 to$499.99

Sale

$500 andover

Name of supplier (or intermediary)

Date of invoice or paid

Total amount of invoice or paid

Amount of tax charged1/tax status

Supplier’s valid GST/QST number

Purchaser’s name (bill to)

Description of property or service

Terms of payment

GST/HST overview

• General recovery rules

1 Report the GST and QST separatelyProposed change effective 4/20/2021This table has been over-simplified for illustration purposes


2021Slide 44





2021Slide 44



GST/HST overview

• General recovery rule restrictions

General Recovery Restrictions

100% restriction 50% restriction*Other

restrictions

Club dues

Home office

Passenger vehicles,purchased or leased

Meals andentertainment

Personal use

Unreasonableexpenses

Large businessrestriction in PE

Large businessrestriction in QC

* Excludes charities and public institutions







2021Slide 45





2021Slide 45



Common audit exposures

• Non-collection of tax

• Not tax charged

• Tax not remitted

• Wrong tax rate charged

• No tax charged on inter-company transactions

• Not election filed (section 156)

• Input tax credit and rebate exposures

• Documentation requirements not met

• No documentation to support tax paid

• ITCs claimed more than once

• ITCs claim on restricted expenses or purchases


2021Slide 46





2021Slide 46



Upcoming Webinars

• Check my website for tax updates and upcomingwebinars - simplysalestax.com

• Live webinars

• GST/HST— Common Misunderstood IssuesSeptember 23 – 1 hour

• GST/HST— CRA AuditsOctober 21 – 1 hour

• GST/HST— New Housing RebatesNovember 18 – 1 hour

• Taxable Benefits with GST/HST/QST/PST IssuesDecember 9 - 2 hours

• Sign up for important announcements atsimplysalestax.com







2021Slide 47



Thank youThank you

andand

Happy TaxingHappy Taxing

Diane Gaudon, FCPA, FCGASpecializing in GST/HST/QST Training and Advice

[email protected]

Visit simplysalestax.com for information regardingupcoming training webinars and important sales tax announcements

S hould youreq uire a ssista nce w ith respectto GS T/H S T,Q S Torprovincia lsa lesta x com plia nce,recovery ora ny othersa les ta x issue, plea se feel free to conta ct m e.

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2021 SRI LANKAN GST HST UPDATE cover