New CRA Project Targets High Net Worth Individuals

Our friends at KPMG have some news, and it may well be relevant to more than a few of our readers:

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 is 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 it’s not clear exactly how they will determine 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 both public and private corporations, 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, which appears to be intended to help them understand all of the entities to which the taxpayer 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 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 €50million (about CDN$68 million).

The 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.

MRM