T1 claims: Improving CRA verification processes

For several years, tax practitioners have urged the CRA to streamline its verification processes, for example, by reducing apparently excessive information requests and allowing enough time to respond. Tell us: have things improved?

The Canada Revenue Agency (CRA)’s drive to digitalize administration of the tax system is intended to make tax compliance simpler, cheaper and more efficient. The CRA’s electronic filing system for T1 personal tax returns is just one example.

When returns are efiled with no accompanying information, the CRA’s ability to substantiate taxpayers’ claims for tax credits and benefits is crucial to the integrity of our self-assessment system. But some tax practitioners have said they get so many requests for receipts and other documents – to support electronically filed claims for charitable donations, tuition fees, medical expenses and other benefits – that it may be less of a burden to file the return manually with the receipts and pay the related penalty.

As I explained in my September 2014 blog, the CRA’s pre- and post-assessment processes for verifying T1 claims may be diminishing the benefits of tax digitalization for taxpayers, practitioners and the CRA alike.

Consultation meeting suggestions

To discuss these issues and explore potential solutions, CPA Canada convened a consultation meeting in May 2016 to bring together CRA representatives, members of the CPA Canada Small and Medium Practitioners (SMP) Tax Committee and other stakeholders.

A range of suggestions were proposed for improving the CRA’s risk selection and verification processes for common tax credit claims. For example, stakeholders submitted that the CRA could:

  • develop the capability to allow efiling of commonly requested receipts and other supporting documents together with tax returns
  • work toward requiring receipts to support claims for charitable donation and other credits to be electronically issued in a standard format that could be accepted and processed by the CRA
  • have CRA assessment officers do more to risk-assess tax claims based on taxpayers’ compliance history, especially for those claiming the same credit annually
  • factor the tax preparer’s credentials and EFILE track record into risk assessments of their clients
  • publish statistics on the results of its verification programs so taxpayers and their advisors can understand the reasons behind the associated compliance burden

Special issues for foreign tax credit claims

Much of the discussion focussed on foreign tax credit (FTC) claims. Practitioners said that up to four in five FTC claims they processed were followed by a request for proof of foreign taxes paid, usually within 30 days. Although the CRA often allows extensions of 60 or 90 days, in many cases, this is not nearly enough time to request and receive verification from the IRS, U.S. state and other foreign tax authorities. Among other issues, there are many cases in which foreign governments simply do not issue notices of assessment or other types of documentation that the CRA says it will accept to verify FTC claims. If taxpayers are delayed in providing the documentation requested, the CRA has been known to assess the taxpayer’s return without the FTC claim – in effect, taxing the same income twice until the evidence can be provided.

The group suggested that the CRA consider empowering its post-filing assessment officers to examine a broader range of indirect evidence and permit more reasonable extensions of time to respond (e.g., allowing enough time to permit the foreign country to complete its own assessment process). The CRA could also consider doing more to obtain FTC verification from foreign tax authorities directly through the CRA’s tax information exchange agreements. (See the stakeholder meeting notes for more details of these and other recommendations.)

Now that the 2016 personal tax season is behind us, the time seems right to check into the extent to which the CRA’s pre- and post-assessment processes have improved. For example, one welcome development is the CRA’s new practice of accepting cancelled cheques as proof of payment of foreign taxes. The question is whether the CRA’s processes for efiled T1 returns balance the CRA’s mandate to verify expenses against the extra time and costs these processes produce for taxpayers and practitioners.

We want to hear from you

What is your recent experience with CRA requests to support foreign tax credit, tuition fee, medical expense and other claims? Are there more steps could the CRA take to streamline and improve the efficiency of its T1 verification processes?

CPA Canada’s Tax Blog
is designed to create an exchange of ideas on tax policy and practice issues, and their impact on those who practise tax. Your comments can provide helpful input into the public interest advocacy positions developed by CPA Canada.

About the Author

Gabe Hayos, FCPA, FCA, ICD.D

Vice-president, Taxation, CPA Canada