G10140-TX Chapter 11.0 Completing the Audit - CPA · PDF file1 Published May 2015 11.0...

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11.0 Completing the audit

(Revised February 2015)

11.1.0 Completion checklists

(Revised December 2014)

11.1.1 For future use

11.1.2 File completion checklist

(Revised December 2014)

Taxpayer identification

Taxpayer:

Address:

BN/SIN: Statute-barred date:

Case no.: File no.:

General information

Type of organization:

Names of shareholders:

Number of years in operation:

Major NAICS code:

Description of products and services

provided

Part A: Completing the audit

Yes No N/A WP ref

1. Review all working papers and ensure that they are

properly cross-referenced and that findings are

clearly summarized.

2. Have all the audit concerns been addressed? If a

previous audit indicated that follow-up was required

to ensure that the taxpayer was in compliance, have

these issues been addressed and clearly summarized?

3. Have contentious issues been discussed with the team

leader and resolved prior to the final interview with

the taxpayer?

4. Have audit findings with national implications been

identified and the information forwarded to

Headquarters (HQ)?

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5. Are you considering gross negligence penalties?

6. Are you referring the case to Criminal Investigations?

If you are, go to Parts B and C of this checklist and

complete what is applicable at the time of the

referral. Do not initiate any further contact with

the taxpayer and do not issue the proposal letter

or the reassessment until Criminal Investigations

reviews the referral. Go to 10.11.8 for more

guidelines on referrals to Criminal Investigations.

7. Provide the taxpayer with a summary of the

adjustments.

8. Discuss the proposed adjustments with the taxpayer.

Determine if the taxpayer concurs. Allow 30 days for

the taxpayer to review the adjustments and provide

additional information.

9. Ensure that the taxpayer's representations have been

reviewed and discussed. Prepare a revised schedule

of adjustments, if required.

10. Ensure that relevant schedules (capital cost allowance

(CCA), non-capital loss, and net capital loss) have

been updated and a copy sent to the taxpayer.

11. If necessary, discuss the need for adequate records

and recommendations.

12. If the adjustments are material, complete the

Collection Report.

13. Have all significant issues raised by the taxpayer

been clearly answered?

14. Have borrowed books, records, and documents been

returned to the taxpayer and has Form T2213,

Receipt for borrowed books, records, and documents,

been updated as required?

15. Determine if follow-up is required.

16. Advise the taxpayer of the CRA’s position and

prepare a letter that confirms the adjustments.

Part B: Assembling the audit file

Include these reports and documents in the electronic audit file:

Place applicable documents in the audit file, including:

• most recently audited income tax return;

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• Table of contents / Working paper index;

• Form T20, Audit Report;

• Penalty Recommendation Report;

• supplementary reports:

• Capital Gain vs. Income Report;

• Third-Party Civil Penalty Recommendation

Report;

• Summary of the Taxpayer’s Income and

Composition of the Farm Loss;

• Waiver of Objection Rights, including scan

of signed agreement with the taxpayer;

• Provincial Income Allocation Audit Plan,

Provincial Income Allocation Report, and

worksheets;

• Small and Medium Enterprises Research

Audit Program (SME RAP), WinALS Form

RC101-T1 or Form RC101-T2);

• Income Tax Internal Taxpayer Relief

Recommendation Form; and

• Assessment after Normal (Re)Assessment

Period Recommendation Report.

• Small and Medium Workload Referral Template

from income tax audit to GST/HST Workload;

• referral to Specialty Audit;

• WinALS worksheet, Audit Results Coding – T1

or Audit Results Coding – T2, Computerized

Coding System (CCS) template;

• Calculation of Federal Tax Expected;

• scan of Form T2029, Waiver in respect of the

normal reassessment period or extended

reassessment period;

• in chronological order, correspondence to and

scans of correspondence from the taxpayer,

representative, and third parties, such as:

• initial contact letter;

• request for additional documentation;

• proposal letters;

http://www.cra-arc.gc.ca/E/pbg/tf/t2029/



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• representations; and

• final letter.

• scan of Form T2213, Receipt for borrowed books,

records and documents;

• scan of consent forms:

• Form RC59, Business Consent; and

• Form T1013, Authorizing or Cancelling a

Representative , or authorization letter.

• scan of Form RC4288, Request for Taxpayer

Relief – Cancel or Waive Penalties or Interest, or

taxpayer’s written request and supporting

documents;

• Form T2020, Memo for file, including but not

limited to meetings and conversations with

taxpayers, representatives, team leader, and other

CRA employees, issue and receipt of documents,

and approval of Audit Plan; if the team leader

sends a detailed email to the auditor approving

the Audit Plan, a copy of that email, imported

into WinALS, is accepted as approval;

• revised schedules as a result of audit /

adjustments;

• Audit Plan;

• initial interview;

• tour of premises;

• review of books and records, internal control, and

lifestyle;

• Schedule of Audit Adjustments;

• scan of financial statements, if not included in or

different from those in WinALS;

• screener’s package;

• indexed and cross referenced working papers,

which address the screener’s comments and

support the audit work done, regardless of the

audit findings;

• all relevant documentation supporting the audit

findings, such as bank statements, cancelled

cheques (front and back), invoices, receipts,

agreements and contracts, and leases; and


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• Income Tax Assessing IVI Decision Tree; if the

team leader sends a detailed email to the auditor

approving the Income Tax Assessing IVI

Decision Tree, a copy of that email, imported into

WinALS, is accepted as approval.

Place priority reassessments in red file folders and attach

completed Form T287, Priority Assessments and

Reassessments Control.

Part C: Processing the audit results

Include paper copies of these documents and reports when necessary in the audit file, but leave

loose. Other units need these documents and reports to process the audit file or for follow-up.

• final letter, signed but not dated, and revised

schedules that need to be mailed to the taxpayer;

• reassessing documentation:

• Form T99,T1 and T3 Tax Calculation

Information;

• Form T99A, T2 Tax Calculation Information;

• Form T919, Request for Online RAP;

• Form T919Q, Request for Online RAP

(Quebec Only); and

• Form T7W-C, Explanation of Changes on

Reassessment.

• Form T2029, Waiver in Respect of the Normal

Reassessment Period or Extended Reassessment

Period;

• place priority reassessments in red file folders and

attach completed Form T287, Priority

Assessments and Reassessments Control;

• Form T133, Lead or Project Information, and

other referrals;

• permanent document (PD) folder and any

documents to be placed in PD folder;

• Form RC59, Business Consent;

• Form T755, Referral to Revenue Collections;

• Form T1013, Authorizing or Cancelling a

Representative, or authorization letter; and

• any leads and/or referrals prepared during the
















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audit for:

• GST/HST audit;

• excise tax;

• employer compliance audit;

• Valuation Section – Business Equity

Valuation;

• Valuation Section – Real Estate Appraisal;

• Aggressive Tax Planning;

• Criminal Investigations; and

• Interpretations.

Permanent document folder

(Revised March 2014)

Although the audit file is completed electronically, certain documents must be printed and stored

in the permanent document (PD) folder. These documents include:

• internal reports, for example:


• Penalty Recommendation Report; and

• Income Tax Internal Taxpayer Relief Recommendation Form.

• special elections, agreements, and returns;

• prescribed forms and legal documents; and

• net worth statements and schedules (not the working papers).

For more information, go to Appendix A-11.2.16, Permanent document folder and retention

period.

11.2.0 Communications and negotiations with taxpayer


11.2.1 No change audits

(Revised September 2013)

If no adjustments are to be made, send a no change letter to the taxpayer to confirm that the file

is being closed without any changes. Where the taxpayer is involved in several businesses and

the audit covered only one of the businesses, the no change letter will specify which business

was audited and that the other businesses may be audited at some future time. Attach Income

Tax Information Circular IC78-10R5, Books and records retention/destruction, available at

www.cra-arc.gc.ca/E/pub/tp/ic78-10r5/README.html, to the letter.

For sample letters, go to Appendix 11.1.0, Letters.

11.2.2 Downscreened audit

(Revised October 2013)

http://www.cra-arc.gc.ca/E/pub/tp/ic78-10r5/README.html

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If information is obtained after contacting the taxpayer that indicates there is low or no potential

risk and the audit is downscreened according to 9.16.6, advise the taxpayer that the audit of the

business will not be done and state the reason. For more information, go to 9.16.6,

Downscreening audits by Business Intelligence.

If the taxpayer is involved in several businesses and the downscreened audit covered only one of

the businesses, advise the taxpayer that the other businesses may be audited at some future time

and note on Form T2020, Memo for file.

11.2.3 Negotiation of settlement at conclusion of field work


Depending on the size and nature of the taxpayer's business being audited, the complexity of the

files, and any proposed adjustments, the auditor may discuss potential adjustments with the

taxpayer or with the person designated by the taxpayer. An agreement may have been reached

with the taxpayer on the appropriate assessing action for these items during the course of the

audit.

The taxpayer or the auditor may suggest a meeting to discuss all potential adjustments identified

during the course of the audit. Include the team leader in the meeting where considered

appropriate. During the meeting, resolve outstanding issues and attempt to obtain taxpayer

concurrence for the adjustments.

If concurrence is reached on all items under discussion, send a final letter to the taxpayer to

confirm the agreed upon adjustments. Provide with the letter, any relevant schedules reflecting

revisions to items such as capital cost allowance (CCA) and continuity of losses.

11.2.4 Audit completion – Proposal letter


Send a proposal letter outlining potential adjustments to the taxpayer as soon as possible after

completing the audit procedures. In the case of a no change audit, send a no change letter. The

proposal letter provides details of all proposed adjustments. The taxpayer is usually given

30 days from the date of the proposal letter to provide any response, rebuttal, explanation, or

further documentation relating to the proposed adjustments.

Depending on the circumstances, the proposal letter may be presented to the taxpayer during a

meeting to explain the proposed adjustments or sent to the taxpayer, suggesting that a meeting be

held to discuss the proposed adjustments. In some cases, the taxpayer may wish to conduct

research before discussing the issues in the proposal letter.

In all cases, it is essential that the taxpayer receive a full explanation of the proposed adjustments

and is given an adequate opportunity to respond. Where the taxpayer is involved in several

businesses and the audit covered only one of the businesses, the proposal letter must specify that

the audit was restricted to a particular business and that the other businesses may be audited at

some future time.

Following receipt of any representations and/or submissions from the taxpayer, discuss any

outstanding issues by telephone or in person in a final meeting.

Include the summary of adjustments, by year, with supporting schedules with the proposal letter.

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If the proposal letter includes a recommendation for a gross negligence penalty, give details of

the items and amounts subject to penalty, and the penalty rate. For more information, go to

Appendix A-11.1.7, Proposal letter with gross negligence penalty.

A reasonable extension of time requested by the taxpayer to review the proposed adjustments

and to prepare a response should be considered. The extension should be confirmed in writing,

taking into account the possibility of periods under review becoming statute-barred.

If the taxpayer fails to respond within the time period, the reassessment may be processed. The

auditor should contact the taxpayer to ensure that a response is not in the mail or to determine if

the taxpayer needs more time to complete their response to the proposal letter.

If a tax year for which adjustments are proposed will become statute-barred shortly after the

30-day response period, the proposal letter should state that no extension of the 30-day period for

representations will be provided without a signed waiver having been received prior to that time.

If the taxpayer refuses to sign a waiver, process the file without delay at the conclusion of the

representation period.

Where adjustments are being considered but the file will become statute-barred before the expiry

of the 30-day representation period, a decision will be made to either withdraw the proposed

adjustment or provide a representation period of less than 30 days. A representation period of

less than 30 days requires approval from the assistant director, Audit (ADA).

11.2.5 Final interview/meeting


A final interview with the taxpayer is essential to provide a detailed explanation of all

adjustments and to discuss any representations and submissions the taxpayer and representative

may have in response. The team leader should attend the final interview at the taxpayer’s or

auditor's request or when circumstances warrant.

The meeting is generally held after the taxpayer has been provided with the proposal letter.

However, this meeting can also be conducted prior to issuing the proposal letter, if circumstances

and timing warrant. For more information, go to 11.2.3, Negotiation of settlement at conclusion

of field work. Where complex issues are to be resolved, consider sending relevant information to

the taxpayer for review in advance of any meetings.

Schedule a final interview within a reasonable time period after the fieldwork is completed.

While discussions with the taxpayer may take place throughout the audit process and audit issues

and possible adjustments can be resolved as they arise, the final interview is the opportunity to

conclude all issues and to ensure that everyone is aware of the adjustments that will be made,

whether or not concurrence is reached.

Except for a no change file or when full concurrence was achieved at the final interview, the

auditor should make a final contact. On the last day of the representation period or shortly

thereafter, the auditor must confirm that the taxpayer is not providing any further representations.

Auditors must document all discussions at the final interview on Form T2020, Memo for file.

Prepare a letter to the taxpayer following this meeting or if it is determined that the taxpayer is

not making a representation to the proposal; outline the CRA's final position and the reasons for

the adjustments to ensure that the taxpayer understands the adjustments.

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Provide with the confirmation letter to the taxpayer, any revised continuity schedules as a result

of the audit. Examples include:

• capital cost and CCA schedules, including undepreciated capital cost (UCC);

• continuity of loss schedules;

• Form T2SCH31, Schedule 31, Investment tax credit – Corporations;

• Form T2SCH27, Schedule 27, Calculation of Canadian manufacturing and processing

profits deduction;

• Form T2SCH23, Schedule 23, Agreement among associated Canadian-controlled private

corporations to allocate the business limit; and

• Form T2SCH49, Schedule 49, Agreement among associated Canadian-controlled private

corporations to allocate the expenditure limit.

If the taxpayer was informed that gross negligence penalties were being considered and they are

no longer being considered, make this clear in the letter. For more information, go to Appendix

A-11.1.18, No gross negligence penalty after review letter.

Adjustments in taxpayer's favour

Unclaimed deductions in computing income may be discovered during the course of the audit.

Advise the taxpayer of the deductions that the taxpayer is entitled and include the additional

deductions in the proposal letter.

Revision of capital cost allowance and other permissive deductions

The taxpayer may wish to claim additional CCA, other permissive deductions, or apply

unclaimed losses from other years to minimize the tax payable resulting from the proposed audit

adjustments. These requests will usually be accepted; however, the taxpayer must submit a letter

with revised schedules and pertinent information detailing the requested adjustments.

Full concurrence

Where there is no doubt that the taxpayer is in full agreement on all proposed adjustments, the

auditor may complete and process the file without waiting for the representation period to elapse.

Usually, the auditor should request the taxpayer's signature on the statement or summary of audit

adjustments to indicate concurrence, to be included in the file. The audit file is processed as soon

as the taxpayer confirms concurrence.

Proactive waiver of interest and penalties

With the approval of the team leader, or other designated responsible authority, auditors

recommend the waiver of interest and/or penalties at the time the audit is being finalized.

For more information, go to:

• 3.0, Taxpayer rights and taxpayer relief;

• 11.6.1, Form T20, Audit Report; and

• Income Tax Information Circular IC07-1, Taxpayer relief provisions, at www.cra-

arc.gc.ca/E/pub/tp/ic07-1/README.html.

Informal agreement, books and records

http://www.cra-arc.gc.ca/E/pub/tp/ic07-1/README.html


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Where applicable, the auditor requests that the taxpayer sign the informal books and records

letter. For more information, go to Appendix A-10.1.2, Informal books and records letter.

11.2.6 Accepting payment


The taxpayer may voluntarily ask the auditor to accept a payment for amounts owing. The

responsibility for collection lies with Taxpayer Services and Debt Management. The auditor

should advise the taxpayer to obtain a remittance form from the Business Window and file it

with their financial institution or send to the CRA. For reassessments under the Income Tax Act,

the auditor may calculate the approximate tax owing, but cautions the taxpayer that it is an

estimate only and does not include interest. Cheques should be made payable to the Receiver

General.

11.2.7 Compliance letters


For sample letters to complete an audit, go to Appendix 11.1.0, Letters, as well as WinALS.

11.2.8 Waiver of right of objection or appeal


For more information, go to Communiqué AD-05-02B, The Audit Agreement and Waiver of a

Client's Right to Object.

11.3.0 Normal reassessment period


11.3.1 Income tax reassessment period

(Revised January 2014)

The normal reassessment period for a tax year for a mutual fund trust and a corporation, other

than a Canadian-controlled private corporation (CCPC), is the four-year period commencing

with the date an original notice of assessment or an original notification of no tax payable for

that year was mailed out.

In any other case (individuals, trusts other than mutual fund trusts, and CCPCs), the normal

reassessment period is three years from the mailing date for the original notice or reassessment

or notification of loss for the particular year.

The minister may at any time assess or reassess a taxpayer for additional taxes, interest, or

penalties during a year that is part of that normal reassessment period.

Income tax implications – Normal reassessment period

Subsection 152(4) of the Income Tax Act (ITA) lists the situations when a return can be assessed

or reassessed. Also go to subsection 152(3.1).

Normal

reassessment

period Situation

4 years For mutual fund trust or a corporation other than a Canadian-controlled

private corporation (CCPC)

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3 years In any other case (an individual, a trust other than a mutual fund trust, or a

CCPC)

3 years plus

the normal

reassessment

period

Subsection 152(4)(b) of the ITA – when subsection 152(6) is applicable,

for example, losses carried back, assessment or reassessment of another

taxpayer's tax payable, transactions involving the taxpayer and a non-

resident person with whom the taxpayer was not dealing at arm’s length,

or additional payment or reimbursement of tax to another country.

T1 example – Last day notice of reassessment can be issued

Date of initial assessment January 18, 2009

Last day a notice of reassessment may be issued January 18, 2012

Statute-barred date January 19, 2012

If the last day falls on a holiday, the last day of the normal reassessment period is extended to the

next working day in accordance with Section 26 of the Interpretation Act.

Statute-barred date – Second notice of assessment issued

Under subsection 152(4) of the ITA, the minister may reassess or make additional assessments or

assess tax, interest, or penalties under Part I within the normal reassessment period.

While the minister is able to correct a previous assessment by way of a new assessment, as

opposed to a reassessment or additional assessment, the new assessment does not extend the

normal reassessment period. Paragraphs 152(4)(a) and 152(4)(b) ensure that such a reassessment,

additional assessment, or new assessment for a particular tax year must be issued within the

appropriate time frame as established by the first notice of assessment received by the taxpayer.

Exceptions to the normal reassessment period

Subsection 152(4) of the ITA outlines the situations in which an assessment may be made after

the normal reassessment period.

The minister may assess or reassess a person for a tax year at any time beyond the normal

reassessment period if that person has:

• made any misrepresentation that is attributable to neglect, carelessness, or wilful default,

or

• committed any fraud in filing a return of income or in supplying any information under

the ITA, or

• filed a prescribed waiver before the end of the normal reassessment period.

Re-opening income tax returns

Subsection 152(4) of the ITA refers to subsection 152(6) which provides that where a taxpayer

claims a deduction for an unused loss carry-over, investment tax credit or foreign tax credit, the

CRA must reassess the year at issue to allow these items to be carried over, provided that the

taxpayer has filed the prescribed form amending the particular return by the date on which the

return for the carry-over year was filed.


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11.3.3 Application of losses


For more information, go to 29.0, Losses.

The following rules apply to losses:

• Non-capital losses may be carried back up to three years and forward up to twenty years

under paragraph 111(1)(a), and may apply them against any type of income for the year

of loss application.

• Net capital losses may be carried back up to three years and forward indefinitely under

paragraph 111(1)(b). For the purpose of computing the amount of net capital loss for the

loss year that can be deducted in the year of loss application, go to Income Tax

Interpretation Bulletin IT232R3, Losses – Their deductibility in the loss year or in other

years, at www.cra-arc.gc.ca/E/pub/tp/it232r3/README.html.

• Restricted farm losses may be carried back up to three years and forward up to twenty

years under paragraph 111(1)(c). However, under this paragraph, no amount of restricted

farm losses is deductible for the year of loss application, except to the extent of any

income for the year from all farming businesses carried on by the taxpayer.

• Farm losses may be carried back up to three years and forward up to twenty years under

paragraph 111(1)(d), and may deduct them from any type of income for the year of loss

application.

• Limited partnership losses cannot be carried back but may be carried forward indefinitely

in accordance with 111(1)(e). However, no amount of limited partnership loss is

deductible for the year of loss application, except to the extent of the taxpayer’s at-risk

amount in respect of the partnership (within the meaning assigned by subsection 96(2.2))

at the end of the last fiscal year of the partnership ending in the year of loss application,

less certain amounts specified in subparagraph 111(1)(e)(ii).

Administrative policy – Loss carry-over

Notwithstanding the wording of subsection 152(6) of the ITA, the following is the CRA policy

regarding the re-opening of prior year returns to make adjustments applicable under subsection

152(6):

• A request to apply or change loss carry forwards will be accepted, provided the request

can be processed within the time limits specified under subsection 152(4).

• A request to apply or change loss carry backs will be accepted, provided that the request

can be processed within the time limits specified under paragraph 152(4)(b), that is, six

years from the date of original assessment.

• Requests for a loss carry-back should be submitted on the prescribed form. Where the

request is submitted on a facsimile form and there is no doubt as to the completeness of

the information, such a request will not be denied. If there is any element of uncertainty

regarding the taxpayer’s request or the completeness of the information submitted, the

taxpayer is to be provided with a blank prescribed form and instructed that the request

will be processed upon receipt of the completed form.

http://www.cra-arc.gc.ca/E/pub/tp/it232r3/README.html

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• Where an internally generated adjustment results in an increase to income and a loss of

another year has been applied to that year, the taxpayer will be given the opportunity to

amend the loss application.

• Where an internally generated adjustment results in a decrease to a loss incurred and such

a loss was applied to more than one taxation year, the taxpayer will be asked which loss

application is to be changed.

Changing the loss balance in the year of application

Statute-barred loss year

Even if the loss year is statute-barred, the return for the years in which that loss is applied can be

reassessed to reduce the overstated loss carry over. However, the return for the statute-barred

loss year cannot be reassessed, even if the changes that are made also affect the taxable income

or taxes due in the loss year.

Example – Statute-barred loss year – Under review

Facts:

• The individual taxpayer claimed a non-capital loss (NCL) of $100,000 in 1995.

• The claim was treated originally as filed.

• The normal reassessment period for 1995 ends in 1999.

• The 1995 NCL was deducted from an income of $200,000 in computing taxable income

for the 2000 taxation year.

• During an audit conducted in 2001, the auditor discovers that the $100,000 NCL incurred

in 1995 included non-allowable expenses of $120,000, thus the taxpayer had, in fact,

income for that year of $20,000.

Tax consequences:

• A reassessment of the 2000 taxation year to reduce to nil the 1995 NCL of $100,000

claimed can be issued.

• The CRA cannot issue a notice of reassessment on income of $20,000 for the 1995

taxation year because 1995 is statute-barred. However, Form T7W–C, Explanation of

changes on reassessment, for 1995 indicating the change in the loss should accompany

the notice of reassessment for the year 2000. The note indicating that a loss determination

notice will be issued on request is not necessary.

Loss year that is not statute-barred

When the loss year is not statute-barred, the minister may issue a notice of reassessment for the

loss year:

• if the previous assessment was not nil;

• if the changes result in taxable income or tax payable for the loss year.

When the changes only reduce or cancel the loss and do not affect the taxable income or the tax

payable, a notice of reassessment is not necessary for the loss year return, even if it is not

statute-barred. However, Form T7W-C, Explanation of changes on reassessment, for the loss

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year indicating the change in the loss should accompany the notice of reassessment of the

carry-over year, with a note to the effect that a loss determination notice will be issued upon

request.

Carry back of losses

Time limit in paragraph 152(4)(b)

Any claim for a carry back of losses under subsection 152(6) will be allowed on the condition

that the claim can be processed within the time limits specified in paragraph 152(4)(b).

The minister should issue a reassessment for the taxation year to which the claim is carried back,

to take into account the claim made on the prescribed form, and issue a reassessment for any

ensuing taxation year that could be affected by the taxpayer’s claim.

The minister is not obligated, however, to issue a reassessment for a year prior to the year to

which the claim is carried back.

Example of the time limit in paragraph 152(4)(b)

The notice of assessment for a taxpayer’s 1995 return was mailed on March 31, 1996. The

normal period for assessing 1995 ends on March 31, 1999. If the 1995 return is reassessed under

subsection 152(6), the minister has until March 31, 2002, to issue a reassessment of this return.

Example – Effect of loss carry-over on business investment tax credit (BITC) and the years

preceding the claim

A taxpayer files their T1 return for 1995, indicating a non-capital loss incurred. If the taxpayer

files the prescribed form to amend their 1993 return by April 30, 1996, the minister must issue a

reassessment for this return to apply the loss carry back.

If, by reason of the reassessment made for 1993, the taxpayer now has a BITC in 1993 that can

be carried forward, the minister is required to issue a reassessment for the subsequent years

affected. However, the minister is not required to reassess the 1991 or 1992 returns to carry over

the unused BITC.

Example – Loss carry back

In January 1996, a taxpayer requested that their non-capital loss from 1994 be carried back and

allowed on their 1993 return. They then asked that their BITC from 1993 be carried back to

reduce their taxes payable in 1991 or 1992.

1991 1992 1993 1994

$25,000 $30,000 $40,000 $(30,000)

Although subsection 152(6) clearly states that the minister is not obligated to make a second

carry back resulting from the first loss carried back, the CRA would agree to the taxpayer’s

request, provided that the years in question can be reassessed. In this particular case, since each

of the years can be reassessed under paragraph 152(4)(b), the adjustments would be processed

upon receipt of the prescribed forms:

• T1A, Request for loss carryback, available at www.cra-

arc.gc.ca/E/pbg/tf/t1a/README.html;

http://www.cra-arc.gc.ca/E/pbg/tf/t1a/README.html

http://www.cra-arc.gc.ca/E/pbg/tf/t1a/README.html

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• T2A;

• T2038(IND), Investment tax credit (Individuals), available at www.cra-

arc.gc.ca/E/pbg/tf/t2038_ind/README.html.

Exception to the time limit in paragraph 152(4)(b)

If the CRA can show that, at the time when the income tax return for a given year was filed and a

loss was carried back to the prior taxation year by means of the prescribed form, the taxpayer

made any misrepresentation attributable to neglect, carelessness or wilful default, the CRA may

issue a reassessment of the year of the carry back to disallow the loss or any part of the loss

resulting from the false or fraudulent return in the year in question.

Example of exception to paragraph 152(4)(b) time limit

A taxpayer claimed a non-capital loss in 1991. This loss was carried back and applied in 1988, in

accordance with section 111.

An audit shows that the taxpayer had taxable income in 1991. During the audit of the taxpayer’s

income for 1991, it was determined that the taxpayer was negligent or careless in claiming the

loss. The CRA may then issue reassessments for the 1988 and 1991 taxation years.

Revising capital cost allowance and other permissive deductions in a loss year

Where a taxpayer wishes to claim additional CCA or other permissive deductions, as discussed

in 11.3.5 for a particular loss year, the taxpayer should write to the appropriate tax centre (TC) or

TSO where the income tax returns are filed. The letter should describe the revisions and should

be accompanied by CCA or other schedules that are affected by the revisions.

There is no provision in the ITA for filing an amended return for this purpose. The request for

the additional claim would be allowable even though the particular loss year was statute-barred

under subsection 152(4) of the ITA, so long as there was no change in the tax payable for any

year in respect of which the time has expired for filing a notice of objection. Such a request will

not be allowed, however, where the minister has issued a notice of determination under

subsection 152(1.1). A taxpayer who wishes to revise the CCA or other permissive deductions in

a year for which a notice of determination has been issued, should do so within 90 days from the

day of mailing the notice of determination for that year.

For information on the circumstances where revisions to CCA and other permissive deductions

could be made, go to:

• 12.1.2, Taxpayer requests; and

• Income Tax Information Circular, IC84-1, Revision of capital cost allowance claims

and other permissive deductions, at www.cra-arc.gc.ca/E/pub/tp/ic84-1/ic84-1-e.html.

Issuance of another NIL assessment or notification – Under review

Where an initial assessment is made owing to non-capital losses sustained in the year and the

taxpayer subsequently requests amendments as contemplated in paragraph 10 of Income Tax

Information Circular IC84-1, Revision of capital cost allowance claims and other permissive

deductions, available at www.cra-arc.gc.ca/E/pub/tp/ic84-1/README.html, CRA will issue a nil

assessment or notification that no tax is payable.

http://www.cra-arc.gc.ca/E/pbg/tf/t2038_ind/README.html


http://www.cra-arc.gc.ca/E/pub/tp/ic84-1/ic84-1-e.html


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Published May 2015

The taxpayer is advised of the acceptance of request, and the file is automatically updated. The

time limit imposed by subsection 152(4) of the ITA will be applicable where such revision of the

non-capital loss results in change in the tax payable for the year in which the loss was sustained.

A "NIL" assessment is an assessment for purposes of establishing the normal reassessment

period but it does not constitute an assessment that is subject to appeal.

Notice of determination of a loss and time limit under subsection 152(4) – Under review

Where no tax is payable by a taxpayer for a year, a notice of determination of a loss must be

obtained.

Without this notice, the CRA may disallow the loss carry forward by changing the calculation of

the loss of a prior year. Such a change is not otherwise subject to the limitation periods because

the assessment for that prior year remains nil. The time limits will begin as soon as a notice of

determination of a loss is issued under subsection 152(1.2).

If a notice is requested for more than one type of loss, CRA is required to issue a notice for each

of the types of loss being requested. Note that an initial notice of determination of a loss can be

issued only at the taxpayer’s request and the amount of the loss thus determined must differ from

the amount claimed by the taxpayer.

Loss revised at the taxpayer’s request

When losses are changed after the taxpayer has submitted a change request or new information,

the revised loss will be considered as the loss claimed. Informing the taxpayer of an updated

amount of a revised loss does not mean that the taxpayer has to submit a determination request.

Redetermination of loss

The minister, if able to conduct a determination only at the taxpayer’s request, may conduct a

redetermination within the time limits prescribed by the ITA beginning the day of mailing of the

notice of determination or at any time subject to paragraph 152(4)(a) of the ITA, for example,

misrepresentation , fraud, filing of an appropriate waiver.

11.3.4 Tax credits


Business investment tax credit carry-over – Subsection 127(5)

Unclaimed business investment tax credits (BITC) can be carried forward for up to twenty years

or back up to three years, to reduce Part I income tax. Carrying BITCs back is possible only if

the taxpayer cannot claim them during the year in which they were received.

Furthermore, the ITA provides an order for claiming credits. Thus, credits from the current year

and unused credits from prior years must be claimed before unused credits from subsequent

years can be claimed.

The refundable tax credit (40%) that certain corporations receive for current expenditures cannot

be carried over, since it is 100% refundable in the year it is received.

Subsections 127(9.1) and 127(9.2) provide special rules that restrict the carry-over of investment

tax credits in the event of an acquisition of control.

For more information, go to Income Tax Information Circular:

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Published May 2015

• IC78-4R3, Investment tax credit rates, at www.cra-arc.gc.ca/E/pub/tp/ic78-

4r3/README.html; and

• IC78-4R3SR, Special Release – Investment tax credit rates, at www.cra-

arc.gc.ca/E/pub/tp/ic78-4r3sr/README.html.

Business investment tax credit and income tax payable

The annual BITC limit for a taxpayer for a tax year was repealed by the 1993 budget, applicable

to tax years beginning in 1994 or later.

Requests to carry over business investment tax credits – Prescribed forms

Taxpayers use these prescribed forms to calculate their refundable tax credit or to indicate that

they want to carry back part of the BITC:

• Form T2SCH31, Schedule 31, Investment tax credit – corporations, at www.cra-

arc.gc.ca/E/pbg/tf/t2sch31/README.html; and

• Form T2038 (IND), Investment tax credit (Individuals), at www.cra-

arc.gc.ca/E/pbg/tf/t2038_ind/.

Requests to carry back part of the BITC or to amend a previous carry back will be accepted when

the necessary audits have been conducted, provided that the reassessment can be made within the

time limits in paragraph 152(4)(b) of the ITA, even if the form is not filed in time.

Requests regarding the refundable portion of the BITC received in a prior year or revisions made

to previous requests will also be accepted, provided that the year in question is not statute barred

and that the prescribed form is filed.

Refundable business investment tax credit – Time limit

The refundable BITC under section 127.1 of the ITA is considered a payment on account of tax.

Under paragraph 152(1)(b), the minister must determine the amount of the refundable BITC or

any other payment specified by this paragraph.

This determination, given to the taxpayer as part of the notice of assessment, replaces the

assessment solely for the purposes of the credit or rebate. Adjustments to the credit can be made

only within the prescribed time limits beginning from the determination date, which is also the

date of the assessment or notification.

Foreign tax credits

Subsections 126(2) and 20(11) and 20(12) of the ITA provide the rules for claiming, carrying

over, and deducting foreign tax credits for business and non-business income earned in a foreign

country.

The situations contemplated are when a Canadian resident, including an individual or a

corporation, earns business or non-business income in a foreign country directly. If the Canadian

resident earns business or non-business income in a foreign country through a corporation in that

foreign country, additional rules apply (see subsection 112(2) and section 95).

Subsection 126(2) provides a tax credit to the Canadian resident for business income taxes paid

in a foreign country. The tax credit is deductible against Canadian taxes payable by the Canadian

resident. This foreign tax credit is available to be carried forward for 10 years or back for 3

years.



http://www.cra-arc.gc.ca/E/pub/tp/ic78-4r3sr/README.html

http://www.cra-arc.gc.ca/E/pub/tp/ic78-4r3sr/README.html

http://www.cra-arc.gc.ca/E/pbg/tf/t2sch31/README.html


http://www.cra-arc.gc.ca/E/pbg/tf/t2038_ind/

http://www.cra-arc.gc.ca/E/pbg/tf/t2038_ind/

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Published May 2015

Subsection 126(1) provides a tax credit to the Canadian resident for non-business income taxes

paid in a foreign country. The tax credit is deductible against Canadian taxes payable by the

Canadian resident. If the foreign non-business tax credit is not used in the year it occurs, no carry

forward or carry back is available. Instead, a deduction may be available against income under

subsection 20(11).

For more information, go to Income Tax Folio S5-F2-C1, Foreign Tax Credit, at www.cra-

arc.gc.ca/tx/tchncl/ncmtx/fls/s5/f2/s5-f2-c1-eng.html.

11.3.5 Revision of capital cost allowance and other permissive deductions


The following comments outline the CRA's position regarding requests for revised CCA of prior

years. The comments apply equally to other permissive deductions such as:

• special mortgage reserves calculated under section 33 of the ITA;

• scientific research expenditures of a capital nature calculated under paragraph 37(1)(b);

and

• taxable capital gains reserves, calculated under subparagraph 40(1)(a)(iii).

A taxpayer may wish to amend or claim further discretionary deductions in a previously assessed

year. For more information, go to:

• Income Tax Information Circular IC84-1, Revision of capital cost allowance claims

and other permissive deductions, at www.cra-arc.gc.ca/E/pub/tp/ic84-

1/README.html; and

• R. Lussier vs. The Queen, [1998] 2 CTC 2794 (available in French). 11.3.6 Examples

of loss application and the business investment tax credit – Under review


Situation 1 – Non-capital loss applied (non-deductible expenses included in the loss)

A taxpayer reported a $90,000 non-capital loss in 1994, which was applied on filing against 1995

net income of $200,000. Both returns were initially processed as filed. An audit determined that

the 1994 non-capital loss included non-deductible expenses of $80,000.

The 1995 return may be reassessed to reduce the non-capital loss carry-forward to $10,000

provided it is not statue-barred. No reassessment notice is required for the 1994 return; however,

a 1994 Form T7W-C, Explanation of changes on reassessment, indicating the loss change should

accompany the 1995 reassessment notice with the notation that a notice of determination will be

issued upon request.

Situation 2 – Non-capital loss applied and statute-barred year

Same reassessment treatment as Situation 1, except that the 1994 non-deductible expense is

$110,000. The 1994 return will be assessed to reflect income of $20,000, if it is not statute-

barred, and the 1995 return reassessed to disallow the 1994 non-capital loss carried forward. If

the 1994 return is statute-barred from reassessment, 1995 can be reassessed to disallow the loss

carried forward if it is not statute-barred.

Situation 3 – Non-capital loss applied and statute-barred year

http://www.cra-arc.gc.ca/tx/tchncl/ncmtx/fls/s5/f2/s5-f2-c1-eng.html

http://www.cra-arc.gc.ca/tx/tchncl/ncmtx/fls/s5/f2/s5-f2-c1-eng.html



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Same reassessment treatment as Situation 1, except that the 1994 loss was carried back and

applied in the 1993 year. In this case, the 1993 reassessment deadline is six years from the date

of mailing the initial assessment under subparagraph 152(4)(b)(i) of the ITA. As in situation 1,

Form T7W-C, Explanation of changes on reassessment, will be issued to explain the changes.

Situation 4 – Application of business loss and statute-barred year

The taxpayer reported taxable income of $10,000 in 1993, NIL in 1994 and $20,000 in 1995. In

1997, an audit determined that the taxpayer had a loss of $30,000 for 1993 from a business that

had not been deducted in determining the $10,000 taxable income. As 1993 is statute-barred, the

taxpayer requested the application of the loss in the 1995 tax year, which is not statute-barred.

The non-capital loss of $20,000 ($30,000 less the $10,000 taxable income reported) can be

carried forward to 1995.

Situation 5 – Reassessing action – Non-capital loss and refundable business investment tax

credit under section 127.1 of the ITA

Same reassessment treatment as Situation 2, except that the taxpayer had claimed and received a

refundable investment tax credit under section 127.1 for 1994. In addition, the BITC earned in

1994 was overstated. In this case, the reassessing action concerning the loss is the same as in

Situation 2 and the 1994 assessment notice includes the redetermination of the refundable

investment tax credit. If the 1994 return is statute-barred, no adjustment can be made to the

refundable BITC, but the pool of tax credits carried forward to other years can be adjusted

subject to the same rules that apply for losses.

Situation 6 –Business investment tax credit under subsection 127(5) of the ITA overstated

An individual, trust, or CCPC reported taxable income in 1994 but offset the income tax

otherwise payable (federal liability) with BITCs under subsection 127(5). The return was

accepted as filed. During an audit, it was discovered that the BITC was overstated. Because the

BITC claimed under subsection 127(5) is a deduction from income tax payable (not a deemed

payment as in the case of a section 127.1 refund), no income tax was assessed and therefore the

result of initial processing was a notification. The disallowance of the BITC claim, resulting in

an income tax liability, would require the issuance of an assessment notice within three years

after the issue of the initial notification.

References

Income tax information circulars

• IC84-1, Revision of capital cost allowance claims and other permissive deductions, at

www.cra-arc.gc.ca/E/pub/tp/ic84-1/README.html;

• IC75-7R3, Reassessment of a return of income, at www.cra-arc.gc.ca/E/pub/tp/ic75-

7r3/README.html; and

• IC07-1, Taxpayer relief provisions, at www.cra-arc.gc.ca/E/pub/tp/ic07-

1/README.html.

Income tax interpretation bulletins

• IT512 Cancelled, Determination and redetermination of losses; and






20

Published May 2015

• IT232R3, Losses - Their deductibility in the loss year or in other years, at www.cra-

arc.gc.ca/E/pub/tp/it232r3/README.html.

Other reference

• Technical document no. 9237427 (E).

11.3.7 Assessment after the normal assessment or reassessment period and penalty for false

statements or omissions


Generally income tax returns cannot be reassessed after three or four years (depending on the

nature of the taxpayer) from the date of the original assessment. However, where audit evidence

of neglect, carelessness, wilful default, or fraud dictates that the period to be assessed or

reassessed exceeds those limitations, PROTECTED

Go to

28.4.13, Reopening statute-barred years.

For a sample report, go to Appendix A-11.2.25, Assessment after Normal (Re)Assessment

Period Recommendation Report.

To reassess tax payable beyond the normal assessment or reassessment period, it is not necessary

to assess the gross negligence penalty of 163(2) of the ITA but only a misrepresentation

attributable to neglect or carelessness need be present as opposed to the more serious gross

negligence. Statute-barred years may be opened even if a penalty is not recommended as long as

the auditor can prove the neglect, carelessness or, the more serious, wilful default or fraud. (Jet

Metal Products 79 DTC 624)

The burden of establishing misrepresentation lies on the CRA in any appeal from an assessment

beyond the normal reassessment period (Taylor 61 DTC 1139; Roselawn Investments 80 DTC

1271). The CRA must prove at least one instance of misrepresentation by the taxpayer that,

while it may have been made in good faith, was nevertheless not one which a normally wise and

cautious taxpayer would have committed (Jet Metal Products 79 DTC 624).

When assessing or reassessing beyond the normal assessment or reassessment period, subsection

152(4.01) restricts the reassessment to whatever can be reasonably regarded as relating to a

misrepresentation, fraud or a waiver, or a matter specified in any of subparagraphs 152(4)(b)(i)

to (v).

Statute-barred cases where a misrepresentation due to fraud exists

The courts have ruled that when the minister alleges misrepresentation, the audit evidence, on

balance, must support that allegation. The major consideration is establishing the right to

reassess. The onus of proof is on the minister who must prove misrepresentation beyond the

balance of probability in each of the years concerned.

This becomes a separate phase of the audit and all necessary precautions must be taken to

safeguard the audit evidence. Potential witnesses should be interviewed beforehand. Once the

right to reassess has been established, the onus is on the taxpayer with regard to the assessment

itself.

To demonstrate that a representation is false, or a true statement is omitted, it is usually

necessary to have audit evidence of a number of transactions for which income has been



21

Published May 2015

understated or a single improperly recorded or omitted transaction involving a material amount

of income. In either case, judge the materiality of the income understatement in relation to the

income originally declared.

If the net worth method has been used to arrive at income subject to tax, penalties can be

assessed if willfulness can be demonstrated in a material number of specific items included in the

net worth increase, and it is improbable that the balance of its increase was gained under

innocent circumstances.

Alternative basis for assessment after the normal reassessment period

Under subsection 152(9) of the ITA and subject to the rules of procedure of the court, the

minister may change the basis of an assessment after the normal reassessment period. However,

in keeping with best practices and in support of full disclosure, both primary and alternate

reasons should continue to be identified. The taxpayer has the right to complete, accurate, clear,

and timely information, as stated in the Taxpayer Bill of Rights, at www.cra-arc.gc.ca/rights/.

Subsection 152(9) is subject to subsection 152(5), which generally prevents any amount that was

not included before the end of the normal reassessment period from being included in computing

the income.

Questions and answers

Q.1: In a statute-barred year, does applying fraud or a misrepresentation in the form of neglect,

carelessness or wilful default under subsection 152(4) of the ITA allow the CRA to make other

adjustments that are not attributable to fraud or misrepresentation?

A.1: No, other adjustments, not attributable to fraud or misrepresentation, cannot be included in

the adjustment unless they were specified in a waiver filed by the taxpayer.

Q.2: For the purposes of the ITA, can the CRA issue a reassessment after the normal

reassessment period to disallow a loss carry-over or any part of the loss resulting from a

reassessment in a given year?

A.2: To the extent that the CRA can show that, at the time when the income tax return for a

given year was filed and a loss was carried back to a prior tax year by means of the prescribed

form, the taxpayer made any fraud or misrepresentation attributable to neglect, carelessness or

wilful default, the CRA may issue a reassessment for the year of the carry back to disallow the

loss or any part of the loss resulting from the false or fraudulent return in the year in question.

11.4.0 Waivers


11.4.1 Overview


The CRA may assess tax, interest and penalties and, furthermore, it may reassess or make

additional assessments within the normal reassessment period.

A taxpayer may file a waiver to allow CRA to issue an assessment or reassessment beyond the

normal reassessment period. To be valid, the waiver must be filed within the normal

reassessment period.

http://www.cra-arc.gc.ca/rights/

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Published May 2015

The taxpayer may, under subsection 152(4.1), file Form T652, Notice of revocation of waiver,

available at www.cra-arc.gc.ca/E/pbg/tf/t652/, to revoke a waiver previously given to the CRA.

The minister has up to six months after the date the notice of revocation is filed to assess or

reassess the taxpayer. For more information, go to 11.4.3, Revocation of waiver.

11.4.2 Filing a waiver


Subparagraph 152(4)(a)(ii) of the ITA provides for the filing of a waiver for a given tax year that

specifies matters on which an assessment or reassessment may be issued at any time thereafter.

Use Form T2029, Waiver in respect of the normal reassessment period or extended reassessment

period, available at www.cra-arc.gc.ca/E/pbg/tf/t2029/README.html, or a photocopy.

Implied waiver

When a waiver has not been filed in the prescribed form, the CRA will accept a written request

for adjustment as being an implied waiver for the purpose of subparagraph 152(4)(a)(ii) of the

ITA provided:

• the requested adjustment favours the taxpayer;

• the delay in processing the request for adjustment was not attributable to the taxpayer;

and

• the essential information required in the prescribed waiver is included.

The taxpayer is considered to have complied in substance with subsections 152(4) and 152(5) of

the ITA, when read in context and with the scheme and intent of the section in mind. The

wording of the waiver form limits the power of the minister to reassess only those matters

specified in the waiver or reasonably related thereto.

Purpose of the waiver

A waiver should be filed when a taxpayer wishes the CRA to delay issuing a notice of

assessment beyond the normal reassessment period to have time to produce additional

information.

When the CRA proposes an adjustment, a waiver may be requested from the taxpayer to allow

additional time to consider all relevant information and for the taxpayer to submit

representations.

The waiver's purpose and the tax matters to which it applies should be clearly specified in the

waiver, such as, a full description of the subject matter, not just references to sections of the

relevant act, and explained to the taxpayer.

The CRA will not ask a taxpayer to file a waiver solely for the purpose of keeping a tax year

open for reassessment beyond the statue-barred date. The practice of asking for a blanket waiver

in advance of an audit or of asking for a waiver for the sole purpose of extending the time needed

to complete the audit is not acceptable.

Validity of the waiver

A waiver filed after the normal reassessment period is not valid; nor is a waiver included with an

income tax return when it is filed.



23

Published May 2015

A waiver will not be accepted when the taxpayer has specified a time limit for its period of

application or if, in the opinion of the CRA, the waiver does not protect the reassessment

process. The waiver will be returned to the taxpayer immediately and the taxpayer will be asked

to file an appropriately amended waiver.

Waivers – Closing

There is no apparent restriction on the length of time that a waiver remains in effect, if the

taxpayer doesn't formally revoke it. However, once the matters specified in the waiver has been

fully resolved, the CRA considers the matter closed.

Content of the waiver

The taxpayer should be encouraged to specify the particular items for which the normal

reassessment period is waived. The taxpayer, authorized officer, or legal representative must sign

the waiver.

Multiple waivers for the same year

The ITA does not limit the number of waivers that a taxpayer may file for a particular tax year.

As a waiver should be as specific as possible in identifying its subject matter, when there is more

than one issue in contention, a taxpayer may wish to issue separate waivers. Consequently, the

taxpayer can revoke a waiver covering one issue while still keeping that year open regarding the

issues covered by the other waivers.

Statement of subject matter

A waiver that contains only a simple statement such as ABC Company for the year ended

April 30, 2009 is not in the taxpayer's favour as the minister may theoretically reopen the return

for any matter relating to that year. It is in the best interests of the taxpayer to set out in the

specific matters for which the time limit of the normal reassessment period is being waived.

By objecting to the inclusion of a specific amount in income, the taxpayer has the burden of

showing that the amount cannot reasonably be regarded as relating to a matter specified in the

waiver. Waivers that contain only the sections of the legislation rather than the description of the

subject matter should not be accepted.

Where the taxpayer does not indicate the Part of the relevant act that applies, or does not specify

any subject matter, the taxpayer will be asked to do so before the waiver is accepted. However, it

is not necessary to set out the specific legislation involved, provided that the matter at issue is

sufficiently well defined and described. The tax effects are from the act as a whole, and thus it is

not necessary to specify the specific part thereof.

The issue is particularly relevant for aggressive tax planning, since there are instances where

taxpayers have refused to sign waivers if tax avoidance – general anti-avoidance rule (GAAR), is

included. However, specifying parts of the legislation or asking taxpayers to specify them is still

preferable to ensure that the issues in respect of which the waiver is being provided are clearly

and definitively explained or presented.

Situations where a waiver is or is not needed

Waiver as a condition of making a downward adjustment

24

Published May 2015

Downward adjustments to eliminate double tax will be made without requiring the taxpayer to

file a waiver. However, this practice will not apply in cases where, at the time of reassessment, a

tax year is about to become statute-barred. Note these downward adjustments in the matters to

be followed-up section of Form T20, Audit Report, since these years are not allowed to become

statute-barred if they are still unsettled in Appeals. An upward adjustment will be required if it

appears that a tax year is about to become statute-barred and a waiver has not been provided.

Offsetting downward reassessments without waivers

When income tax is allocated from one person to another, the downward reassessment will not

be made until the upward reassessment of the first person is completed and the appeal period has

expired. Although it will be the responsibility of the recipient to ensure that waivers are filed, it

would be appropriate for auditors to advise recipients of this responsibility when they make a

proposal to reassess. This policy has been issued in contemplation of non-arm's length situations

and is not intended to apply to arm's length situations.

Upward reassessments without waivers

Where there has been an income reallocation and Appeals has vacated the reassessment (either in

whole or in part), Appeals should refer such cases back to Audit for reassessment (upward

reassessment of the second party).

Capital cost allowance and other permissive deduction adjustments

In some cases, the taxpayer may want to offset additions to income, in whole or in part, by a

claim for additional capital cost allowance or other permissive deductions available. Although

subsections 152(4.01) and 152(5) of the ITA impose a restriction on the minister to deal only

with items specified in the waiver, it does not prevent the taxpayer from claiming these

additional deductions, even though the taxpayer did not make any statement on the matter in the

subject waiver. Once the return has been re-opened, the taxpayer may raise an objection for any

reassessment and that objection may relate to any matter in the calculation of income.

Withholding tax: Waiver

The CRA has indicated that, when there is a tax saving because of the availability of a treaty

provision, tax must be withheld as required by regulation and recovered only when a return is

filed. This may create withholding tax problems in tax planning for international executives. The

CRA will grant a waiver for a withholding tax request when the non-resident can demonstrate

that the withholding is in excess of the tax that will be payable after taking treaty protection into

account. Waivers will be issued on a case-by-case basis, taking into account the specific

circumstances of each case.

When a person seeks an exemption from Canadian tax under a tax treaty, that person should

submit a description of the facts and relevant provisions of the treaty to the team leader of the

non-resident section in the TSO that serves the area where the person will be working. The

written application should be submitted to the TSO no later than one month before the

commencement of the employment in Canada.

11.4.3 Revocation of waiver


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Published May 2015

Subsection 152(4.1) of the ITA provides that a taxpayer may revoke a waiver by filing

prescribed Form T652, Notice of Revocation of Waiver, available at www.cra-

arc.gc.ca/E/pbg/tf/t652/README.html.

Effective date of revocation

The revocation of the waiver becomes effective six months after the date the notice of revocation

of waiver is filed. For example, the minister may not issue an assessment or reassessment under

the waiver more than six months after the date the revocation was filed. A notice of revocation of

waiver cannot be rescinded or cancelled once it has been filed.

11.5.0 Assessments


11.5.1 General policy – Assessments and reassessments


The auditor's responsibilities during the audit include:

• determining if the taxpayer has complied with the legislation;

• determining if taxable income has been calculated and related tax paid in accordance with

the ITA; and

• making such adjustments as are required and issuing any required assessments and

reassessments to ensure the taxpayer has paid or remitted the correct tax for the period

under audit.

A notice of reassessment must be issued for each taxpayer where the audit has resulted in an

adjustment.

Discretionary reassessments

Reassessments may result from:

• new information provided by the taxpayer; or

• an audit by the CRA.

Mandatory reassessments

Properly filed requests claiming losses incurred in subsequent years for purposes of the ITA, or

changes implementing settlements of notices of objection or decisions of the courts are examples

of situations where the CRA must reassess a return in accordance with the time periods of the

legislation. For more information, go to 11.3.0, Normal reassessment period.

Uniformity of assessments

Where contentious issues may be encountered that are common to related, connected, or

associated corporations, assessments must be made consistently within the corporate group. This

requires careful planning and control where different TSOs are responsible for auditing the

various branches or divisions within the group. Agreements made with the taxpayer with respect

to certain issues in one TSO may have an impact on other assessments or reassessments, and all

TSOs affected must be notified to ensure consistency.

Wound-up and dissolved corporations



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Published May 2015

The law, as it relates to each provincial companies act differs in many areas. Rules regarding

dissolutions will vary with each jurisdiction. When a corporation is dissolved by the Companies

Branch, it ceases to exist and can only be revived by filing the outstanding annual returns and the

Articles of Revival. To assess or reassess a wound-up or dissolved corporation, the company

must be restored to the appropriate provincial corporate register. If restoration of a dissolved

corporation is required, a formal request should be sent to the Department of Justice (go to

Appendix A-9.1.6, Department of Justice – Restoration of corporation). When the company has

been restored, the notice of assessment and/or reassessment is issued in the name and corporation

or business number (BN) of the restored company.

11.5.2 Priority reassessments


General instructions

The AIMS workload control system codes the audit period for all returns selected for audit. This

ensures that the return for a year that is going statute-barred will be identified at least six months

in advance of the probable statute-barred date.

Auditors are reminded that rather that processing a priority reassessment, they should consider

obtaining a waiver from the taxpayer for the particular year involved and the CRA policy

regarding reopening prior year returns. For more information, go to:

• 11.3.0, Normal reassessment period; and

• 9.11.0, Audit scope.

It is generally accepted that statute-barred problems can be minimized through early

identification and strict control. As it is not always possible to obtain a waiver, the identification

and control procedures must be relied on to ensure that a notice is issued on time.

For adjustments requested by the taxpayer within the three-year period and being followed-up by

audit, every attempt will be made either to obtain a waiver or reassess within the prescribed

period.

Although the following procedures are outlined primarily to facilitate the processing of a return

approaching statute-barred status, priority reassessments might be considered in other urgent or

exceptional circumstances such as the taxpayer leaving the country.

To assist the auditor in processing a reassessment where a statute-barred deadline is approaching,

procedures have been coordinated among the various sections involved. These procedures apply

to reassessments to be issued by TCs. Under some circumstances it may be necessary to issue a

reassessment at the TSO, and each office should have local procedures in place to handle these

situations.

While the following procedures provide that a priority reassessment may be processed in a short

time interval, even on a walk-through basis if absolutely necessary, auditors must provide as

much lead-time as possible to facilitate the processing in each section.

Processing procedure

Categories have been established for the application of the different processing procedures. The

reference to days is the period determined from the date that the file is forwarded to the

responsible processing unit in the TC. Auditors should add an extra 10 days to the days specified

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to allow for processing of the file through the review and forms preparation stages. This extra

10-day period may be varied based on individual TSO experience in processing files or the

complexity of the case. Procedures vary depending on the circumstances as follows:

• over 120 days prior to the statute-barred date;

• between 60 and 120 days prior to the statute-barred date;

• between 30 and 60 days prior to the statute-barred date; and

• less than 30 days to the statute-barred date.

Over 120 calendar days

A special processing procedure is not required if the statute-barred date is over 120 days from the

date the file is sent to the responsible processing unit in the TC.

60 - 120 calendar days

Special control procedures are not required if the reassessment is between 60 and 120 days of

becoming statute-barred. Process the file in the usual manner, placing it in a red folder with the

statute-barred date clearly marked on the front cover. Also, enter the statute-barred date

(YY/MM/DD) in red in the top margin of forms:

• T99, T1 and T3 tax calculation information;

• T919, Request for online RAP;

• T919Q, Request for online RAP (Quebec only); and

• T99A, T2 tax calculation information.

30 - 60 calendar days

If a return is to be reassessed and will be sent to the responsible Assessing unit 30 to 60 days

prior to the statute-barred date, these procedures apply:

• Enter the statute-barred date (YY/MM/DD) in red in the top margin of forms T99, T919,

T919Q, or T99A.

• The auditor prepares three-part Form T287, Priority assessments and reassessments

control, which will be Assessments Control's method of ensuring that the priority return

is adequately controlled while in the process. Note that a TC normally requires a

minimum of 15 days to process a reassessment.

• The priority return, processing documents and all three copies of Form T287 must be

placed in a red folder with the statute-barred date clearly marked on the outside. The files

will be processed as manual reassessments.

• Form T287 will be submitted to the team leader for approval as a priority reassessment

action.

• Once the auditor has completed the processing procedures, the file will be forwarded

with:

• Copy 3 of Form T287 to Assessments Control; and

• Copy 2 of Form T287 to Revenue Accounting.

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• The file with Copy 1 of Form T287 will be forwarded for processing to the responsible

Assessing unit in accordance with established procedures in the TSO.

• When forwarded by an audit support clerk or other staff members, Audit, using Form

T2003, will direct that these files be forwarded on a priority basis to the attention of the

expeditor (liaison offices), where applicable.

The AIMS section will assign priority to each file relative to the respective Notice to be issued

date on Form T287.

Note: When forwarding returns for processing that are within 60 days of being statute-

barred, ensure that the prior year information required for general averaging is provided

or that a TAPMA identification printout is attached. If for some reason the information is

not available, the reasons should be documented to alert the Tax Calculation area to the

situation.

Less than 30 days – Walk-through

A return to be reassessed that is within 30 days of being statute-barred, will be processed in

accordance with the procedures for the 30 to 60 calendar day statute-barred files

The auditor will complete the priority procedures and pass the file to the team leader, who will

forward the file using express delivery or fax to the attention of the expeditor (liaison officer) in

the TC.

The TC will treat the walk-through reassessment in the same manner to ensure that there is no

undue delay in completing the reassessment.

Cancellation of a reassessment on a priority basis

If a priority reassessment becomes unnecessary, for example when a waiver is received, record

the Date, Authority, and Reason and notify the expeditor (liaison officer) in the TC to cancel

the requested reassessment action.

11.5.3 Assessments under subsection 152(7) of the ITA


Pro-forma notional assessments

For more information, go to 9.5.0, Unfiled returns.

Assessments – Subsection 152(7) of the ITA

Legislative authority

The legislative authority to prepare pro-forma returns and issue assessments is provided in ITA

subsection:

• 152(4) – assessment and reassessment;

• 152(7) – assessment not based on return of information;

• 162(1) – failure to file return of income;

• 162(2) – repeated failure to file; and

• 164(1) – refunds.

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Assessments when returns are not filed at the time of audit

Subsection 152(7) of the ITA allows the minister to issue an assessment whether or not the

taxpayer has filed a return. This action may be taken in certain situations when the taxpayer has

not filed a return voluntarily. To fulfil this mandate, the Non-Filer/Non-Registrant Section in the

Employer Services Unit in the TCs and the Non-Filer/Non-Registrant (NF/NR) Units in the

TSOs can raise assessments under this subsection by preparing pro-forma returns, also known as

subsection 152(7) assessments.

Generally auditors should not prepare assessments under 152(7); however, decisions should be

made on a case-by-case basis after discussing the outstanding returns with the team leader and

the NF/NR Section.

Assessments under subsection 152(7) have been referred to as arbitrary assessments. The

assessment is not arbitrary; it is realistic and based on factual income information.

A pro-forma return is not considered to be an original return for Canada child tax benefit

(CCTB) purposes.

Although a return has not been filed by the taxpayer, a notice of assessment will still be issued,

and therefore the time limit in subsection 152(4) applies when determining whether a

reassessment can be issued. If the result of a reassessment is an overpayment, the refund will not

be issued unless the taxpayer files the return within the three year period prescribed by

subsection 164(1).

11.5.4 Additional assessments


A reassessment of a tax year replaces the previous assessments or reassessment for that year.

When a return is reassessed, the taxpayer's right to appeal is not limited solely to any changes

made under that last reassessment.

An additional assessment, on the other hand, does not replace or void the original assessment or

previous reassessments, but merely adds income or allows an additional deduction to the income

previously assessed. However, the taxpayer's right to object to that assessment is restricted to the

specific items adjusted. The carrying back of a loss, tax credit, etc. under subsection 152(6) of

the ITA is a reassessment, not an additional assessment. Before issuing an additional assessment,

contact your program at Headquarters for approval.

Restricted use – Additional assessment

An additional assessment would be justified where:

• Income or deductions were attributed by the taxpayer to an incorrect tax year, and a

reassessment correcting the error would result in a permanent loss of tax revenue – see

example 1 below.

• Additional income tax is to be assessed under subparagraph 152(4)(a)(i) of the ITA for an

otherwise statute-barred year because of fraud or gross negligence.

• An adjustment is required to a tax year of an item unrelated to an issue under appeal and

presently before the Courts.

• An additional assessment has been previously issued.

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Other factors to note:

• The goal in issuing an additional assessment is not to open the original assessment or a

reassessment for objection.

• Where an additional assessment has been issued, any subsequent reassessments should be

avoided, if possible. It would be more appropriate to issue further additional assessments.

• Form T7W-C, Explanation of changes on reassessment, or Form T7W-8, Explanation of

assessment or of change made, explaining the additional assessment, must contain the

statement: This is not a reassessment but an additional assessment.

• If any matter is at the objection stage, auditors should inform the taxpayer to contact

Appeals and ask to amend the objection or, if there is an additional assessment, ask

Appeals in writing to include the additional assessment.

Example 1 – Under review

A taxpayer applies a non-capital loss from the 1994 tax year, to reduce the 1993 taxable income.

During a subsequent audit, it was determined that the taxable income for 1995 was substantially

understated, and an adjustment was proposed. At the same time, the taxpayer advised that a

taxable capital gain reported in 1995 was actually realized in 1994 and that would have reduced

the loss carried back to 1993. However, the 1993 tax year was statute-barred at the time of the

audit.

The taxpayer stated that if the CRA reassessed 1995, a Notice of Objection would be filed to

exclude the taxable capital gain from 1995 income. If successful, the taxpayer would have

escaped paying tax on the full amount of the capital gain.

By issuing an "additional assessment" for 1995, the taxpayer's right of objection is limited to

only the audit adjustments proposed, precluding any reference to the capital gain reported in that

year.

11.5.5 Jeopardy assessments

(Revised November 2013)

General guidelines

The purpose of these guidelines is to clarify some terms and to facilitate the recovery of revenues

through the co-operation of the Audit Divisions and Taxpayer Services and Debt Management

Divisions in respect of the jeopardy provisions of the ITA.

The ITA imposes a 90-day waiting period before any collection proceedings (legal action) can be

taken.

However, part IX of the Excise Tax Act (GST/HST) and source deductions (PAYDAC) under the

Income Tax Act are considered trust funds and collection can be initiated at any time.

Collection in jeopardy

When collection is in jeopardy and to prevent or minimize losses, provisions under the ITA

permit collection action prior to the expiry of the 90 day waiting period imposed by section

225.1 of the ITA.

Jeopardy provisions

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• Under subsection 225.2(2) of the ITA, Taxpayer Services and Debt Management has to

demonstrate to the court that there are reasonable grounds to believe that collection of all

or any part of the amount assessed would be jeopardized by the delay in the collection.

• Under subsection 164(1.2) of the ITA, Taxpayer Services and Debt Management has to

demonstrate to the court that there are reasonable grounds to refuse repayment of any

amount in controversy or to surrender security where eventual collection of the amount

would be jeopardized by the repayment or surrender of the security.

Jeopardy vs. danger of loss

Jeopardy occurs when a delay in collection (due to collection restrictions imposed by section

225.1 of the ITA) may result in a loss to the Crown.

The term danger of loss generally refers to amounts already assessed that are subject to

collection action. Danger of loss may occur not only in cases of fraud, but also in cases where the

tax debtor may dispose of, liquidate or otherwise transfer property beyond the reach of the CRA.

With the understanding of the basics of the jeopardy assessment, the auditor will be in a better

position to provide assistance and information on the Collection Report that will assist Taxpayer

Services and Debt Management when jeopardy collection actions are taken.

For more information, go to Income Tax Information Circular IC98-1R4, Tax collections

policies, at www.cra-arc.gc.ca/E/pub/tp/ic98-1r4/README.html.

Taxpayer leaving Canada

Section 226 of the ITA provides that when a taxpayer's prescribed filing and remittance period is

not yet past and there are reasonable grounds to believe that the collection of an amount could be

jeopardized in the event of a delay in assessment, bring the situation to the attention of the

Assistant Director – Taxpayer Services and Debt Management, so that Taxpayer Services and

Debt Management may take collection action to eliminate or reduce revenue loss.

Collection Report

Prepare a Collection Report where necessary. A template is available in WinALS.

Procedures

Process files requiring urgent processing or jeopardy reassessments according to the

walk-through procedures. For more information, go to 11.5.2, Priority reassessments. In

addition:

• Contact Taxpayer Services and Debt Management and maintain close liaison to ensure

that appropriate action and procedures are taken.

• Forward the files to the TC by the quickest and most efficient method.

• Advise the expeditor at the TC that the file is being forwarded.




11.5.9 NIL assessment – Notification


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When a taxpayer files an income tax return for a year, the CRA is required to examine the return

and issue an assessment notice for the amount of tax, interest and penalties assessed, if any, or to

notify the taxpayer that no tax is payable, commonly referred to as a NIL Assessment. The

assessment form is identical. Where no income tax, interest or penalties are assessed, it is not an

assessment in law, but a notification.

An assessment and a notification are similar for the purposes of determining the statute-barred

date after which the CRA is prevented by law from making a reassessment, an additional

assessment, or assessing tax, interest or penalties unless paragraph 152(4)(a) of the ITA is

applicable.

In the case of a notification, the statute-barred date does not have any relevance where the CRA

disagrees with a taxpayer's reported loss or where the taxpayer wishes to revise their claim for

permissive deductions, provided the adjustment does not create tax payable for that year so that

an assessment is required.

Where the CRA ascertains a loss that is different from the amount reported by the taxpayer, the

taxpayer may request a loss determination. This determination is identical to an assessment for

purposes of determining the statute-barred date.

11.5.10 Loss determination


For more information, go to 29.0, Losses.

Legislative authority

Subsection 152(1.1) of the ITA effectively provides that where the CRA notifies a taxpayer that

a change has been made to a reported loss, the minister shall, at the taxpayer's request, make a

determination and issue Form T67AM, Notice of determination/Redetermination of a loss, to

confirm the amount of the changed loss, including a:

• non-capital loss;

• net capital loss;

• restricted farm loss;

• farm loss; and

• limited partnership loss.

This provides the taxpayer with the statutory right of objection or appeal. Subsection 152(1.2)

provides that divisions I and J, as they relate to an assessment or reassessment and to assessing

income tax and reassessing income tax, are applicable to a determination or redetermination,

(except that subsections 152(1) and 152(2) are not applicable to determinations made under

subsections 152(1.1) and 152(1.11)). The taxpayer has the right to appeal a change made to a

reported loss because of the option available to request a determination that is subject to

objection and appeal.

Subsection 164(4.1) does not apply in respect of determinations and redeterminations made

under subsection 152(1.4) dealing with partnerships. Therefore, where a court on disposing of an

appeal of a determination or redetermination regarding a partnership orders the minister of


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national revenue to make a redetermination, the minister will have discretion not to make the

redetermination or to refund any resulting overpayment immediately and to wait until all rights

of appeal have expired.

Where the minister makes a determination of the amount of a taxpayer's loss, subsection

152(1.3) provides that, subject to the taxpayer's right of objection and appeal in respect of the

determination and subject to any redetermination by the minister, the determination is binding on

both the minister and taxpayer for the purpose of calculating the taxable income of the taxpayer

in any other year. For example, if a notice of determination has been issued, the taxpayer may

not appeal the year in which the loss is being applied (in respect of the loss itself). However, if

the taxpayer does not request a notice of determination, they may appeal, in respect of the

amount of the loss, in the year in which the loss is being applied.

While a determination shall be made by the minister only at the request of the taxpayer,

including requests made under subsection 245(6) with respect to general anti-avoidance rule

(GAAR) transactions, the minister may make a redetermination within the normal reassessment

period from the date on which the notice of determination was issued, or at any time as provided

in paragraph 152(4)(a).

Policy and procedures

NIL notice of reassessment with no tax change

The original notice of assessment provides the taxpayer with an explanation of the changes made

to reported losses at the initial assessing stage. Changes to reported losses resulting from an audit

require a reassessment to be issued with an accompanying Form T7W-C, Explanation of changes

on reassessment, advising the taxpayer of the changes.

A nil notice of reassessment may be issued even though the year may be statute-barred, provided

the previous assessment or reassessment was also nil. If the previous assessment was not nil and

the year has become statute-barred, no assessment notice will be issued. Explain the changes in a

letter or on Form T7W-C, accompanied by a letter.

In addition to providing an explanation of the changes, include this message on Form T7W-C (or

in the letter):

"The CRA has determined that the amount of the loss you incurred does not agree with the

amount you reported. As the difference does not affect your assessed tax, the ITA does not

allow you to file an objection. However, you have the following choices if you want to

dispute the loss amount as determined by the CRA:

i) Request in writing that the CRA issue to you, Form T67AM, Notice of

determination/Redetermination of a loss, under subsection 152(1.1) of the ITA, with

respect to the loss. This loss determination is binding on both you and the minister,

subject to your right to object or appeal. Once you have received your loss determination,

you can file an objection to the amount of the loss. The CRA will treat your objection in

the same manner as an objection to a tax reassessment.

ii) Alternatively, you may wait until you can apply your losses to a year in which you

reported taxable income. You can then deduct the losses to the extent you originally

reported them. The CRA will reassess that year's return to adjust the loss claimed and you

will then be able to file an objection to that reassessment.

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Notes:

• Under subsection 165(1.2), a taxpayer may waive the right to object to one or more issues

being proposed for reassessment. The waiver must apply to specific issues in accordance

with CRA policy. The taxpayer may still choose to request a loss determination to object

to other issues and there is no provision for waiving the right to request a loss

determination. Use the above message on Form T7W-C, but alter the message to reflect

the waiving of the taxpayer's right to object on specific issues.

• Where a NIL notice of reassessment is issued as a result of an adjustment to a reported

loss of any kind, and concurrently, there is an adjustment to the loss carried over to

another tax year that may be objected to or appealed in the normal manner, the above

message does not need to be entered on Form T7W-C of the loss year.

• For T2 reassessments, the message should be printed immediately after the narrative

description of the changes made to the reported losses on Form T7W-C.

• Where a NIL Notice of reassessment is issued under Part I, but tax is also assessed under

another part of the ITA, (for example Part I.3 or Part IV), the above message appears on

Form T7W-C below the Part I adjustments but before the adjustments to the other part.

Each part is treated separately.

• For T1 returns, enter the message directly after "Revised Loss" on Form T99, T1 and T3

tax calculation information, before "End of T7W-C," and under area A, tick the “Nil

notice to be issued” box.

Unchanged reassessment with tax payable


Where losses are changed as a result of the taxpayer requesting a change or submitting new

information, the revised loss will be considered to be the reported loss. The taxpayer would not

be able to request a determination, providing that there are no changes to the revised loss

requested by the taxpayer.

In these situations, the taxpayer should be informed in writing of the revised loss and a copy of

the letter placed in the permanent document (PD) folder. Where taxpayers ask for a

determination for other purposes such as to provide a comfort letter for taxpayers trying to sell a

loss corporation, these requests should be denied and the CRA's policy should be explained to

them. For more information, go to Appendix A-11.1.25, Loss determination – Request denied

letter.

The policy is intended to give taxpayers the right to request a determination only where there has

been a material change to a reported loss resulting from an audit by the CRA. Minor,

immaterial changes should not be made to reported losses where such a change would require

advising the taxpayer of the change giving the taxpayer the right to request a determination. This

could make it necessary to perform an audit that would not otherwise be carried out.

An example of an immaterial change that is frequently made at the initial assessing stage is the

adding back of charitable donations. In such a case, place Form T2003 on the return noting the

required changes that can be made when the loss is applied.

A taxpayer may report a profit, a loss or a nil profit, and as a result of an audit the minister

ascertains that the taxpayer actually suffered a loss. Similarly, the taxpayer reports a loss and, as

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a result of an audit, the minister changes the reported loss to a nil amount. In either case, the

CRA's practice is to issue a notice of determination of a loss, if requested by the taxpayer. In

these situations, the underlying intent of the provision must be maintained rather than placing

unintended emphasis on the word amount in subsection 152(1.1) of the ITA.

Requests for a notice of determination of a loss

If, after receipt of a NIL notice of reassessment or a letter, as the case may be, a taxpayer makes

a written request for a determination, the request will be forwarded by the Assistant Director,

Audit Division to the relevant Audit Section Manager for assignment to an auditor.

A request for a determination can be made at any time after a NIL notice of reassessment, or a

letter advising the taxpayer that a loss has been changed, has been received. There are no time

limits for filing such a request.

The taxpayer may withdraw the request for a determination providing such request is in writing

and the notice of determination has not already been issued. Once issued, the determined loss is

binding on both the taxpayer and the CRA, subject to the taxpayer's right to object or appeal.

Where a loss has been changed as a result of an audit, the changed amount will, in all

probability, be the amount confirmed in the notice of determination. However, where the change

in the reported loss was authorized by the Assessing Section (that is, as a result of an initial

assessment action, non-audit adjustment or small business audit) the request for a loss

determination will be handled by the Assessing Section except for a file which falls exclusively

in the small, medium, basic and large file ranges. In such cases, the TC will refer the file to the

assistant director, Audit Division or designate to ensure that other changes are not required

before the amount is confirmed in the notice of determination.

Such action is required because it is not desirable to confirm a changed loss and then reduce it

after the notice of determination has been issued.

On the other hand, since in all likelihood the taxpayer will be appealing the amount confirmed in

the notice of determination or no request would have been made, the change should be further

examined to ensure its validity. The amount to be confirmed in the notice of determination will

be that which is considered correct at the time the notice is issued.

Issuing Form T67AM, Notice of determination/redetermination of a loss


Issue a request to T1 Taxpayer Services and T2 Corporation Services to prepare Form T67AM.


• Appendix A-11.3.3, Request for loss determination – T1;

• Appendix A-11.3.4, Request for loss determination – T2; and

• Form T67AM, Notice of determination/Redetermination of a loss.

11.5.11 Joint liability assessments (ITA)


Tax liability on property transferred not at arm's length

Subsection 160(1) of the ITA provides that where a taxpayer has transferred property to their

spouse or common-law partner, to a person who has since become the taxpayer's spouse or


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common-law partner, to a person under 18 years of age, or to any other person with whom the

taxpayer did not deal at arm's length, the transferor and transferee are jointly and severally liable

for certain taxes for which the transferor would otherwise alone be liable.

Subsection 160(1.1) generally provides that where subsection 69(11) of the ITA gives rise to a

deemed disposition of property by a particular person, the person acquiring the property is jointly

and severally liable for the particular person's tax liability arising because of the deemed

disposition.

Subsection 69(11) is an anti-avoidance rule intended to prevent the tax-deferred transfer of

properties with accrued gains to parties who are either tax-exempt or who will be in a position to

shelter any gains realized on subsequent dispositions.

Assessment

Section 160 of the ITA is not a reassessment; rather, it is a new assessment and therefore not

subject to the policy governing reassessments. When it is determined that a transaction between a

transferor and a transferee has section 160 implications, an assessment will be made. The

transferee then has the right to appeal the assessment by filing a notice of objection.

Subsection 160(2) provides that a transferee can be assessed under that subsection at any time, as

though the assessment had been made under section 152. Consequently, an assessment under

subsection 160(2) may be statute-barred by virtue of the time limitations in subsection 152(4).

11.5.12 Consequential assessments


Subsection 152(4.3) of the ITA allows the minister to reassess beyond the normal reassessment

period for a tax year where it is necessary to do so as a result of an adjustment to an amount

deducted or included in computing a balance of the taxpayer for another year.

A balance of a taxpayer for a tax year is defined in subsection 152(4.4) as the income, taxable

income, taxable income earned in Canada or any loss of the taxpayer for the year, or as the tax or

other amount payable by, refundable to, or deemed to have been paid by, the taxpayer for the

year.

Subsection 152(4.3) limits its application to reassessments of tax years that follow the year of

adjustment, so that the subsection cannot be used for reassessing preceding tax years. As well,

reference is added to allow the minister to re-determine the amount deemed to have been an

overpayment.

11.5.13 Collection stall code procedures – Form T718, Memorandum to Collections Section


To ensure that taxpayer service is maintained at the optimum level, all employees have to be

aware of the importance of stall code procedures. The CRA must postpone collection activity

whenever a taxpayer has a legitimate query. Where there is any doubt, the taxpayer will be given

the benefit of the doubt until the matter can be verified.

Collection action for that portion of any debt in question will be suspended until the matter has

been resolved or an adjustment has been processed when a taxpayer contacts the CRA in person,

by telephone, or in writing to:

• request a review of an assessment;

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• question the application of previous payments;

• provide information in respect of a possible reassessment; or

• file a notice of objection.

All requests, enquiries or objections regarding assessed amounts of tax, interest or penalties

received by any area in the CRA, whether related to the receiving section or not, that cannot be

concluded at the time will require that the individual taxpayer's CINDAC account be stall coded.

The area responsible to resolve the matter will be indicated through the appropriate RAPID

element legend code and an acknowledgement issued to the taxpayer, where applicable.

To provide a high standard of service to taxpayers, it is the TSO employee's obligation at initial

contact to obtain sufficient detail from the taxpayer and to give appropriate direction and advice

as to where to send any additional audit evidence or information to resolve the matter. Contact

includes telephone conversations, correspondence, and over-the-counter interviews.

Where acceptable proof or a source document is required and not provided at the time of contact,

advise the taxpayer to send in the material and a record of the contact must be prepared and

maintained. If the receiving section cannot resolve the matter, forward with a round-trip

memorandum to the appropriate section. When it is apparent that the taxpayer has not forwarded

the information as requested, discard the BF record and delete the CINDAC stall code.

In any other case, forward a round-trip memorandum with the details to the appropriate Section

for their action.

Stall codes will be deleted automatically when a reassessment is posted to the CINDAC account

except when matching automatic RAPs or when the stall code element is Appeals.

Attach labels with the inscription STALLED/SUSPENDU to the taxpayer's correspondence,

round-trip memorandum or undelivered mail envelopes to indicate to the recipient that a stall

code has been set. If labels are not available, inscribe the word STALLED manually in red.


• Appendix A-11.2.13, Form T718, Memorandum to Collections Section; and

• Form T718, Memorandum to Collections Section.

11.6.0 Auditor’s reports


Introduction

The preparation of reports is a very important step in the audit completion process. A report is a

summary of the work performed and any resulting assessment actions. In most cases, a report

satisfies the users' needs without having to examine the detailed working papers.

There are many potential users of auditor’s reports. They include team leaders, screeners, other

auditors, Appeals officers, Quality Assurance reviewers, and if the case is challenged in court,

justice lawyers. Reports may also be made available to the taxpayer through an informal request

for information or under the Access to Information Act.

Reports are a means of communication. They need to be clear, complete, and concise. Auditor

reports should present the facts objectively. The tone and style should reflect the professional

http://infozone/english/r1713497/formpub/form-e.asp?formid=193826016176970http://infozone/english/r1713497/formpub/form-e.asp?formid=193826016176970

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nature of the document and be free from personal opinions, comments, or information about

other taxpayers.

Generally, it is not necessary to prepare separate reports for each year assessed, unless the case

deals with scientific research. However, consider preparing reports for individual years if the

adjustments are complex and where separate reports would help to clarify the adjustments.

Sometimes more than one taxpayer will be assessed as a result of the same audit (such as

associated or secondary files). Prepare separate reports with all the information about the

assessments for each taxpayer. The reader of the report should not have to refer to other files for

information about the assessment.

The most commonly prepared auditor reports include:


• Penalty Recommendation Report;

• Capital Gain vs. Income Report;

• Summary of the Taxpayer’s Income and Composition of the Farm Loss; and

• Income Tax Internal Taxpayer Relief Recommendation Form.

11.6.1 Form T20, Audit Report

(Revised July 2014)

Form T20, Audit Report, gives the reader vital information about the audit, including:

• who was audited;

• who did the audit;

• nature and extent of audit procedures;

• use made of computer audit techniques during the audit; and

• basis for any audit adjustments and how they were calculated.

A template in WinALS can be used for both income tax and GST/HST audits.

Prepare Form T20, Audit Report, for every audit regardless of the nature and scope of the audit.

Use the template in WinALS to achieve consistency, as well as to ensure that pertinent points are

covered. Where other information not included in the standard template should be included to

enhance the team leaders or other reader's understanding of the audit results, add that

information.

WinALS software must be used on all audits and examinations conducted on small and medium

businesses. This applies to all small business audits (program 17) and medium business audits

(program 18).

The minimum mandatory documentation requirements for audit files have not changed.

However, in an electronic environment, supporting working papers and correspondence with the

taxpayer and/or representative must be scanned and included with the electronic file. This will

ensure the national audit archive (NAA) contains the complete file.

Go to memorandum, Mandatory use of WinALS and use of scanners – Small and Medium

Audits and GST/HST Pre-assessment Examinations, dated May 9, 2012.

http://infozone/english/r6001000/audit/memo/winals_mandatoryuseofscanners-e.html

http://infozone/english/r6001000/audit/memo/winals_mandatoryuseofscanners-e.html

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Contents of Form T20, Audit Report

These sections describe how to complete Form T20, Audit Report, using the template in

WinALS.

Section A: General information


Indicate that income tax was audited and the audit scope.

Enter this information:

• taxpayer’s name;

• taxpayer’s address;

• period covered by the report;

• case number;

• file number for this taxpayer;

• Supp No (This field is for the Non-Resident Audits Program. It has to be manually

populated by the auditor, as the information is not downloaded.);

• auditor's name;

• team leader's name; and

• date Form T20, Audit Report, is completed.

When a case is downloaded in WinALS, some information is filled in automatically but should

be reviewed to ensure its accuracy.

Audit Report authorization

Form T20, Audit Report, must be signed and dated by each person who prepared, examined, or

approved it. The signature of the team leader signifies approval of the extent and quality of the

audit work performed, as well as the results obtained.

Section B: Type of business

Briefly describe the taxpayer's main business activity.

An additional subsection has been added for the Non-Resident Audit Program captioned as type

of payments.

Describe the organization and if applicable the relationship with other business entities. Indicate

whether the taxpayer being audited is the head office or a branch or division of the company. If

appropriate and available, include an organization chart to help readers understand the company's

capital structure. If the taxpayer is a partnership, indicate the number of partners, the types of

partners (for example silent partner) and the relationship of the partners.

Section C: Other files in case

Check the box if there are any other files in this case. List all of the taxpayers involved in the

case, and specify their relationship with the principal file by inserting the corresponding letter:

(S) for secondary, (A) for associated, or (R) for related. Enter (S) only when the secondary file

has been the subject of an adjustment.

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For corporations with 10 shareholders or less, attach a list showing the names and addresses of

all shareholders, their relationships to one another, and the number of shares held by each

shareholder. For larger corporations, provide this information for the principal shareholders only.

Section D: Extent of audit


Check the box if you have completed form T682, Specific Audit Program interview

questionnaire, which is part of WinALS. If you have not used this program, describe the extent

of the audit coverage and/or audit scope by describing (not an exhaustive list):

• records examined and whether electronic or hard copy;

• nature and extent of indirect tests; and

• compliance review.

Records examined

For a general compliance audit, state the audit procedures followed and the files examined. For a

limited scope audit, state the reason for the audit. Make observations based on analyses of the

records examined, including:

• the type of records maintained by the taxpayer (that is, electronic or manual);

• the completeness and accuracy of the records and books of account;

• the accounting methods used, including the type of computer software if applicable;

• details of analyses made, including computer audit techniques used, such as IDEA

software in analysing the accounts;

• the extent of reliance on internal controls;

• tests performed (that is, substantive and compliance tests);

• the ledger accounts audited; and

• areas of concern and areas where improvement is required.

Discuss the evaluation of the records and any shortcomings with the taxpayer and suggest

corrective action, where appropriate.

Nature and extent of supporting indirect verification of income tests

Provide details on any supporting indirect verification of income (IVI) testing methods used,

such as:

• bank deposit analysis (mandatory IVI step);

• rough net worth;

• source and application of funds; and

• ratio analysis.

Provide an explanation if IVI tests were not used. State if a net worth statement or assessment

was prepared under subsection 152(7) of the ITA, including the reasons why this approach was

considered necessary. If an IVI technique was used, describe the steps taken to ensure that books

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and records will be adequately maintained in future. For a sample letter, go to Appendix

A-10.1.3, Informal books and records agreement letter. Record on Form T2020, Memo for file,

or another working paper, all discussion with the taxpayer about the need to use the IVI

technique. For more information, go to 13.4.0, Assessing net worth.

Section E: Explanation of all changes


Explanation of changes for all audits

Explain all adjustments in detail. Include a summary of the adjustments by fiscal year, as well as

changes that affect determining loss carry-overs, investment tax credit balances, undepreciated

capital cost, and other such amounts in future years.

Relate all relevant facts, both favourable and unfavourable, and include any schedules,

documents, and correspondence used to support the decisions made. If necessary, a diagram may

help the reader to understand the relevant transactions. For each of the adjustments, indicate the

relevant sections of the ITA and applicable regulations, as well as any other supporting

references, including for example, income tax folios, income tax interpretation bulletins, income

tax information circulars, and court cases.

The method that was used to determine or identify unusual transactions that resulted in an

adjustment should be described. This information should be communicated to the parties

concerned at the TSO and to the appropriate program area within HQ Audit. This helps provide

the information necessary to update the specific audit guidelines and/or audit techniques area of

the Income Tax Audit Manual.

Explanation of changes required for international transactions

When changes are proposed that involve international transactions with a person with whom the

taxpayer has a non-arm's length relationship, and these transactions are covered by a tax

convention, it is important that the change is explained in detail.

Include supporting documents even where the taxpayer agrees with the adjustment. This is

necessary because the foreign party to the transaction could use the tax convention provisions

regarding the competent authority to oppose this change. If the changes are not clearly explained

in detail or supporting documents are not included, the competent Canadian authority can require

that the adjustment be cancelled.

Charitable organizations

Where the audit concerns a charitable organization, treat a recommendation that the

organization's charitable registration be revoked as a change.

Audits where no changes or adjustments are required

Upon completion of the audit, send a letter to the taxpayer to confirm there are no changes or

adjustments. The letter states that the audit is completed and no changes or adjustments to

reported net income are required. For sample letters, go to Appendix 11.1.0, Letters, and

WinALS.

Penalties and interest


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Penalty proposed

If a penalty under subsection 163(2) of the Income Tax Act is proposed, a Penalty

Recommendation Report must be prepared and approved by the designated authority.

Where a penalty has been proposed in writing to the taxpayer, the auditor must follow the

procedures described in 11.6.2, Penalty Recommendation Report.

As well, in Section E of Form T20, Audit Report, the auditor ticks the box “Penalty

Recommendation Report attached.”

If a gross negligence penalty was proposed but not applied, the Penalty Recommendation Report

should clearly outline the factors considered in determining that additional penalties were not

warranted.

Penalty not proposed

If a penalty was not proposed, a Penalty Recommendation Report does not need to be prepared.

However, the auditor must document the reasons why a penalty was not proposed to support the

decision made.

In such cases, the auditor must tick the “Penalty not proposed” box in Section E of Form T20,

Audit Report. As well, the auditor must provide a clear explanation of why a penalty was not

proposed, including sufficient details from the facts of the case to support the reasons cited and

make the basis of the decision clear.

For further information, go to 28.4.4, Specific factors to consider when imposing gross

negligence penalties.

Depending on the facts of the case, if a penalty was not levied, the auditor may advise the

taxpayer in writing that the penalty may be applied in subsequent years in the event of

reoccurrence of the issue in question. This would be helpful in refuting a claim in later years that

the taxpayer did not knowingly make a false statement or omission.

Application of the taxpayer relief legislation - Waiver of penalty and/or interest

In all cases the auditor must comment on whether there were delays in the audit or other

circumstances that warranted the application of the taxpayer relief legislation.

A report must be prepared for each file on which taxpayer rights and taxpayer relief provisions

were considered, regardless of the final decision. This report constitutes a documented summary

of all the relevant facts and must contain sufficient information to enable the team leader or other

reader to take action based on the auditor's recommendation. All statements in this report must

be substantiated with working papers and other supporting documents. Go to Appendix 11.2.24,

Income Tax Audit Division Internal Taxpayer Relief Recommendation Form, for a template to

prepare a taxpayer relief report.


• 3.2.0, Taxpayer relief provisions; and

• memorandum, New Mandatory Proactive Taxpayer Relief Guidelines, dated September

25, 2012.

Section F: Taxpayer's representations


http://infozone/english/r6001000/audit/memo/proactivetaxpayerrelief-e.html

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State in detail the steps taken to inform the taxpayer of the proposed adjustments and any action

taken by the taxpayer in response to the proposed adjustments. The date that the proposal was

presented or the date the proposal letter was sent to the taxpayer should be indicated here.

If the explanations provided in Section E, Explanation of all changes, are not sufficient to rebut

the representations put forward by the taxpayer, the auditor must explain in this section the

reasons for rejecting them.

Taxpayer representatives

The taxpayer will often refer the auditor to their representative to discuss any matters covered by

the audit. Ensure that a third-party authorization is on file prior to discussing the audit results

with the representative. Provide the name and title of all persons who have represented the

taxpayer as well as any correspondence or additional information received. Document all

discussions with the taxpayer or their representative.

Section G: Taxpayer’s concurrence/non-concurrence


State clearly whether or not the taxpayer agrees with the proposed changes/adjustments. This

section must include the name of the persons that agreed to the adjustments as proposed and a

statement indicating one of the following situations:

• The taxpayer agrees with the proposed changes. This agreement must be confirmed by

means of a letter, the minutes of one or more meetings, or a report summarizing any

telephone conversations with the taxpayer. A summary of the discussion confirming the

adjustments must be recorded on Form T2020, Memo for file, or other working paper in

the file.

• The taxpayer does not approve of some or all of the proposed changes.

• The taxpayer has made representations, but it is not clear whether there is concurrence.

• The taxpayer has not responded orally or in writing to the proposed changes.

Section H: Referrals


Briefly describe the nature of any referrals made to areas such as Real Estate Appraisal, Business

Equity Valuation, Criminal Investigations (referrals to criminal investigations are under review),

International Transactions, Taxpayer Services and debt management, other TSOs, or

Headquarters

List leads that were referred to other sections by type of referral and the number referred. Do not

identify other taxpayers by name or any other means. To make a referral for GST/HST issues, go

to 9.13.0, Workload referral procedures for GST/HST and Small and Medium Enterprises.

If a referral from Taxpayer Services and Debt Management was received, this section should

include a brief description of the information provided by Taxpayer Services and Debt

Management.

A form for referrals to Taxpayer Services and Debt Management is available in WinALS. For

income tax audits, a referral is made when the balance owing exceeds the established local

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threshold. If arrangements for payment have been made, include the details of such

arrangements.

Section I: Matters to be followed-up


If follow-up action is necessary because of significant potential for adjustment or the risk that the

taxpayer will not comply, details of these issues are to be provided in this section. The

requirement for follow-up action should be noted in the screen in WinALS. A PLATINUM

report can be requested that lists files where follow-up was considered necessary.

Note adjustments that decrease or eliminate otherwise double-taxed amounts in this section, as

these years are not to be allowed to become statute-barred if still unsettled in Appeals. An

upward adjustment will be required if it appears that a tax year is about to become statute-barred

and a waiver has not been provided. The taxpayer is required to file a waiver as a condition of

this type of adjustment, where at the time of reassessment certain tax years will become

statute-barred within one year.

Form T578, Follow-up retrieval record

To track outstanding files, complete in triplicate, Form T578, Follow-up retrieval record.

Prepare this form at the end of the audit and submit to the team leader for control

purposes. Keep completed copies of Form T578 in a follow-up bank and extract the

relevant returns periodically for follow-up. When the returns are received, the team leader

gives the return to the original auditor or to another auditor, who conducts a follow-up

audit or reassessment. Once the audit or reassessment is completed, the auditor fills in the

rest of Form T578, attaches copy 1 to the return with Form T20, Audit Report, and returns

copy 2 to the follow-up bank.

Section J: Other items


Include in this section of Form T20, Audit Report, comments on any of these items included in

the Audit Plan or covered during the audit:

• screener's comments;

• multiple jurisdiction and place of supply;

• assistance from Electronic Commerce Audit Specialists;

• ambiguities in the law or CRA policy;

• transactions with non-residents and/or exports;

• advance rulings;

• aggressive tax planning;

• other matters;

• notice of determination/re-determination;

• advertising expenses;

• capital gain vs. income; and


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• farm losses and restricted farm losses.

Screener's comments

Note screener's comments that were not addressed elsewhere on Form T20, Audit Report.

Multiple jurisdictions and place of supply

In all cases where multiple jurisdictions are involved, verify the allocation of taxable income

among the provinces concerned. The verification is mandatory and the extent of examination

must be specified. For more information, go to 12.14.0, Multiple jurisdictions and allocation of

income.

Assistance from Electronic Commerce Audit Specialists

When computer assisted audit techniques are used during the course of the audit, provide this

information:

• Where the services of an Electronic Commerce Audit Specialist (ECAS) were used, the

extent of the services and their impact on the audit.

• Details of the analyses made by the auditor with IDEA software, or other computer-based

analytical software, using data provided by the ECAS.

• If the services of an ECAS auditor were not used, state the reasons.

Ambiguities in the law or CRA policy

If the audit findings indicate technical problems were caused by ambiguities in the law or in the

CRA's policies and interpretations, an unfair interpretation of the current legislation is indicated,

or unforeseen potential tax consequences, provide details on Form T20, Audit Report.

If the ambiguity problems have been the subject of memoranda or correspondence, it is sufficient

to cross-reference the report to the documents.

Transactions with non-residents/exports

Describe any major transactions with non-residents including drop shipments and transactions

with offshore related taxpayer (TORT) transactions that are not described elsewhere in this

report. Cross-reference working papers that deal specifically with these issues.

Advance tax rulings

When a taxpayer has obtained an advance tax ruling (ATR), indicate if the proposed transaction

was in fact carried out as described in the ruling. If not, provide full details of the steps taken to

clarify the matter including discussions with the rulings officer and other officials from the

relevant division of the Income Tax Rulings Directorate at Headquarters, the taxpayer or

representative, and of any resulting reassessing action.

Aggressive tax planning

Provide details of any transaction not otherwise described on Form T20, Audit Report, where

consultation with Aggressive Tax Planning was considered necessary.

Other matters

Describe any other issues and identify any other amounts that are considered important or likely

to be helpful to future auditors. Describe any other matters as required by TSO policy.

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Notices of determination/re-determination

If the taxpayer has received a notice of determination or re-determination of a loss under

subsection 152(1.1) of the ITA, provide details of the type and amount of the determined losses

as indicated on Form T67AM, Notice of determination/Redetermination of a loss.

If the taxpayer did not request a determination/re-determination of some losses, enter the

notation not requested next to each.

Advertising expenses - ITA sections 19 and 19.1

Describe the procedures used to determine whether advertising was published in a non-Canadian

periodical or broadcast by a foreign radio or television station that could make certain expenses

non-deductible under sections 19 or 19.1 of the ITA.

Capital gain vs. income

If consideration was given to treating a reported capital gain as income from a business that is an

adventure or concern in the nature of trade, a Capital Gain vs. Income Report must be

prepared, regardless of the decision reached. This report may be included in this section of Form

T20, Audit Report, or it may be a separate report. For more information, go to 11.6.3, Capital

Gain vs. Income Report.

Farm losses and restricted farm losses

Prepare a report when farm losses or restricted farm losses are verified. Complete the report as a

separate document or as a part of Form T20, Audit Report. For more information, go to 11.6.5,

Restricted farm loss report.

Section K: Recommendations

This section is for the Non-Resident Audit Program.

Section L: Taxpayer relief - Delays in file


Section M: Taxpayer education on non-resident forms



Copies of Form T20, Audit Report

For an audit with no changes or adjustments, or a T1 audit, one copy of Form T20, Audit Report,

is usually sufficient. In all other cases, prepare two copies. For more information, go to 11.8.0,

Audit completion - Storage of working papers and other documents.

Form T682, Specific Audit Program Interview Questionnaire


WinALS provides templates for Form T682, Specific Audit Program Interview Questionnaire,

included with Form T20, Audit Report. These forms are used to describe the extent of the audit

performed.

11.6.2 Penalty Recommendation Report


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Prepare a Penalty Recommendation Report if a penalty under subsection 163(2) of the ITA has

been proposed in writing to the taxpayer, regardless if it is ultimately applied.

The onus of proof of a penalty is on the minister under subsection 163(3). A summary of the

facts considered in deciding to apply a penalty should be included in the report. The summary

must contain sufficient information to ensure that penalties under subsection 163(2) are

justifiably applied and to enable the reader to take action on the auditor's recommendation

without having to refer to any other documents in the file.

For more information about penalties, go to 28.0.

Although the report should be able to stand on its own, support statements in the report with

working papers and other documents in the file that clearly identify the records reviewed and the

audit evidence obtained to substantiate the application of the penalty. This information will

support the penalty applied if the taxpayer files a notice of objection.

Contents of a Penalty Recommendation Report

Follow this prescribed format to ensure that the report contains the information needed to support

the recommendation.

(1) Taxpayer:

Name: Enter the name as shown on the return or the most recent reassessment in the file, in

order of first name, initials, and surname.

Number: Enter the social insurance number (SIN) or the business number (BN) of the taxpayer

being reassessed.

Tax years: Enter the tax years being reassessed.

(2) Address:

Enter the taxpayer’s most recent known mailing address.

(3) Type of business:

Indicate if the taxpayer being audited is an individual or a corporation. If the taxpayer carried on

a business, describe the type of business activity.

(4) Source of lead:

Indicate the source of any lead.

It may be a document that was reviewed during the course of the audit or another source, such as

the taxpayer's representative or financial institution.

(5) Nature and explanation of adjustments for penalty considerations:

Provide a concise statement of the facts relating to those adjustments subject to a penalty, along

with the amount of the adjustment. If the penalty covers more than one year or reporting period,

specify the adjusted amount for each year individually.

Indicate whether the assessment is based on an assessing indirect verification of income (IVI)

technique, and, if so, explain the assessing IVI technique used.

To establish that there has been negligence on the taxpayer's part, explain the nature of the

adjustment in detail (for example, the taxpayer's returns contain false statements).

http://v2.taxnetpro.com/find/default.wl?mt=tnpHome&db=206416&ft=l&docname=uuid(I8d8f38d80633343de0440003ba833f85)&cxt=TOC&rp=%2ffind%2fdefault.wl&findtype=l&ordoc=I8daec09a3a9909aee0440003ba833f85&tc=-1&vr=2.0&fn=_top&sv=Split&tf=-1&referencepositiontype=T&referenceposition=RSC1985c1s5_163_3_&rs=TNPR14.04

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Discuss all adjustments with the team leader.

(6) Audit evidence of “knowingly” or “gross negligence”:

The criteria (6-a) to (6-l) are a guideline to determine if the audit evidence of “knowingly” or

“gross negligence” exists, but they are not intended to be exhaustive.

Provide rationales to responses for (6-a) to (6-l). All statements must be well-documented and

supported by facts.

For more information about the meaning of the term “knowingly or under circumstances

amounting to gross negligence,” go to 28.4.2. For more information about audit evidence, go to

10.5.0.

(6-a) Materiality of amount:

Describe how material the adjustment is relative to the taxpayer’s reported income and the

source of income.

For more information on materiality, go to 9.17.0. For more information about minimum

thresholds with regard to penalty consideration under subsection 163(2), go to 28.4.7.

(6-b) Preparation of books, records, and returns:

Was the taxpayer involved in maintaining the books and records and preparing their returns? If

so, describe their involvement and the books and records maintained. If the taxpayer was not

involved, provide the name and title of the representative who maintained the books and records

and prepared the taxpayer’s returns.

(6-c) Taxpayer's knowledge of tax matters:

Describe the taxpayer’s knowledge of tax law.

(6-d) Taxpayer's knowledge of income and expenses:

Discuss the taxpayer’s knowledge of their income and expenses. Indicate whether the taxpayer

understood how sales were recorded and expenses were deducted, and the origins of numbers on

the financial statements and returns.

(6-e) Taxpayer's awareness of degree of care required:

Comment if the taxpayer demonstrated that reasonable care was taken to the best of their ability

to ensure that amounts reported were correct.

(6-f) Prior contact with the Canada Revenue Agency:

Indicate if the taxpayer had previous contact with the CRA with regard to the books and records

or returns or tax issues, and the nature of the contact. Comment if the taxpayer’s books, records

and returns had been audited in the past by the CRA and what the outcome was.

(6-g) Similar income in the past:

Comment if the taxpayer reported similar income or deducted a similar amount in the past, and

when it occurred.

(6-h) Examination of return prior to filing:

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Indicate if the taxpayer signed their returns. If not, provide the reason why they did not sign

them.

For electronically filed returns, detail if the taxpayer signed:

• Form T183, Information return for electronic filing of an individual's income tax and

benefit return, available at www.cra-arc.gc.ca/E/pbg/tf/t183/README.html; and/or

• Form T1013, Authorizing or cancelling a representative, available at www.cra-

arc.gc.ca/E/pbg/tf/t1013/README.html, to authorize the electronic filer.

Did the taxpayer electronically certify the completeness and accuracy of NETFILE returns?

For more information about the significance of the signature, go to 28.4.4, under Signature on

the return.

(6-i) Proper information to the representative:

Comment whether the taxpayer provided sufficient information to their representative, if one was

engaged to prepare their returns during the audit period.

List the books and records the taxpayer provided to the representative.

Describe how involved the representative was in preparing the taxpayer’s returns.

For more information on the taxpayer or representative’s responsibility, go to 28.4.6.

(6-j) Proper books and records:

Indicate if the taxpayer kept adequate books and records.

Indicate if an informal written request or a requirement letter to keep adequate books and records

was issued and signed by the taxpayer.

Indicate particular areas in the records that are deficient and link to the understated income, if

possible. For more information on books and records, go to 10.2.0.

(6-k) Increase in net worth or lifestyle that is incompatible with reported income:

Discuss if there has been a change in the business, records, or net worth relative to their reported

income, or if their lifestyle is not supported by their reported earnings.

(6-l) Other considerations:

Include any other factors to consider, if applicable.

(7) Taxpayer’s contact and representations:

Chronologically list the taxpayer’s contact and representations and the CRA’s responses to the

representations.

• List the steps taken to advise the taxpayer of the proposed penalties.

• Indicate the date the proposal letter was sent to the taxpayer.

If the taxpayer concurs:

• State clearly that the taxpayer agrees with the adjustments and penalties as proposed.

• Summarize the discussion confirming the adjustments on Form T2020, Memo for

file, or another working paper in the file, and list the dates or cross references.




http://7.28.65.47:8000/edds/7186/112488/t2020-fill-09b.pdf

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If the taxpayer does not concur:

• Summarize the points of the taxpayer’s representations and reference correspondence

received or dates of conversations on Form T2020.

• Outline the CRA’s responses to each of the arguments presented by the taxpayer.

• Include any other factors that do not support the imposition of penalties.

(8) Description and location of documentary audit evidence:

Include copies of all audit evidence supporting the recommendation to impose a penalty.

Describe the exact location of the books and records. For example, if the banking records are

stored at the taxpayer’s personal residence, provide the address, the room in the residence where

they are normally kept, and describe the container.

(9) Conclusion:

After a complete review of the facts, circumstances, and relevant documents, draw a conclusion

on whether the taxpayer knew or ought to have known there were false statements or omissions.

Recommend if a penalty under subsection 163(2) should be applied.

To support the imposition of a penalty under subsection 163(2), the audit evidence in favour of

the penalty must be stronger than the audit evidence against it. More specifically, the facts and

audit evidence gathered should show that:

• the taxpayer was negligent;

• the taxpayer is not credible;

• the taxpayer's explanations about how the errors and omissions occurred are not

reasonable;

• the taxpayer's explanations are incompatible with the facts of the case;

• the taxpayer should have been more careful and should have known that the returns

and statements included irregularities; and

• the taxpayer did not make an honest mistake.

Penalty Recommendation Report authorization

The Penalty Recommendation Report must be approved by the assistant director, Audit (ADA),

or section manager.

Other factors to note

Start gathering supporting audit evidence as soon as the imposition of penalties appears

warranted.

Be thoroughly familiar with all the guidelines on the imposition of penalties; the Penalty

Recommendation Report must contain information sufficient for the approving manager to make

an informed decision.

Refer to the Penalty Recommendation Report on Form T20, Audit Report.

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If a penalty under subsection 163(2) is not recommended, consider a penalty under subsection

163(1).

When completing the Penalty Recommendation Report:

• Ensure that the report contains all of the facts and the correct references.

• Make certain that arguments are reasonable and stated as intended.

• Make sure that the conclusion is based on the facts and the audit evidence.

• Proofread the report carefully to eliminate any typing errors.

• Read the report when completed, as if for the first time.

11.6.3 Capital Gain vs. Income Report

The Capital Gain vs. Income Report indicates that the auditor has examined any relevant

transactions to determine whether they gave rise to a capital gain or income from the business

that is an adventure or concern in the nature of trade.

A copy of the Capital Gain vs. Income Report must be attached to form T20, Audit Report, or

included in the report. If more than one taxpayer participated in a given transaction, prepare a

separate Capital Gain vs. Income Report for each taxpayer, as the circumstances surrounding

each case may be different.

Contents of Capital Gain vs. Income Report

The report must contain a complete statement of all the facts surrounding the transactions in

question, as well as the auditor's recommendations and conclusions with supporting

documentation. Sufficient detail should be provided to allow the team leader or other reader of

the report to assess the situation without having to consult any other documentation contained in

the file.

The WinALS template provides a list of the information that must be considered when making a

capital gain versus income determination. As it may not identify all the factors that must be

considered, each case must be reviewed based on its unique facts and the report customized

accordingly.

11.6.4 Determination of commercial activity and reasonable expectation of profit Report


When considering if a reasonable expectation of profit, auditors must consult Communiqué

AD-02-05, Reasonable Expectation of Profit, and discuss the file with the team leader.

The audit process outlined in the communique must be followed.

For a sample report, go to Appendix A-11.2.22, Reasonable Expectation of Profit Report.

11.6.5 Restricted farm loss report – Under review


Due to recent Supreme Court of Canada decisions involving the use of reasonable expectation of

profit tests in income tax audits, review Communiqué AD-02-05 Reasonable Expectation of

Profit, and discuss the case with your team leader or technical advisor before using the report.

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Form T20, Audit Report, or an appendix to it, contains this information when the audit involves

farm losses or restricted farm losses:

• pertinent information about the proposed adjustments;

• disallowance of the farm loss;

• restriction of the farm loss;

• mandatory inventory adjustment; and

• loss carry over.

• the reasons for the reassessment based on facts;

• the facts that can be established;

• the agreement of the taxpayer; and

• the reasons why the taxpayer disagrees.

The tax treatment of farm losses depends on the facts of each case. The comments on each point

of the report should be limited to the facts.

For a sample report, go to Appendix A-11.2.23, Farm Loss Report.

11.6.6 Income tax Audit Division Internal Taxpayer Relief Recommendation Form – Under

review

(Revised July 2014)

When considering the mandatory proactive taxpayer relief, auditors must review memorandum,

New Mandatory Proactive Taxpayer Relief Guidelines, dated September 25, 2012. The Income

Tax Audit Division Internal Taxpayer Relief Recommendation Form is included in Appendix B

of the memorandum.

New mandatory guidelines

New mandatory guidelines have been established with respect to proactive taxpayer relief and

the recommendation of the waiver of interest and/or penalties. The guidelines address two areas

of concern:

1. The proactive taxpayer relief must be adequately documented in a consistent manner.

2. There must be appropriate segregation of duties between the auditor, audit team leader

and the final approving independent third party reviewer for the proactive taxpayer relief.

Documentation

The application of taxpayer relief will be based on the facts of each case. The documentation to

support the waiver of penalty and/or interest should include:

1. an Income Tax Audit Division Internal Taxpayer Relief Recommendation Form

providing the reasons for recommending taxpayer relief with the names and signatures of

the auditor and audit team leader;

2. the completed Form T20, Audit Report, (or similar working paper) which should include

a more detailed account of the audit as well as comments relating to the cause of any

delays; and

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3. any other relevant supporting documentation.

Note:

• For all audit programs currently using WinALS, the documentation related to the

proactive taxpayer relief must be scanned and uploaded by the auditor as part of the

WinALS upload.

• The location of the supporting documentation must be clearly documented in the Income

Tax Audit Division Internal Taxpayer Relief Recommendation Form.

Independent third-party review

Once the auditor and team leader agree that penalties and / or interest should be waived on a file,

they will each sign the Income Tax Audit Division Internal Taxpayer Relief Recommendation

Form for waiver of penalties and interest. The signed form must be submitted to an independent

third party for review and approval. An independent third party is a person that:

1. is considered to be at arm’s length from the taxpayer relief request;

2. has not been involved in the audit; and

3. has no vested interest in the outcome of the taxpayer relief request.

To allow flexibility for local conditions, a TSO may select any of these options for third-party

review, as long as they are independent:

• a Taxpayer Relief Committee within a TSO or a region;

• a separate section assigned the responsibility for processing taxpayer relief for Audit

Divisions;

• an independent audit team leader;

• an independent audit manager; or

• another delegated independent individual within the TSO or region.

Taxpayer Relief Registry and storage

The individuals approving requests for taxpayer relief will ensure the reasons for the decision are

entered in the Taxpayer Relief Registry. In addition, a description of the format, whether hard

copy or electronic, and the location of the supporting documentation must be included.

Electronic documentation must be stored in a centralized storage location together with the audit

file. For Small and Medium Business Audits in income tax, the National Audit Archive (NAA)

system will constitute a centralized electronic storage location.

The person authorizing the taxpayer relief must provide the Taxpayer Relief Registry number to

the auditor and team leader on a timely basis to allow file closure.

For additional information on the Taxpayer Relief Registry, go to:

• Taxpayer Relief Registry Guide; and

• Taxpayer Relief Procedures Manual.

A report must be prepared for each file that the taxpayer relief provisions were considered,

regardless of the ultimate decision. This report constitutes a documented summary of all the

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relevant facts. All statements in this report must be substantiated with working papers and other

documents in the file. This report must contain sufficient information to enable the approving

manager or other reader to take action based on the auditor's recommendation.

For complete information about the taxpayer rights and taxpayer relief provisions, go to:

• Taxpayer Relief and Service Complaints Directorate; and

• 3.0, Taxpayer rights and taxpayer relief.

Contents of the Income Tax Audit Division Internal Taxpayer Relief Recommendation

Form

This information should be included in the Income Tax Audit Division Internal Taxpayer Relief

Recommendation Form:

Section 1: File Information

• income tax account number;

• account name;

• trade name;

• income tax return type;

• tax years audited;

• periods to be waived;

• case numbers; and

• file numbers.

• Request Types– indicate the types of request;

• waiver of penalty and/or interest (specify the types of interest/penalty); and

• late, amended, or revoked elections.

• Reason Types:

• CRA error;

• CRA delay;

• death/accident/serious illness/emotional or mental distress;

• civil disturbance;

• natural or man-made disaster; and

• other circumstances.

Section 2: Relevant Facts

The auditor should indicate the reason for the request and details as to why the request is being

made.

• Provide all relevant facts including any schedules, documents, and correspondence, along

with the timeline from the initial interview, proposal, representations, and closing of the audit

with:

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• recommended amount of penalty/interest to waive;

• tax years and reporting periods affected;

• waiver period (start and end);

• amount upon which waiver is calculated; and

• particulars of penalty reduction (no. of months involved, percentage reduction).

• Provide a brief history indicating the hours spent on the file and whether other sections

and/or auditors have worked on it.

• Provide the location of supporting documentation.

Section 3: Analysis and Recommendation

Analysis:

Provide an explanation of the reason the facts support a waiver of penalties and/or interest that

support the recommendation.

Recommendation:

The taxpayer relief guidelines found in Income Tax Information Circular, IC07-1, Taxpayer

Relief Provisions, allow penalties and/or interest to be waived under certain circumstances. I

recommend that penalties and/or interest be waived on the years income tax returns for the

period from (date) to (date).

Section 4: Income tax Team Leader Approval

The team leader’s decision and signature, indicating acceptance or refusal of the auditor's

recommendation, along with the team leader’s explanation in the comments area.

Section 5: Independent Third-Party Review

The third party’s decision and signature, indicating acceptance or refusal of the auditor and team

leader's recommendation, along with the third party’s explanation in the comments area.

For a sample taxpayer relief request, go to Appendix A-11.2.24, Income Tax Audit Division

Internal Taxpayer Relief Recommendation Form.

11.7.0 Supporting forms for assessments

(Revised May 2014)

This section deals with the completion of forms that support assessments and reassessments

originating from audit.

Where there are losses or carry-back amounts such as Investment Tax Credits, Reserves, etc. for

income tax, a current CORTAX or TAPMA printout is required before starting the audit

completion stage.

All supporting forms must be in the official language of the taxpayer, the amounts should be

rounded to the nearest dollar and the documents should be free from whiteout or hand written

corrections. The supporting documents should be sent to the taxpayer's most recent mailing

address.

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For forms discussed in this section, go to WinALS and Appendix 11.2.0, Nationally used forms

and instructions.


11.7.2 Forms for completing an audit


Form T7W-C, Explanation of changes on reassessment

General instructions for Form T7W-C in WinALS

Form T7W-C, Explanation of changes on reassessment, sets out the taxpayer's revised taxable

income and details all changes to reported income resulting from the audit. Form T7W-C is also

the primary source of information used by the Audit Support/Tax Cal unit to determine the

revised income tax payable.

In the narrative portion of Form T7W-C, provide:

• the taxpayer’s name and address;

• a detailed description of all adjustments to each source of income; cross-reference the

adjustments to supporting schedules, correspondence, notes of meetings held with the

taxpayer or the taxpayer's representative;

• the revised capital cost allowance (CCA), loss applications, and other schedules that

show the previous and revised figures, with explanations of the changes made;

Provide the taxpayer with a copy of any revisions to CCA claims for class 24, 27, 29,

and 34 assets.

• and also on any attachments, the details of any changed components of the tax calculation

as listed on Form T99, T1 and T3 tax calculation information, and Form T99A, T2 tax

calculation information, not otherwise evident;

• comments, if applicable, following the "Revised Taxable Income" line, regarding:

• amounts subject to penalties under section 163 of the ITA;

• application of penalties under section 162 of the ITA;

• number of days interest waived under subsection 220(3.1) of the ITA; and

• revised losses; make reference to subsection 152(1.1) of the ITA, notice of

determination.

• if only a tax shelter has been audited, this statement with the explanation of the

adjustment:

"This adjustment relates only to the audit of (name of tax shelter). Other information

in this tax return may be subject to further review or audit, if necessary."

If a penalty under section 163 of the ITA has been levied on income earned in the provinces of

Quebec or Alberta, on Form T7W-C-PROV, Explanation of changes on reassessment

(Provincial), provide an explanation of the amount of income subject to tax on which the penalty

applies in those provinces.

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If changes are made to an initial assessment, prepare Form T7W-8, Explanation of assessment or

of change made, for T1 individual returns and Form T7W-9, Explanation of changes on

assessment, for T2 corporate returns.

Note: Returns assessed or reassessed with a penalty under subsection 163(1) and/or

163(2) of the ITA must clearly note on Form T7W-C, the amount of income subject to

penalty so that the non-agreeing provinces (Alberta and Quebec for T2s and Quebec for

T1s) are able to reconcile the amount subject to penalty.

T1 and T3

For T1 and T3 reassessments, the audit support clerk prepares Form T7W-C, Explanation of

changes on reassessment, from the information provided on Form T99 and the return.

For a T1, the account number is the taxpayer's social insurance number (SIN).

For a T3, if there is a T3 number available on the return (an eight-digit number prefixed by T),

provide the number on Form T99 and Form T7W-C. If the number is SL 123456 or a number

you are unsure of, leave the T3 number blank on Form T99 and Form T7W-C.

T2

For T2 reassessments, the auditor prepares Form T7W-C, Explanation of changes on

reassessment. It is essential that the explanation of changes be arranged to allocate the total

adjustment to these types of income, if applicable:

• active business income;

• Canadian investment income;

• foreign investment income;

• personal services business income;

• specified investment business income; and

• other adjustments – for example, dividends deductible under sections 112 and 113 in

computing taxable income.

If there has been a corporate amalgamation and a return filed by a predecessor company is

assessed, prepare Form T7W-C in the name of new amalgamated company with a reference to

the name and income of the predecessor company in the appropriate areas of Form T7W-C.

• For example, if A Ltd. and B Ltd. amalgamate and become AB Ltd., address Form

T7W-C to the amalgamated company "AB Ltd." with reference in the "re" area to the

income of the predecessor "A Ltd."

• Similarly, the account number of the amalgamated company must be used; however,

include a reference to the predecessor's account number.

The same procedures will apply for reassessed returns of wound-up companies amalgamated into

the parent company, including those companies wound-up if a liquidator has been appointed but

no clearance certificate has yet been issued. Note that the transferee or the liquidator has a

responsibility only to the extent of the value of the property distributed.

Part I.3 tax is payable by every corporation whose taxable capital employed in Canada is in

excess of its capital deduction of $10 million. Part I.3 tax is filed with the T2 return and any

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changes can be included on Form T7W-C. Provide revised Part I.3 tax information on Form

T99A in the “SPECIAL INSTRUCTIONS” area.

Note: Section 181.2 of the ITA provides rules for determining the capital, taxable capital,

taxable capital employed in Canada and investment allowance of corporations (other than

financial institutions) resident in Canada for the purposes of the Part I.3 tax on large

corporations, which was fully phased out in 2005. The determination of a corporation's

taxable capital employed in Canada is relevant for other provisions in the ITA, including

the calculation of a corporation's small business deduction and the scientific research and

experimental development expenditure limit.

General instructions for Form T7W-C (Version 2011), Explanation of Changes on

Reassessment

The instructions for the revised form are the same as for the version available in WinALS,

explained above.

11.7.3 T1 Reassessments

(Revised May 2014)

Form T99, T1 and T3 tax calculation information

The purpose of Form T99 is to provide the Tax Calculation unit with the information that has to

be included on Form T7W-C, Explanation of changes on reassessment, and to provide

information required to complete various forms to update the T1 file of the taxpayer. Form T99

keeps the auditor's involvement in the actual reassessing procedure to a minimum.

Only changes are required to be listed and an explanation of changes provided that adequately

describes each income source adjusted. Enter the field number of the income area being adjusted

in the column provided.

When adjusting self-employment income, include the gross and net self-employment income, as

both the gross and net self-employment income must be keyed. For example, Gross business or

professional income: business on line 162, professional on line 164. Net business or

professional income (loss): business on line 135, professional on line 137.

The auditor completes one copy of Form T99 for each year reassessed, updated, or where a NIL

notice of reassessment is to be issued.

If a statute-barred return is reassessed, indicate the reason in the top margin of Form T99, such

as:

• filed Form T2029, Waiver in respect of the normal reassessment period or extended


• implied waiver;

• taxpayer relief legislation;

• any reason under subsection 152(4) of the ITA – for example, fraud, misrepresentation

attributable to neglect, carelessness, or wilful default; and

• illegal payments – subsection 67.5(2) of the ITA.

Form T919 and T919Q (Request for online reassessment program)

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The following instructions set out the guidelines for those T1 adjustments that can be processed

using Form T919, Request for online RAP, and the "fast-track" procedures. The T1 file with

Form T919 attached will be forwarded to online reassessment program (RAP) for processing

when completed.

A reference to Form T919 also includes Form T919Q used in the province of Quebec. Form

T919 is a single copy form, whereas Form T919Q is in duplicate, as a second copy is required

for the Ministère du Revenu du Québec (MRQ).

For every file that will be reassessed using the "fast-track" path, auditors must complete all

screens generated by AIMS.

Form T919 is used to process non-complex T1 adjustments; as a general rule, these types of files

may be processed without completing Form T20, Audit Report, Form T7W-C, Explanation of

changes on reassessment, and Form T99, T1 and T3 tax calculation information.

Use Form T919 for:

• T1 files that otherwise would be processed as a secondary file with audit action code 03

(that is, adjustment only), such as a secondary file that is reassessed for an employment

benefit. If additional audit issues are identified and audited in the secondary file that are

unrelated to the principal file, then the secondary file has been partially audited and audit

action code 02 is required, or audit action code 01, if Business Intelligence risk-assessed

the secondary file. These secondary files do not qualify for the “fast-track” path;

therefore, do not complete Form T919.

• a file that has been field audited but is in the Office Examination range.

• taxpayer requests (TPRs) referred from a TC for processing by Audit.

Acceptable adjustments would include, but are not necessarily restricted to:

• omitted employment or shareholder taxable benefits;

• adjustments to a similar income item or a deduction where numerous taxpayers are

involved, such as in project cases, provided one file is treated as a principal file and

includes all relevant documentation;

• revisions to federal and provincial tax credits of a spouse or common-law partner;

• transfer of spousal or common-law partner deductions and tax credits; and

• revisions to personal exemptions, medical expenses, or charitable donations, etc.

T1 files are not appropriate for this procedure if they cannot be processed online in the TSO.

Examples include:

• Where older years are no longer on TAPMA.

• Where priority reassessments are required either because a return will become

statute-barred within a short time period or there is some other urgency. For more

information, go to 11.5.2, Priority Reassessments.

• Transaction codes 4 and 5 reassessments. For more information, go to Appendix

A-11.2.11, Online reassessment program for T1 File.

Inappropriate adjustments include those:

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• Where the adjustment directly affects a reserve, a loss, or an ITC claim that changes a

carry-forward balance and, therefore, requires additional coding and some type of

schedule to accompany the notice of reassessment.

• Controversial or complex adjustments that require a detailed explanation.

• Where a penalty has been applied, since additional comments and coding are required.

It is important to ensure that the file stands on its own by including all documentation relating to

the reassessment. This includes (minimum requirements):

• Any communication with the taxpayer, a letter with accompanying supporting schedules

or Form T2020, Memo for file, explaining the proposed adjustment and the taxpayer's

response.

• Working papers supporting the adjustment.

• The accompanying spouse or common-law partner's returns for adjustments of GST/HST

credit and Canada child tax benefit (CCTB).

11.7.4 T2 reassessments


Form T99A, T2 tax calculation information

The purpose of Form T99A, T2 tax calculation information, is to provide the Tax Calculation

unit with information that cannot be included on FormT7W-C, Explanation of changes on

reassessment, and information required to complete various forms to update the T2 file.

In the event that no reassessment is being issued (for example, where changes are for a statute-

barred year) it is necessary prepare Form T99A to update the file. A notation should be entered

in area L "For update purposes only" or at the top right corner in red.

When levying a penalty under section 163(1) on a corporation, auditors must note on Form T99A

each permanent establishment that the corporation has. This information is necessary for the T2

assessors to correctly calculate the penalty and allocate each province’s share.

The auditor must complete one copy of Form T99A by for each year reassessed, updated, or

where a NIL notice of reassessment is to be issued.

If a statute-barred return is reassessed, indicate the reason in the top margin of Form T99A, such

as:

• filed Form T2029, Waiver in respect of the normal reassessment period or extended


• taxpayer rights and taxpayer relief legislation;

• any reason under subsection 152(4) of the ITA, for example, fraud, misrepresentation

attributable to neglect, carelessness, or wilful default; and

• illegal payments – subsection 67.5(2) of the ITA.

11.7.5 T3 reassessments


Form T99, T1 and T3 tax calculation information

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The auditor concludes the reassessment of a T3 return by completing Form T99 according to the

instructions in Appendix A-11.2.10, Form T99, T1 and T3 tax calculation information.

AIMS will be responsible for completing Form T488 or Form T67B-V, where applicable.

For more information on Form T99, go to 11.7.3, T1 reassessments.

11.7.6 Pro-forma assessments


For samples of pro-forma returns relating to initial income tax assessments under subsection

152(7) of the ITA, go to:

• Appendix A-11.2.5, Sample pro-forma form T7W-8, Explanation of assessment or of

change made; and

• 9.5.0, Unfiled returns.

11.7.7 Completing audit information management (AIMS) screens


All the activities related to the audit, to an investigation by the Criminal Investigations

Directorate (referral to Criminal Investigations is under review)and the processing of a case, are

controlled under the same case number. It is possible to add files related to the case at any time

during the audit to ensure that the inventory control system remains complete.

For more detailed information, go to Audit information management system (AIMS) online

guide – Severed version.

11.8.0 Audit completion – Storage of working papers and other documents

(Revised July 2014)

11.8.1 WinALS – Audit file


WinALS includes templates for electronic working papers that enable the auditor to complete

the audit electronically, which reduces the handling and storage costs associated with completed

audits.

Templates are audit tools that are used to save time and organize the working papers in a logical

manner as they help to plan and document the audit work done. The WinALS standard templates

become part of the audit file documentation and also provide the basis for proposing audit

adjustments to the taxpayer.

All programs 17 and 18 audits must be completed electronically using WinALS. Team leaders

are responsible to ensure that hard copy working papers and letters in completed audits should be

for placement on the permanent document (PD) folder or necessary to process the audit.

Once the team leader approves the audit, the audit is uploaded. The upload process will update

all applicable mainframe systems and then the file is archived into the National Audit Archive

(NAA). For more information, go to 9.8.1, Purpose and content of audit working papers, and

working papers prepared in electronic format – WinALS and NAA.

Storage of completed cases in WinALS Client Management Window

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There has been an increase in storage of completed cases in WinALS Client Management

window by auditors and team leaders. For security purposes, this practice is discouraged. Before

a completed case is stored in the Client Management, these points should be considered:

• Once a case in WinALS is completed by the auditor, the Need to Know for the auditor

ceases to exist. Once a case has been approved, uploaded and archived by the team

leader, the Need to Know for the team leader also ceases to exist. Furthermore,

according to the CRA Procedures for the Reporting of Security Incidents of the Security

Volume of the Finance and Administration Manual, if a laptop is lost or stolen, although

the hard drive is fully encrypted, for each case the auditor has in WinALS, the CRA may

have to advise the taxpayer that the confidentiality of their information has been

compromised.

• Although WinALS was designed to handle many cases in its Client Management, the

more cases a user holds in the Client Management, the greater the risk of problems and/or

corruption when a new version of WinALS is released or when files need to be updated

in WinALS.

• A case that has been properly completed in WinALS can be retrieved from the National

Audit Archive (NAA) and reviewed in WinALS at any time. Auditors must not maintain

any electronic or paper documents in their filing cabinets, desk drawers, or computer

equipment after the completion of an audit.

11.8.2 Retention of hard copy (paper) documents – Under review

(Revised July 2014)

For more information, go to memorandum , Documentation Requirements for Electronic Audits

– Small and Medium Business Income Tax Audits, dated November 19, 2012.

11.8.3 Documentation not stored at the tax centre


Criminal Investigations - Under review

The Investigations Manual (under review) retention policy, cancelled Chapter 16.16,

Investigations files – Maintenance, retention and destruction, applies to Criminal Investigations

files. Generally, all file material is maintained for a period of five (5) years after the date the case

is closed and after all criminal or civil appeals have been completed (Chapter 16 of the

Investigations Manual). Because of the possibility of repeat offences or offenders, it was

determined that these files are normally maintained in the TSO. Auditors outside of Criminal

Investigation’s may have restricted access to these files and should consult the Criminal

Investigation’s file during the final stages of the audit to ensure that the audit is completed as an

auditor and not as an investigator.

Appeals

Upon receipt of the notice of objection (NOO), the audit file is requested by Appeals. Following

the first level of appeal, the audit file is sent to the Department of Justice restricting future access

to the information.

Appeals create a dummy file in accordance with internal guidelines and policies to maintain

control of the file as it passes through the different court levels and to provide information

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contained in the file. Only this hard copy information is available at the TSO if the file has gone

to the Department of Justice:

• copies of correspondence;

• the decision reached at each level of court proceedings;

• copies of the returns (no working papers);

• copy of Form T401, Notice of Objection Negotiated Settlement Report;

• copy of the notice of objection; and

• WinALS NAA.

This schedule provides information on the disposition of files under Appeal:

Appeals decision Availability of file

Code 1 – Allowed in full / parties

agree

The file is returned to audit for processing of the

adjustment and then returned to the TC as soon as

possible.

Code 2 – Assessment varied / parties

agree

The file is returned to audit for processing and then on

to the TC for storage.

Code 3 – Assessment confirmed /

parties agree

The file is returned to the TC as soon as possible.

Code 4 – Upward adjustment /

parties agree

The file is forwarded to audit for processing and then

sent to the TC as soon as possible.

Code 5A – Assessment confirmed /

parties disagree

The audit and appeals files are retained for 90 days

plus an additional 30 days to allow for a response (120

days). After 120 days the file is returned to the TC.

Code 5B – Assessment varied /

parties disagree

The file is returned to audit for processing and then

retained for 90 days plus an additional 30 days to allow

for a response (120 days). After 120 days the file is

returned to the TC.

Code 5C – Upward adjustment /

parties disagree

The file is forwarded to audit for processing and then

returned to Appeals to be held for 90 days plus an

additional 30 days to allow for delays of the mail (120

days). After 120 days the file is returned to the TC.

Real estate appraisal and business equity valuation files

Where space permits, real estate appraisal and business equity valuation files are retained at the

TSO. Auditors have restricted access to these files and should contact the respective Business

Equity Valuation or Real Estate Appraisal Section to determine where they are available.

Other specialized areas

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Designated persons in each TSO have access to:

• T3s and forms for international audit stored in the Ottawa TC; and

• non-resident forms for GST/HST filed in the designated TSO.

11.8.4 Permanent documents – Under review


Permanent documents stored at the tax centre


Permanent document (PD) folders are specifically for storing documents that may relate to

multiple tax years. They may have an impact on future tax years or be useful in future audits of

the taxpayer's returns. During the completion stage of each audit, the contents of the PD folder

are reviewed and obsolete information culled.

There are two PD folder categories:

1. Category I documentation with a retention period in excess of five years; and

2. Category II documentation with a retention period of five years or less.

The retention period is noted on Form TX75, T1 and/or T3 permanent document filing, and

Form TX75A, T2 permanent document filing slip, when a document is put in the PD folder.

For more information, go to Appendix A-11.2.16, Permanent document folder and retention

period.

The PD folder is a compilation of significant data and information about the operations and tax

liabilities of the taxpayer, the organizational structure of the business, other tax-related activities

and any other information used in planning subsequent audits such as:

• Historical information about the taxpayer's business activities including a copy of the

articles of incorporation.

• Information about the books and records, such as, their nature, where they're kept,

accounting and any tax software used.

• Prior Audit Reports, Audit Plans, penalty reports, referrals, Appeals reports and other

documents that are considered to be of assistance for future audits.

• HQ rulings, elections, correspondence and other information regarding concerns that may

require follow-up.

• Any documentation or report such as newspaper or magazine articles, shareholder annual

reports, regulatory reports that are felt to bear on the business and the income tax matters

of the taxpayer.

Document destruction


Audit files in the PD folder should be stamped with the destruction date to ensure that they are

not prematurely culled. Where a follow-up audit is required, the retention date should be clearly

stamped or noted on the file taking into account the timing of the subsequent audit. A date that is

four years after the completion date of the current audit should be sufficient.


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11.9.0 Assembling the audit file


11.9.1 Assembling the file for an income tax assessment – Under review


The following checklists provide the procedures related to forms required at the end of an audit

for assessment and reassessment, as well as instructions to assemble the documentation resulting

from an electronic audit file in electronic storage (ESEE).

Forms required – Checklist

These forms are electronically available in WinALS or online:

Form Description Copies

T7W-C i

(1) Explanation of changes on reassessment

For T1, T2, and T3 returns with no

permanent establishment in the province

of Quebec or Alberta.

Note: For T1 returns online

reassessment program (RAP), see Form

T919.

3 copies:

1. original to

taxpayer;

2. electronic copy in

WinALS; and

3. copy to HQ, where

applicable.

Use the four-part copy of Form

T7W-C-PROV, Explanation of changes

on reassessment (Provincial), for

reassessments of:

• T2 returns with a permanent

establishment in the non-agreeing

provinces of Quebec and Alberta;

and

• T1 returns with a permanent

establishment in Quebec.

Additional copy to

non-agreeing province :

• (extra copies required

where taxable income

has been earned in

more than one of the

non-agreeing

provinces); and

copy to province, if

applicable.

Notes:

• For reassessments of T1 or T2

returns with a permanent

establishment in an agreeing

province, send a letter (or Form

T7W-C) to the taxpayer to

summarize the findings.

• Prepare extra copies of any

supporting schedules referred to on

Form T7W-C or Form

T7WC-PROV for each additional

Form T7W-C prepared.

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T7W-8 ii

(2)

Explanation of assessment or of change

made for T1 / T3

2 copies:

1. original to

taxpayer; and


WinALS.

T7W-9 ii

(2) Initial assessment explanation of

changes for T2

2 copies:

1. original to

taxpayer; and


WinALS.

T99 iii

(3) T1 and T3 tax calculation information 1 copy

T99A iv

(4) T2 tax calculation information 1 copy

T919 v(5) Request for online RAP T1

Note:

• Form T919 replaces Form T7W-C,

Explanation of changes on

reassessment, Form T99, T1 and T3

tax calculation information, and

Form T20, Audit Report.

• Form T919Q is the required form to

use for reassessments of T1 returns

in the province of Quebec.

1 copy*

* Extra copy by year for

Quebec.

Audit Report vi

(6) Note:

• Extra copy of explanation of

changes of Form T20, Audit Report,

is required for T2, for changes made

in provinces of Alberta or Quebec.

• Extra copy of explanation of

changes of Form T20, Audit Report,

is required for T1/T3, for changes

made in province of Quebec.

3 copies:

1. copy to PD folder;


WinALS; and

3. copy to HQ, if

applicable.

Penalty

Recommendation

Report vii

(7)

Same as Form T20, Audit Report

11.9.2 Checklist for assembly of the audit file – T1 and T2


Checklist – Assembly of the audit file – T1 and T2

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No change

Documents required: Document placed in/on or forwarded to:

Routing Slip – optional (go to Appendices

A-11.3.1 and A-11.3.2)

• attached to outside of the audit file

WinALS file • audit file - to be stored in electronic

storage (ESEE)

Form T20, Audit Report • PD folder viii

No change letter • copy in the electronic audit file; and

• original, hard copy is sent to the

taxpayer with Income Tax Information

Circular IC78-10R5, Books and Records

Retention/Destruction, by the TSO.

Form T133, Lead or project information • if Form T133 is prepared as the result of

the audit, the form is left loose in the

audit file; copies are sent to the

appropriate area after the file is

approved.

Referring Form T133, Lead or project

information

• a Form T133 that initiated the audit

(comment on AIMS screen 1), is placed

in the audit file.

Form T578, Follow-up retrieval record • distributed as indicated on the form.

Form TX23, Memorandum to • if Form TX23 is prepared, an electronic

copy should be placed in the audit file;

ensure that the hard copy of the form is

also forwarded to the appropriate

section.

Other documents • documents and forms that are sent to the

taxpayer, province, Headquarters, or

other areas should be left loose in the

audit file.

With change


Routing Slip – optional (go to Appendices

A-11.3.1 and A-11.3.2)

• attach to outside of the audit file.

Form T99, T1 and T3 tax calculation

information

• loose in the audit file to be sent for

processing after approval.

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OR

Form T99A, T2 tax calculation information

Form T2029, Waiver in respect of the

normal reassessment period or extended

reassessment period (with date received)

• copy attached to the return to which the

waiver applies;

• copy in the audit file; and

• original in the PD folder. viii

WinALS audit diskette • audit file - to be stored in electronic

storage (ESEE).

Form T7W-C, Explanation of changes on

reassessment

• loose in the audit file to be sent to the

taxpayer after processing; attach revised

schedules to form T7W-C.

Revised schedules (CCA, losses, etc.) • attach copies to Form T7WC or the

letter confirming changes sent to the

taxpayer; and

• copies placed in the PD folder. viii

Form T20, Audit Report • PD folder

viii

Penalty Recommendation Report • PD folder

viii

Proposal letter • copy in the WinALS audit file.

Change letter • copy in the WinALS audit file; and

• original sent to the taxpayer with

Income Tax Information Circular

IC78-10R5, Books and Records

Retention/Destruction, by the TSO.

Form T133, Lead or project information • if Form T133 is prepared as the result of

the audit, the form is left loose in the

audit file; copies are sent to the

appropriate area after the file is

approved.

Referring Form T133, Lead or project

information

• a Form T133 that initiated the audit

(comment on AIMS screen 1) is placed

in the audit file.

FormT578, Follow-up retrieval record • distributed, as indicated on the form.

Taxpayer representations • placed in the audit file.

Form TX23, Memorandum to • if a Form TX23 is prepared, a copy

should be placed in the audit file; ensure

that the form is also forwarded to the

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appropriate section.

Other documents • documents and forms that are sent to the

taxpayer, province, Headquarters, or

other areas should be left loose in the

audit file.

T1 fast track (on-line RAP)ix


Routing slip – optional (go to Appendices

A-11.3.1 and A-11.3.2)

• attach to outside of audit file.

T919, Request for online RAP

T919Q, Request for online RAP (Quebec

only) + option C (only if no WinALS

diskette)

• copy attached to the T1 for processing.

Revised schedules (optional – prepared only

where a WinALS diskette is prepared)

• attach copies to form T7W-C,

Explanation of changes on

reassessment, or to the letter confirming

changes sent to the taxpayer; and

• copies placed in the PD folder. viii

WinALS audit diskette – optional • audit file – stored in electronic storage

(ESEE) (if completed).

11.9.3 Documentation sent to Headquarters


Assemble a Headquarters (HQ) package for each change file (FILE CONCURRENCE "0"):

• where the GROSS INCOME on SCREEN 1 or 2 is $15,000,000 or higher, (range codes 1

to 5);

• any other file where:

• the permanent income change exceeds $3,000,000, or

• the permanent tax change exceeds $1,000,000.

The package includes:

• A copy of AIMS RESULTS SCREEN 5. Please ensure the FILE NO. is clearly visible

since this number is also the filing reference, (the AIMS clerk will obtain this print out

for the package).

• Analysis of changes for all REASON CODES used on AIMS RESULTS SCREEN 5.

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• If the coding has been done using CCS, a copy of the identification screen; adjustment

screens A through D, where applicable; summary of codes, list of permanent changes,

and list of all changes (when available); options A through C from the REPORT MENU.

• If the coding has been done manually, a list of all changes by code, list of permanent

income and tax changes and the conversion formula.

• If changes have been made to CCA and the laptop CCA program was used, include the

supplementary that lists the changes to the UCC by class.

• All T7W forms and accompanying schedules sent to the taxpayer.

• Form T20, Audit Report, and any associated supplementary reports, for example, Penalty

Recommendation Report, Income vs. Capital Gain Report, and Income Tax Audit

Division Internal Taxpayer Relief Recommendation Form.

For more information on available codes, go to AIMS Online guide – Reference Information.

11.10.0 Processing the audit file (Revised March 2014)

11.10.1 Routing of completed audits


With the exception of the T1 with Form T919, there are currently no systems for processing T1

or T2 reassessments online.

Auditors prepare the routing slip form and staple it to the front cover of the file.

When all the files in the case are completed and assembled, the auditor provides the completed

electronic file with any essential hard copy documents to the team leader for review and

approval.

Processing a priority return before the remainder of the file or case

Note that in some situations it might be necessary to process a priority return before the

remainder of the file or case. In these circumstances, the auditor:

• Completes the file in a case being processed before the remainder of the case as a

secondary file and process it in the normal fashion.

• When the remainder of the case is processed, ensures that the No. Files block includes all

current and previous reassessments processed for the case.

• Where the majority or the entire principal file is being processed before the remainder of

the case, that main part is completed as usual. In the No. Files block, enters the total

number of files being processed, as well as those files for which reassessments are

anticipated.

• In these circumstances, the case remains open and time charged to the case number until

it is completed.

Team leader responsibility at the file completion stage (all audits)

The team leader will ensure that:

• Quality standards are met.

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• Audit Reports and working papers do not violate the Access to Information Act or

Privacy Act or the confidentiality provisions of section 241 of the ITA.

• The procedures and policies in this chapter have been followed.

• When an income tax return with a Form T287, Priority assessments and reassessments

control, in a red folder is to be reassessed before the remainder of the file or the case (for

example, a return is nearing statute-barred date or a subsection 152(7) assessment), a

separate secondary file is made. Form T2003, Inter Office Memorandum, is attached to

the file folder indicating the number of files in the case to follow. These files, with

attached Form T287, must be processed as priority assessments or reassessments.

• Information on AIMS SCREEN 5 is completed in accordance with AIMS instructions

and the results are coded according to audit results coding handbook.

• Associated and related files that do not require reassessments are returned to the TC.

• After the review is complete, the front page of Form T20, Audit Report, has been signed

by the team leader.

• The current date is noted on the routing slip and the file is forwarded to the AIMS clerk

for processing.

• The number of files to be forwarded for processing agrees with # of files entered in

AIMS RESULTS SCREEN 5 of the principal file.

When all the files in the case have been reviewed and approved by the team leader, these steps

are required to ensure that assessments and reassessments of all the files in the case are processed

properly:

• All files in the case are to be securely bundled together and enclosed in an internal

envelope or envelopes and forwarded to AIMS/ON-LINE RAP Team.

• An unchanged audit case (that is, the principal file) must also be forwarded to the AIMS

team so that they can complete the AIMS SCREEN 5 and close the case.

• For Priority reassessment files, the taxpayer's name and SIN/corporation number will be

listed on the mail routing Form T973 and the priority files placed on top of the bundle of

all files being forwarded.

Processing clerk

The clerk will ensure that:

• Compliance letters are dated and forwarded to the mailroom for mailing.

• Form T578, Follow-up retrieval record, and follow-up letters resulting from audit action

are filed locally for future action.

• Audit electronic files in the case are forwarded to the audit clerk to be stored in electronic

storage (ESEE).

• Referrals (for example, Form T133, Lead or project information, and Form TX23,

Memorandum to) are forwarded to the appropriate sections.

AIMS online team


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The AIMS online team ensures that:

• Tax returns and PD folders have been reassigned to the AIMS section in the RAPID

Charge-out system.

• T7W-C forms, Explanation of changes on reassessment, are machine-generated, are

complete and correct.

• T99 forms, T1 and T3 tax calculation information, are completed and T99A forms, T2

tax calculation information, and T919 forms, Request for online RAP, have been

checked.

• Any file in a red folder with Form T287 attached has been processed as a priority

assessment/reassessment.

• AIMS data entries on Screens 1, 2, 3, 5, and supplementary screens have been verified.

• The processor's name has been entered on screen 5 when all documents are verified and

accurate.

• Adjustments for T919 fast track on-line RAPs have been processed.

• If needed, a hard copy package for HQ has been assembled and stored securely for

forwarding to HQ.

• A hard copy package for provinces has been assembled by the auditor for forwarding to

the respective province.

• The auditor has assembled and forwarded hard copy documents to the TC with Form

T7W-C for the taxpayer.

Appendix 11.1.0 Letters


A-11.1.1 Audit Quality Review proposal letter – With penalty (Revised February 2015)

A-11_1_1 Audit Quality Review proposal letter - With penalty.doc

A-11.1.2 Audit Quality Review proposal letter – No penalty


A-11_1_2 Audit Quality Review proposal letter - No penalty.doc

A-11.1.3 Audit Quality Review proposal letter with repeated offence penalty


A-11_1_3 Audit Quality Review proposal letter with repeated offence penalty.doc

A-11.1.4 For future use


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A-11.1.7 Proposal letter with gross negligence penalty


Use this letter to advise the taxpayer that a gross negligence penalty is being considered; adjust it

for individuals and corporations that may be subject to different combinations of federal and

provincial or territorial penalties.

A-11_1_7 Proposal letter with gross negligence penalty.doc

A-11.1.8 Assessing net worth proposal letter with gross negligence penalty


A-11_1_8 Assessing net worth proposal letter with gross negligence penalty.doc

A-11.1.9 Proposal letter with repeated offence penalty


Use this letter to advise the taxpayer of proposed adjustments and the possibility of a penalty

being applied under ITA subsection 163(1); it indicates that adjustments have been made and

that only the proposed application of a penalty is outstanding.

A-11_1_9 Proposal letter with repeated offence penalty.doc

A-11.1.10 No change letter


Use this letter if the completed audit results in no changes to the returns as filed.

A-11_1_10 No change letter.doc



A-11.1.13 Change letter with compliance issues


Use this letter if the completed audit results in changes to returns as filed.

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A-11_1_13 Change letter with compliance issues.doc

A-11.1.14 Change letter with taxpayer relief


A-11_1_14 Change Letter with Taxpayer Relief.doc


A-11.1.16 Assessing net worth change letter


This letter replaces all assessing net worth proposal letters included in TD1109, Indirect

Verification of Income, training material. Adjust this letter to suit the specific taxpayer scenario.

A-11_1_16 Assessing net worth change letter.doc

A-11.1.17 Special project change letter (Revised February 2015)

A-11_1_17 Special project change letter.doc

A-11.1.18 No gross negligence penalty after review letter


A-11_1_18 No gross negligence penalty after review.doc

A-11.1.19 Adjustment to opening inventory – Valuation letter


A-11_1_19 Adjustment to opening inventory - Valuation letter.doc

A-11.1.20 Inadequate inventory records letter


A-11_1_20 Inadequate inventory records letter.doc

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A-11.1.21 Request for waiver of reassessment period letter


A-11_1_21 Request for waiver of reassessment period letter.doc

A-11.1.22 Advisory letter – Gross negligence penalty will be applied if future

non-compliance

(February 2015)

A-11_1_22 Advisory letter - Gross negligence penalty will be applied if future non-compliance.doc



A-11.1.25 Loss determination – Request denied letter


A-11_1_25 Loss determination - Request denied letter.doc

Appendix 11.2.0 Nationally used forms and instructions


A-11.2.1 Form T7W-C, Explanation of changes on reassessment, for T1 – Under review

A-11.2.2 Sample format for Form T7W-8, Explanation of assessment or of change made

John E. Doe

1234 Main Street

Anytown, BC A2A 2A2

Interest and other Investment Income 399.96

Other Income 1,200.00

Net Business Income 45,000.00

Total Income $46,599.96

Deductions from Total Income:

Alimony Allowance paid 2,400.00

Carrying Charges & Interest Expense 75.00

2,475.00

Net Income $44,124.96

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Deductions from Net Income:

Non-Capital Losses of Other Years (see loss schedule attached) 5,400.00

Taxable Income $38,724.96

Non-Refundable Tax Credits:

Basic personal amount 6,458.00

Canada Pension Plan contribution 1,938.00

(Prepared by the auditor)

Note: Leave the notice of assessment boxes blank.

John E. Doe

1234 Main Street

Anytown, BC A2A 2A2

Total Income as filed $52,000.00

Add: Taxable Benefit 1,200.00

Revised Total Income $53,200.00

Less: Deductions from Total Income as filed 4,540.00

Revised Net Income $48,660.00

Less: Deductions from Net Income as filed 2,000.00

Revised Taxable Income $46,660.00

Refundable Tax Credit (Note)

Total Revised Charitable Donations $500.00

Note: There will be an explanation in this area only when the taxpayer's claim has increased by

an audit adjustment.

(Prepared from a signed return)


A-11.2.3 Form T7W-C, Explanation of changes on reassessment, for T2

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Canada Revenue Agence du revenu T7W-C

Agency du Canada Rev. 98

New Agency Ltd

1166 Nowhere Street, Vancouver

B.C.

Enclosed / Ci-joint Being mailed to you Vous est expédié par la poste

YOUR INCOME TAX RETURN FOR THE TAXATION YEAR VOTRE DÉCLARATION D'IMPÔT POUR L'ANNEÉ D'IMPOSITIONINDICATED ABOVE HAS BEEN RE-ASSESSED. THE SUSINDIQUÉE A FAIT L'OBJET D'UNE NOUVELLE COTISATION. VOUSFOLLOWING IS AN EXPLANATION OF THE CHANGES TROUVEREZ CI-APPRÈS LES EXPLICATIONS CONCERNANT LE OU LESMADE: CHANGEMENTS EFFECTUIÉS.

Adjustments to Active Business Income 3,500$

Legal costs disallowed

Cost of sign capitalized 4,000$

Less: Additional CCA allowed (per schedule 1) 800 3,200

6,700

Less: Additional reserve for doubtful debts 5,000 1,700$

Adjustment to Canadian investment income:

Add: Taxable Capital Gains 8,300

Adjustments to Foreign Investment Income:

Add: Dividends from Moore Corp. 600$

Interest from U.K. sources 400 1,000

Other Adjustments:

Add: Taxable Canadian Dividends

B.C. Power Rec'd Nov 1,200$

B.C. Power Rec'd Mar 1,800 3,000

Total Adjustments to Net Income 14,000$

Adjustments to Deductions Permitted in

Computation of Taxable Income

Deduct: Additional donations allowed 2,800$

Prior year non-capital loss applied 4,000 6,800

Additional Taxable Income Assessed 7,200$

Reconciliation of Taxable Income

Taxable Income previously assessed per Notice of Assessment 42,800$

(or Reassessment where applicable) dated 7,200

Add: Additional Taxable Income Assessed (per above) 50,000$

Revised Taxable Income

"This is not a reassessment but an additional assessment"

1 Where applicable, insert the words "Reduction in" for the word "additional".

Mention 152(1.1)

For additional information contact the local taxation office indicated above. You can find the telephone numbers in the Government of Canada listings of your telephone book.

Pour de plus amples renseignements, communiquez avec le bureau d'impôt local susindiqué.

Vous trouverez les numéros de téléphones dans les inscriptions du gouvernment du Canada de

votre annuaire téléphonique.

Taxation Year

Année d'imposition

dd/mm/yyyy

fiscaux Your Notice of Re-Assessment is:

Votre avis de nouvelle cotisation:

Calculation of Additional1 Taxable Income

Resulting from Additional Assessment

Account Number

Numéro de compte

01014 Account_Number_U1

Bureau des servicesTax Services Office

Refresh DCRsFrançais English

152(1.1) English 152(1.1) Français Vide / None

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A-11.2.4 Sample format for Form T7W-9

ABC Ltd.

1000 Main Street

Anytown, BC A2A 2A2

Net Income as filed $12,000.00

Adjustment to Active Business Income:

Deduct: Reduction to Business Income $5,000.00

Adjustment to Canadian Investment Income

Add: Revised Proceeds of Disposition $14,000.00

Less: Adjusted Cost Base 2,000.00

Revised Capital Gain $12,000.00

Revised Taxable Capital Gain 9,000.00




Note: Leave the notice of assessment boxes and the assessment date blank.

(mailing address)

ABC Ltd.

1000 Main Street

Anytown, BC A2A 2A2

Active Business Income:

Net Business Income $10,000.00

Canadian Investment Income

Add:

Proceeds of Disposition $15,000.00

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Less: Adjusted Cost Base 1,000.00

Capital Gain $14,000.00

Taxable Capital Gain 10,500.00


Deduct: Non-Capital Loss from prior years 5,000.00


"This corporation income tax return has been prepared and assessed under the provisions of

subsection 152(7) of the Income Tax Act. The tax payable amount in the Notice of Assessment

reflects our action taken."



A-11.2.5 Sample pro-forma Form T7W-8, Explanation of assessment or of change made

Joe E. Doe

1234 Main Street

Anytown, BC A2A 2A2

Interest and other investment income $399.96

Other income 1,200.00

Net business income 45,000.00


Deductions from Total Income:

Alimony allowance paid $2,400.00

Carrying charges and interest expense 75.00 $2,475.00


Deductions from net income:

Non-capital losses of other years (see loss schedule

attached)

5,400.00


Non-refundable tax credits:

Basic personal amount $6,458.00

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Canada Pension Plan Contribution 1,938.00



A-11.2.6 Sample Form T7W-8, Explanation of assessment or of change made

Joe E. Doe

1234 Main Street

Anytown BC A2A 2A2

Total income as filed $52,000.00

Add: Taxable benefit 1,200.00


Less deductions from total income as filed 4,540.00

Revised net income $48,660.00

Less deductions from net income as filed 2,000.00


Refundable tax credit (see note 1):

Total revised charitable donations $500.00


Note 1: There will be an explanation in this area only when the taxpayer claim has been

increased by an audit adjustment.

Note 2: Leave the notice of assessment boxes blank.

A-11.2.7 Sample Form T7W-9

ABC Ltd.

1234 Main Street

Anytown BC A2A 2A2

Net income as filed $12,000.00

Adjustment to active business income:

Deduct reduction to business income 5,000.00

Adjustment to Canadian Investment Income:

Add revised proceeds of disposition $14,000.00

Less adjusted cost base 2,000.00

Revised capital gain $12,000.00

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Revised taxable capital gain 9,000.00



A-11.2.8 Sample Form T7W-9

ABC Ltd.

1234 Main Street

Anytown BC A2A 2A2

Active Business Income:

Net Income as filed $10,000.00

Canadian Investment Income:

Add: Proceeds of disposal $15,000.00

Less: Adjusted cost base 1,000.00

Capital Gain $14,000.00

Taxable Capital Gain $10,500.00

Adjusted Net Income $20,500.00

Deduct non-capital loss from previous years 5,000.00



subsection 152(7) of the Income Tax Act. The tax payable amount in the notice of assessment

reflects our action taken."



A-11.2.9 Bankrupt and deceased taxpayers mailing address


When the taxpayer is reassessed while in bankruptcy, address Form T7W-C, Explanation of

changes on reassessment, as follows:

Corporation

With trustee

Mr. John Doe

Trustee in Bankruptcy of the Estate in Bankruptcy of ABC Ltd.

Address to Trustee's address

The trustee's first name must be shown, and also, preferably, their middle initials, if known.

Without trustee

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ABC Ltd. (in Bankruptcy)

Address to taxpayer's mailing address

Corporation in liquidation

Mr. John Doe, Liquidator

ABC Ltd.

Address to liquidator's address

Corporation in receivership

There is no specified style. Use the liquidation format.

Individual

Bankrupt

Trustee of the Estate of John Doe

Address to trustee's address

Deceased

T1 deceased (Date of death return)

John Doe, Deceased

c/o Jane Doe, Executrix (Executor / Administrator)

Address to Executrix / Executor

Note: The word “deceased” is not mandatory but is preferred.

T3

The Estate of the Late John Doe

c/o Jane Doe, Executrix

Address to Executrix / Executor

A-11.2.10 Form T99, T1 and T3 tax calculation information

(Revised August 2014)

To accurately prepare the entries for computer-generated reassessments, follow the instructions

in this appendix.

Many related forms are referenced and must be taken into account to calculate T1 and T3

reassessments on Form T99 and to update the taxpayer’s file. Go to Forms and publications.

Internal forms to process assessments and reassessments are also available in WinALS.

Form T99M, T2/T1/T3 supplementary tax calculation information, was eliminated in April 2013

and is no longer needed to complete Form T99, which has been revised to reflect eliminated

Form T99M. Complete Area G on Form T99 if there is a change to multiple jurisdictions.

Tax calculation information -T1 reassessment

Strictly follow the instructions.

Identification area

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Name of taxpayer or trust – Enter the name as shown on the return or the most recent

reassessment in the file. PRINT the usual first name and initials first, and the surname last. For

deceased taxpayers, enter “Estate of the late” before the name.

Account number - Enter the social insurance number (SIN) of the taxpayer being reassessed (to

be included on Form T7W-C, Explanation of changes on reassessment). Enter a trust account

number for a trust.

Identification area revised – Tick () the “Yes” box, if the identification area is revised or the

“No” box, if the identification area is not changed.

To change information on the taxpayer master file (TAPMA), enter the data online; use the

Online Reassessment Program (RAP) or RAPID Option "L." Form 494, TAPMA master file

change, and Form T495, Address/name change, are no longer used.

Changes that may be needed to the TAPMA account include:

• Spouse or common-law partner's account number;

• Marital status;

• Spouse or common-law partner's given name;

• Remitter type;

• Immigrant/emigrant status;

• Language;

• Previous surname;

• Deceased status;

• Birth date;

• Bankrupt status;

• Given names;

• Surname;

• Regular address; and

• Installment address.

Tax year – Enter the taxation year being reassessed.

Current mailing address – Verify the name and address displayed on RAPID Options “I” or

“E” before completing this area. Print the taxpayer’s most recent known mailing address, if

different from the address shown on page 1 of the income tax and benefit return. If the address is

different from the address on the current reassessment, indicate in red on the top of Form T99,

“address for this notice only.” For a deceased taxpayer, change the address to indicate the name

and address of the estate’s executors.

Area A –T7W-C EXPLANATION AREA

The explanation of changes must adequately describe each source of income being adjusted.

Indicate the keypunch field number of the income area being adjusted in the “K.P. field number

adjusted” column. When adjusting self-employment income, include both the gross and net self-

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employment income, as both fields must be keyed. Space is available for any additional

comments or statements to be noted on Form T7W-C following the revised taxable income

amount. List any headings required.

Complete the applicable blocks in respect to the notice of reassessment.

• Nil notice to be issued – Tick () the box if it applies.

• Enclosed – To be completed by AIMS.

• Being mailed to you – To be completed by AIMS.

• English – Tick () the box if taxpayer's notice is to be issued in English.

• French – Tick () the box if taxpayer's notice is to be issued in French.

List changes only.

• No reconciliation to the previous total or taxable income is required. Only items changed

as a result of the audit need be detailed.

• For example, should the income adjustment also increase the amount of the charitable

donations allowable that would be subject to the 75% net-income limit for the year

(resulting in increase in non-refundable tax credit), this will automatically be adjusted by

the AIMS. However, if the actual amount of acceptable charitable donations has been

adjusted, it will be shown under the applicable area of Form T7W-C.

Update each keypunch field that is changed on the reassessment and make adjustments to the

fields affected by these changes. To ensure accurate preparation of the entries for the computer-

generated reassessments, the instructions in this appendix have to be followed. Leave sufficient

space for the clerk to complete the form, when listing adjustments. The narrative in the T7W-C

EXPLANATION AREA contains an accurate and detailed description of each source of income

being adjusted. For more information, go to Income Tax Audit Manual, Appendix A-11.2.2,

Sample format for Form T7W-8, Explanation of assessment or of change made.

Enter the amount in the right hand column for the adjusted keypunch field on Area A. Make sure

that the direction of the adjustment is designated ("+" or "-") properly, otherwise the taxpayer

may not be reassessed correctly. If the field being changed is a positive amount (for example,

business income is + $10,000.00), enter a “+” sign for an increase or a “-” sign for a decrease. If

the field being changed is a negative amount (for example, the business loss is - $10,000.00),

enter a “-” sign to increase the negative (loss) amount or a “+”sign to decrease the negative

(loss) amount. Refer to the Income adjustment chart that follows.

Income adjustment chart

To increase a self-employment business loss of $5,000.00 to $12,000.00

Enter: - 135.

To decrease a self-employment business loss of $500.00 to $100.00

Enter: + 135.

To change a self-employment business loss of $500.00 to a gain of $100.00

Enter: + 135.

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The keypunch fields for gross income from self-employment, gross rental income, and gross

proceeds on property dispositions need not be updated.

If an incorrect keypunch field was used on the initial assessment, make the correction showing,

for example, 141 to 143, in the keypunch field column. This signifies that fishing income was

incorrectly shown as farming income on the initial assessment and is to be corrected.

Capital gains/losses – Describe the capital disposition changes that must include both the revised

total capital gain/loss and the revised taxable capital gain/loss to provide the taxpayer with a

complete explanation of the change on Form T7W-C issued. Adjust only the total capital

gain/loss field for update (see Chart of keypunch fields for capital gains/losses (Schedule 3) that

follows), as the computer program automatically calculates the taxable portion or the amount of

loss allowed to be included in the revised taxable income amount.

• Provide the keypunch field for the source of the capital gain/loss being adjusted as

indicated on the chart that follows.

• Ensure the taxpayer's interest, dividend, and capital gain deduction has been adjusted to

allow the taxpayer the maximum deduction in accordance with the adjustments made.

Chart of keypunch fields for capital gains/losses (Schedule 3)

Qualified small business corporation shares Field 107

Qualified farm property and qualified fishing property Field 110

Mortgage foreclosures and conditional sales repossessions Field 124

Mutual fund units and other shares including publicly traded shares Field 132

Real estate, depreciable property and other properties Field 138

Bonds, debentures, promissory notes and other similar properties Field 153

Other mortgage foreclosures and conditional sales repossessions Field 155

Personal-use property Field 158

Listed personal property Field 159

Farming and fishing income eligible for the capital gains deduction from the

disposition of eligible capital property Field 173

Information slips – capital gains (or losses) from all T5, T5013, T4PS Field 174

Information slips – capital gains (or losses) from all T3 Field 176

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Capital loss from a reduction in business investment loss Field 178

Reserves from line 6706 of Form T2017 Field 192

If there is more than one adjustment in any area, give only the accumulated figures. If necessary,

use a supplementary schedule.

Capital gains/loss: Reserves – where applicable, Form T7W-C description must include details

concerning prior and current year reserves. For family farm property, family fishing property

after May 1, 2006, and small business corporation shares sold to a child of the taxpayer, reserves

that relate to disposition of capital property after November 12, 1981, must be shown separately

from all other reserves (see keypunch fields). Separate keypunch fields are provided for reserves

on Schedule 3 and these fields must be updated where changes are made. See Chart of

application of losses with reserves that follows.

Chart of application of losses with reserves

The taxpayer filed a 2008 return with this information:

Net capital gain Real estate $45,000

Less: Current year reserve 2,000

Net gain $43,000

The total capital gain for the year was $43,000 when the return was initially assessed

and a taxable gain of $21,500 ($43,000 x 50%) was included in calculating total income.

Reassessment on the 2008 return is now processed to increase the net capital gain to

$75,000 and add an additional reserve of $3,000.

Form T7W-C explanation on Form T99 includes:

Add: Revised net capital gain Real estate $75,000

Less: Previous net capital gain Real estate $45,000

Additional net capital gain $30,000 KP 138

Add or (deduct) additional reserve from line 6706 of

Form T2017 (negative amount to be shown in brackets)

($3,000) KP 192

Net gain $27,000

Additional taxable capital gain (at 50%) $13,500

Chart of application of losses to other years

The taxpayer filed a 2008 return with this information:

Net capital loss Shares $2,500

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Net capital gain Real estate $1,200

The total capital loss was $1,300 when the return was initially assessed and an allowable

capital loss of $650 ($1,300 x 50%) was included in calculating total income.

A reassessment on the 2008 return is processed to increase the capital loss on shares to

$6,000.

Form T7W-C explanation on Form T99 includes:

Subtract Previous net capital loss Shares $2,500

Additional Net capital loss Shares 3,500 KP 138

Revised Net capital loss Shares $6,000

Less Previous net capital gain Real estate 1,200

Revised Total capital loss $4,800

Less Capital loss reported 1,300

Additional Capital loss allowed $3,500

Maximum Capital loss allowed in 2008 1,200

After this adjustment, the revised capital loss on shares is $6,000, of which $1,200 has

been applied to the maximum capital gain.

Reassess the 2007 return to allow the remaining $2,400 (50% of $4,800) as the unclaimed

net capital losses of other years, assuming that the net capital gain in 2007 is equal to or

more than $4,800.

Form T7W-C explanation on Form T99 for the 2007 return being reassessed includes this

deduction from revised net income:

Capital loss of other years $2,400 KP 253

Year 2000 inclusion rates

For dispositions of capital property made after February 27, 2000, the inclusion rate for capital

gains and capital losses has been reduced from 75% to 66 2/3%. For dispositions of capital

property made after October 17, 2000, the inclusion rate for capital gains and losses has been

reduced from 66 2/3% to 50%. For individuals (and other taxpayers, including corporations with

a taxation year corresponding to the calendar year), inclusion rates applicable for 2000 are:

Taxable Capital Gain for 2000

Inclusion rate per period

Period Date Taxable

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1 January 1st to February 27th 75%

2 February 28th to October 17th 66 2/3%

3 October 18th to December 31st 50%

As with individuals, calculate the net gain or loss for each period.

When possible, show multiple adjustments in the same order as they appear on the return.

Use a second Form T99 if there is not enough space for the explanation on the first form. Staple

the forms together with the adjustments to total income area on top. Alternatively, consider

preparing a schedule, and show net adjustments on Form T99 according to the "attached

schedule." When listing adjustments, leave sufficient space for the Tax Cal unit.

Capital losses – Application to other years

The application of losses may require the reassessment of a prior and/or subsequent year (see

application of losses chart above).

• Calculate the allowable losses and advise how they are to be applied.

• Complete Form T99 for each year reassessed.

For more information, go to Income Tax Audit Manual:

• Chapter 29, Losses;

• Chapter 11.3.3, Application of losses.

Capital gains deduction and Form T657, Calculation of Capital Gains Deduction (Revised March 2014)

Use Form T657 when the capital gains deduction claimed under section 110.6 of the ITA is

changed. Send a copy of the revised Form T657 to the taxpayer. Taxpayers must request any

additional allowable deductions in writing. A copy of the revised Form T657 is placed in the

permanent document (PD) folder. Indicate on the top right corner of Form T657 that the

deduction or form has been revised and the date it was revised.

Non-refundable tax credit area

Complete this portion if changes are needed as a result of the audit. No reconciliation to the

previous total of the non-refundable tax credit (NRTC) is required – only items to be changed

need to be detailed. Type a footnote on Form T7W-C to explain briefly why the credit is

changed, but no calculation is needed, as it will be reflected directly on the notice of

reassessment.

Any additional information the taxpayer should have is added at the bottom of the Form T7W-C

explanation area, allowing sufficient space for the audit review support clerk to arrive at the

revised taxable income.

Complete this information, if applicable:

Account number – Maximum 9 digits. Enter the applicable account numbers of the client

involved, if applicable. Precede the number with a 0 if it is only an 8-digit number.

AIMS case number – 8-digit number assigned by AIMS for each case.

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AIMS file number – 9-digit number assigned by AIMS for the principal file in the case.

Appeals case number – Case number assigned for Appeals, if applicable.

Taxpayer Relief Registry entry number – 8-digit number assigned by the Taxpayer Relief

Registry (TRR) system. The TRR tracks taxpayer relief requests such as the number of penalties

and/or interest waived and/or cancelled and refunds beyond the normal three-year period.

However, there is no specific box or line for Taxpayer Relief Registry entry number on the form.

It can be hand written at the bottom of the form.

Area B – TO BE COMPLETED BY ONLINE RAP AREA

This area is completed by the AIMS clerk.

Area C – PENALTIES

Section of federal act

Enter the applicable subsection of the ITA: for example, 162(1), 162(2) or 163(1), 163(2)(a), (c),

and (d).

Province and territory and Section of the provincial and territorial act

Enter the name of the province and/or territory and the section of the provincial and territorial act

under which the penalty is being levied. For more information, go to Income Tax Audit Manual:

• 28.3.8, Provincial and territorial income tax provisions regarding repeated failure to

report amounts; and

• 28.4.20, Provincial and territorial income tax provisions regarding gross negligence

penalties.

Net amount subject to penalty

• For returns assessed or reassessed with a penalty under subsection 163(1) and/or 163(2)

of the ITA, clearly note on Form T7W-C or Form T7W-C (PROV.), the amount of

income subject to penalty so that the non-agreeing provinces (Alberta and Quebec for T2,

Quebec for T1) are able to reconcile the amount subject to penalty.

• If the net amount subject to penalty is reduced by increased deductions for CPP, EI, other

employment expenses, RRSP, etc., the required adjustment will be calculated by AIMS.

Other tax deducted, non-resident tax deducted

• Enter the additional tax deductions related to the penalized income added on

reassessment.

Levy penalty if under $100

• Tick () the “Yes” box if a penalty is to be levied if under $100 or the “No” box if no

penalty is to be levied if under $100.

Area D – FOREIGN TAX CREDIT

• Enter the amounts in the applicable spaces.

• Provide the names of the countries and the applicable amounts for each country if there

are foreign tax credits for more than one country.

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• Exclude from "Foreign tax paid on foreign non-business income," amounts deducted

under subsection 20(12) of the ITA.

Area E – FEDERAL INVESTMENT TAX CREDIT

This area must be completed regardless of whether the investment tax credit is being adjusted.

Tick () the appropriate boxes and complete the applicable blocks.

Federal investment tax credit (no change)

• If no adjustment is to be made to the federal investment tax applied on the initial

assessment or the last reassessment, enter the amount of tax credit previously allowed. If

this area is left blank, the computer will automatically allow the taxpayer the maximum

credit available on reassessment.

Refundable (no change)

• Enter the amount of the investment tax credit used to calculate the refund allowable in the

block annotated "ITC used."

• Enter the amount of the tax credit refund allowed previously, if no change is to be made

to the amount allowed on initial or the last reassessment.

Federal investment tax credit (ITC) (revised)

Investment tax credit application

Complete the blocks as follows:

1) Carried forward from preceding tax years – Enter the amount of tax credit unapplied from

previous years whether it is to be used or not on this reassessment, less any credit that has

expired in the current year.

2) Current year credit – Enter the total amount of the investment tax credit available for the

current tax year, this would take into account any adjustments to the rate or qualified

property acquired.

3) Investment tax credit applied from subsequent years – Enter the actual amount of credit

to be applied (not the amount available) to the current year tax credit.

4) Total credit available – Enter the total of block 1, 2 and 3.

5) Investment tax credit allowed in the year – Enter the amount of tax credit to be applied to

the current tax year. The full amount of block 3 (carry-back) should be used.

6) Investment tax credit used for refundable ITC – Enter the amount of investment tax credit

to be used in calculating the amount refundable to the taxpayer on this reassessment. This

should be the full amount used, not the change to the amount. Enter in the refund block the

amount of the refundable investment tax credit to be allowed on this reassessment (for

example, $10,000 ITC at 20% = $2,000).

7) Investment tax credit applied to prior years (carried back) – Enter the amount of tax

credit that is to be carried back to a prior year.

8) Investment tax credit available for carry forward – Enter the difference between total

credit available (block 4) and the total of the amounts used in investment tax credit allowed

(block 5), investment tax credit used for refundable (block 6) and investment tax credit

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applied to prior years (block 7). This amount should be brought forward to block 1 of Area E

on the subsequent tax year, if there are concurrent reassessments.

Note: Ensure that a copy of the revised Form T2038 is forwarded to the taxpayer with

Form T7W-C.

Qualified property acquired in the taxation year

Complete any changes to the qualified property acquired in the taxation year and the applicable

rate to recalculate the investment tax credit earned for the current year. Ensure that only the

qualified property and rate that are being changed are entered. Remember to use any unchanged

amounts to calculate the total credit available for the tax year. The adjustment amount is

reflected as the full amount of qualified property, not just the change (that is, previous qualified

property was 50,000; revised amount is 70,000).

Investment tax credit carried back

Enter the available investment tax credit to be carried back in the block in the lower right-hand

area. Indicate the year and the amount carried back.

For more information, go to Form T2038(IND), Investment tax credit (Individuals), at www.cra-

arc.gc.ca/E/pbg/tf/t2038_ind/README.html.

Area F – SPECIAL TAX CALCULATION INSTRUCTIONS

Tick () the appropriate box on the left-hand side of the form if any of the indicated items is to

be revised. Enter the revised amounts in the applicable box on the right side of the form,

ensuring that the revised amount is entered, not just the amount of the change.

Labour-sponsored funds tax credits – Enter the net cost to the individual (or to a qualifying

trust for the individual in respect of the share) for the original acquisition of the share by the

individual. The tax credit is generally 15% of the net cost to the individual (or to a qualifying

trust for the individual in respect of the share) for the original acquisition of the share by the

individual or by the trust under subsection 127.4(6) of ITA. The allowable credit cannot be more

than 15% of the net cost, to a maximum of $750 per year under subsection 127.4(5) of the ITA.

Dividend tax credit – Enter the taxable amount of dividends to be included in the taxpayer's

income, ensure that the amount entered is the total of the sum of all eligible dividends (previous

plus change) and other than eligible dividends (previous plus change). Specify the amount for

taxable amount of eligible dividends and other than eligible dividends at the bottom of Area F.

For more information on the taxable amount of dividends (eligible and other than eligible) from

taxable Canadian corporations, go to Schedule 4, Statement of investment income, at www.cra-

arc.gc.ca/E/pbg/tf/5000-s4/5000-s4-12e.pdf.

Investment tax credits –Enter the revised investment tax credit.

Federal political contribution tax credit – Enter the amount of revised contribution that is

eligible for the current year tax credit.

Late filing penalty – Enter the amount of subsequent year loss if one applies; otherwise, tick

() the box.




http://www.cra-arc.gc.ca/E/pbg/tf/5000-s4/5000-s4-12e.pdf

http://www.cra-arc.gc.ca/E/pbg/tf/5000-s4/5000-s4-12e.pdf

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Additional tax deductions at source (such as T4 slips) – Enter the amount of the additional tax

deductions, ensuring that amended T4 and other relevant documents are in the taxpayer's file, if

revised.

Other federal tax credits (specify) – Enter the amount of revised other federal tax credits, if

applicable.

Provincial political contribution tax credit – Enter the amount of revised contribution that is

eligible for the current year tax credit, if applicable.

Part XII.2 tax credit – Enter the amount of revised Part XII.2 tax credit.

Environmental tax credit - Enter the amount of revised environmental tax credit, if applicable.

Allowable business investment loss (ABIL) - Enter the amount of the revised allowable

business investment loss. For more information, go to:

• Guide T4037 [link], Capital Gains, at www.cra-arc.gc.ca/E/pub/tg/t4037/ [link]; and

• Income Tax Interpretation Bulletin IT484R2 [link], Business Investment Losses, at

www.cra-arc.gc.ca/E/pub/tp/it484r2/ [link].

GST/HST credits – Enter the amount of revised GST/HST credits, if applicable.

Other provincial tax credits (specify) – Enter the amount of revised other provincial tax

credits, if applicable.

Other credits (specify) – Enter the amount of revised other tax credits, if applicable.

Area G – MULTIPLE JURISDICTIONS

Complete this area only when there is income attributable to a permanent establishment outside

the province in which an individual was resident in the year.

Complete Area G if any of the indicated items is revised. Enter the revised amounts in the

appropriate box on the form, and make sure that the revised amount is entered, not just the

amount of the change.

TYPE A – Type A Multiple Jurisdictions calculation is required.

If the aggregate of the business income (excluding any business losses) exceeds the individual's

net income, tick () the box in TYPE A.

TYPE B – Type B Multiple Jurisdictions calculation is required.

If the aggregate of the business income (excluding any business losses) is less than the

individual's net income, tick () the box in TYPE B.

Business income (%) column – Determine the percentage of business income allocation to each

jurisdiction in business income (%) column.

Note: For more information on how to allocate business income, go to Provincial Income

Allocation Audit Reference Material, Communiqués (Communiqué AD-02-03 R2),

Provincial Income Allocation Audits, Appendix C, Multiple Jurisdiction Income

Reallocation schedules.

http://www.cra-arc.gc.ca/E/pub/tg/t4037/

http://www.cra-arc.gc.ca/E/pub/tp/it484r2/

http://infozone/english/r6001000/manuals/international/provincial/communiques-e.html

http://infozone/english/r6001000/manuals/international/provincial/communiques-e.html

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Business income column – Allocate the amount of business income (from business, profession,

commission, farming and fishing) earned in the year to each province and territory where a

taxpayer had a permanent establishment in the year.

Other than business income column – Allocate employment earnings, income from property, and

other sources of income other than business income to the province of residence on

December 31st.

Total income column– Enter the sum of the two columns, business income and other than

business income.

Note: Foreign business income will generally be allocated to “Outside Canada.”

Provincial or territorial income tax relating to business income is generally payable to the

province or territory where the permanent establishment generating that income is located.

However, there are situations where, at the end of the year, an individual resides in a province or

territory of Canada, but all or part of the individual's business income, including income received

as a retired, inactive, or limited partner, for the year was earned and can be allocated to a

permanent establishment outside that province or territory, or outside Canada. If income was

allocated to more than one jurisdiction on a previous assessment or reassessment for T1,

Form T2203 will be in the file.

For more information on multiple jurisdictions for T1 returns, go to Form T2203 [link],

Provincial and Territorial Taxes - Multiple Jurisdictions, at www.cra-

arc.gc.ca/E/pbg/tf/t2203/README.html [link].

The audit of the provincial allocation formula is necessary to ensure the interests of the agreeing

provinces (all provinces except T2 – Alberta and Quebec, T1 – Quebec) are protected. For more

information, go to Income Tax Audit Manual, Chapter 12.14. Auditors should be concerned

about allocations, as total taxes may not change but the allocation of taxes to particular provinces

may be affected.

Area H - T3 RETURNS

Indicate sections of the federal act under which tax is to be calculated. For more information,

refer to Special tax calculation instructions of a T3 reassessment below.

Upon completion of the form, enter the auditor's name, TSO, section, group-unit number, and

the auditor’s telephone number. Enter the date the file is being processed in the area provided at

the bottom of page 3.

If the reassessment results in an elective section being applied or adjusted, it will be the

responsibility of the auditor to ensure that all required prior years information is included in the

file before it is forwarded to AIMS.

In all other situations where it is evident that the taxpayer filed a return for the missing years and

the tax data for those years are not available, contact the taxpayer for assistance. Where a

taxpayer contact fails to produce the necessary prior year tax data to complete a tax calculation,

estimates the amounts in conjunction with the taxpayer, using data from available returns.

Tax calculation information – T3 reassessment

Identification area



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For instructions, refer to the identification area of Form T99 for a T1 reassessment.

Area A – T7W-C EXPLANATION AREA

To use Form T99 for a T3 reassessment, the auditor will:

• Stroke through total income previously assessed and enter previous taxable income in

the hands of the trustee.

• Outline the revised taxable income in the hands of the trustee.

• Ignore the “K.P. field number adjusted” column on the right side of the form.

• Enter the description of all income adjustments in the normal manner.

• Complete all necessary mathematical calculations to arrive at revised taxable income

in the hands of the trustee.

The auditor will also be responsible to complete any supporting schedules.

Areas B to F

Complete Areas B to F of Form T99, according to the tax calculation information of a T1

reassessment explained above.

Area G – MULTIPLE JURISDICTIONS

Complete this area only when there is business income attributable to a permanent establishment

outside the province in which the trust was resident.

Complete Area G if any of the indicated items is revised. Enter the revised amounts in the

appropriate box on the form, and make sure that the revised amount is entered, not just the

amount of the change.

TYPE A – Type A Multiple Jurisdictions calculation is required.

Where the aggregate of the business income (excluding any business losses) from lines 06 to 09

of the trust's return (amount cannot be negative) exceeds the total net income from line 50 of the

trust's return, tick () the box in Type A.

TYPE B – Type B Multiple Jurisdictions calculation is required.

Where the aggregate of the business income (excluding any business losses) from lines 06 to 09

of the trust's return (amount cannot be negative) is less than the total net income from line 50 of

the trust's return, tick () the box in Type B.

For more information, go to Form T3MJ [link], T3 provincial and territorial taxes - multiple

jurisdictions, at www.cra-arc.gc.ca/E/pbg/tf/t3mj/README.html [link].

Complete the remaining portion of Form T99 according to the tax calculation information of a

T1 reassessment explained above.

Special tax calculation instructions

1972 and subsequent tax years

For 1972 and subsequent tax years, complete Area H of Form T99, because of the special types

of trusts created. Enter the applicable section of the amended act under which part I tax is to be

calculated, in accordance with these sections of the ITA:

http://www.cra-arc.gc.ca/E/pbg/tf/t3mj/README.html

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• Section 117;

• Section 119;

• Subsection 122(1); and

• Subsection 122(3).

For 1972 and subsequent tax years, initiate Form T2SCH18, Schedule 18, Federal and

provincial or territorial capital gains refund, available at www.cra-

arc.gc.ca/E/pbg/tf/t2sch18/README.html, whenever a mutual fund trust is entitled to a

capital gains refund.

A-11.2.11 Online reassessment program for T1 file


Form T919, Request for online RAP

Completion of form by Audit section

Area A – The auditor enters the case number, the file number, the name and SIN of the taxpayer

to be reassessed. Where any of the TAPMA identification information has changed (for example,

new address), the auditor will tick the box at the top of the form and provide the new information

in the space provided.

Area B – The auditor will enter the process sequence number (PSN) for each year in the space

provided and a brief explanation of the adjustment and the KP field affected, the + or – sign and

the amount for each adjusted year.

Revisions to certain tax credits may require the spouse or common-law partner's information and

tax returns as indicated. The auditor will complete the balance of the explanation (up to 60

characters) in the space provided after the phrase, “We have made an adjustment according to.”

Area C – The auditor enters their name, work location and the date where indicated, and passes

the complete package to the team leader.

The team leader, after approving the adjustments, will sign and date Form T919, and then

forward for processing as usual.

Completion of form by online reassessment program clerk

Area B – Upon receipt by online reassessment program (RAP), the clerk will enter the RAP

online and change any TAPMA information if required. It is important to ensure that matching

code 069 is entered on the MISCELLANEOUS INPUT SCREEN. The communication

information provided by the auditor will be used for the explanation accompanying the RAP.

The clerk will record any explanation codes that may be necessary in the appropriate spaces on

Form T919, as well as any other applicable codes as per TOM 19 EXHIBIT 1970-E.

If the returns cannot be reassessed online, they will be returned to the auditor for processing as a

secondary file; otherwise, the file will be passed along for review as usual.

Area C – The audit clerk will have to complete screen 5 (UPDATE FILE RESULTS) from the

menu INVENTORY ADD/UPDATE/BROWSE A CASE OR A FILE accessed from the AIMS

MAIN MENU.

The clerk will sign and date the form in the space provided.



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After verifying the adjustments and coding, the reviewer will sign and date Form T919 and

approve the online RAP.

T1 transaction codes

Adjustments requiring transaction code 5 processing

Note: If a reassessment was processed using transaction code 5, any subsequent reassessment

must be processed using transaction code 4 or 5.

1. The adjustment is a result of an appeal and:

• the adjustment cancelled out of the T1 Cycle for a third time; or

• “T420” is noted at the top of Form T99, T1 and T3 tax calculation information.

2. There is an adjustment to CPP Refund and the QPP Refund shown on TAPMA is not

being adjusted or vice versa.

3. Multiple jurisdiction returns previously assessed tax centre assessment (TCA) or

reassessed code 5 with:

• a claim for British Columbia or Newfoundland venture capital tax credit (1995);

• election to average; or

• Manitoba investment tax credit.

4. Adjustments to these bankruptcy returns:

• any return for a year prior to the year of bankruptcy;

• any return for the year of bankruptcy;

• a return for a year subsequent to the year of bankruptcy where both the taxpayer and

the trustee have not been discharged; or

• Memo Fields 7814, 7817, 7818, and/or 7819 are being updated with the amounts of

the losses (for more information on these fields, refer to TOM 1984.34).

5. A notice of assessment for the year was erroneously issued for a return filed for another

year.

6. Data from a duplicate or amended return filed by the taxpayer, where more than one

notice of assessment was issued, were combined on reassessment.

7. Any of the sub-codes 61, 62, and/or 65 are present.

8. Special circumstances dictate the desirability of manually issuing a notice of

reassessment.

9. The return was previously assessed TCA or reassessed transaction code 5 and section 119

is being applied.

10. A negative balance was calculated on the initial assessment (other than a farmer's and

fisher's election to average) and a "NIL" notice of reassessment is being issued.

Note: The federal tax or provincial tax showing on the Data Label or TAPMA will be a

negative amount.

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11. There is a claim for the Manitoba investment tax credit (current or carry-back).

12. The taxpayer has requested relief under Article XXIV of the Canada-US Tax Convention

in respect of excess foreign tax credits.

13. One of the adjustments in a concurrent series is processed using Transaction Code 5; all

adjustments in the series must be processed using Transaction Code 5, except for certain

cases. Refer to TOM 1913 for the procedures.

14. A reassessment in excess of 20 field changes.

15. A return that will be statute-barred in 30 days or less and no waiver has been filed.

Note: This is for internal adjustments only.

16. An adjustment to reduce a claim for foreign taxes paid due to an adjustment made by a

country other than Canada.

17. Reassessment to a tax where a cancellation of interest has previously occurred.

18. Where the issue involves a tax deducted transfer to Quebec and a transfer was previously

allowed in respect of a TCA or a transaction 5 reassessment (memo field 438/695 cannot

be used to effect the transfer; a DC224 is required).

19. T1 returns that are not updated on TAPMA (that is, subsection 70(2) Rights and things

returns).

20. A reassessment involving years off TAPMA.

21. The taxpayer is requesting an adjustment to contribute to CPP based on self-employed

earnings without having to revoke a previous election not to pay into the plan.

22. Reassessment to a tax year in which a remission order was previously granted.

Note: Transaction Code 5 is not required if a remission order on Ontario Tax Credit was

granted by initial processing. This can be identified by a remission order transaction

shown on Option N.5 and the remission order indicator (Field 7932) is not updated on

Option C.

23. Reduction of an omission or negligence penalty or a change from negligence penalty to

an omission penalty under the taxpayer relief legislation.

24. Reassessment involving a capital gains election late filing penalty.

25. A request processed under voluntary disclosure.

26. An adjustment is requested under taxpayer relief that has an impact on another tax year in

which a debit is created.

27. A 163(2) penalty is being applied and the taxpayer is being penalized for the difference in

the previous and revised Canada child tax benefit received by the taxpayer's spouse or

common-law partner. For more information, go to TOM 19(15) 6.

28. A 163(2) penalty is being applied and the taxpayer is being penalized for the difference in

the previous and revised Canada child tax benefit and/or GST/HST credit received by the

taxpayer's spouse or common-law partner. For more information, go to TOM 19(15) 6.

Adjustments requiring transaction code 4 processing

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Note: If a reassessment was processed using transaction code 4, any subsequent reassessment

must be processed using transaction code 4 or 5.

1. Separate foreign business tax credit calculations are required for foreign taxes paid to

four or more countries.

2. Separate foreign non-business tax credit calculations are required for foreign taxes paid to

four or more countries.

3. Section 119 (election to average for farmers and fishers) has been or is being applied

unless the return was processed TCA, in which case a transaction code 5 is required.

4. A gross negligence penalty under subsection 163(2) of the ITA is being applied and the

taxpayer made an election under section 119 (election to average for farmers and fishers).

5. A gross negligence penalty under subsection 163(2) of the ITA is being applied and an

adjustment is also being made to:

• dividends from taxable Canadian corporations;

• tax adjustments;

• foreign income;

• foreign tax paid;

• overseas employment tax credit.

6. A gross negligence penalty under subsection 163(2) of the ITA is being applied on

elective income included in the adjustment as a tax adjustment.

7. A gross negligence penalty under subsection 163(2) of the ITA is being applied and there

is also a change to the taxing province.

8. A gross negligence penalty under subsection 163(2) of the ITA is being applied and a

forward averaging election or withdrawal is present on the return.

9. A gross negligence penalty under subsection 163(2) of the ITA previously applied is

being reduced.

10. The return is for 1995 and there is an Alberta, Saskatchewan, or British Columbia royal

tax rebate or a Manitoba mineral tax rebate.

11. The adjustment is to allow an ITAR 40 election or an ITAR 40 election was previously

allowed:

• another tax adjustment is involved;

• the return is for a beneficiary and the tax adjustment must be calculated on the prior

year tax data of the deceased; or

• the taxpayer is bankrupt in the year or one of the affected years.

Note: If the criteria shown in number 11 do not apply and the adjustment does not otherwise

require a transaction code 4 or 5, process the adjustment as a transaction Code 2.

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12. Where the tax year in which the investment tax credit was acquired is part of a concurrent

series and an adjustment is being made to carry-back the investment tax credit to a prior

year in the series.

13. The refundable Quebec abatement (Field 440) must be reverted to the taxpayer's original

figures.

14. Write-off of minor balances.

15. Adjustment to a return with a negative tax resulting from federal and/or British Columbia

mining reclamation trust tax credit.

A-11.2.12 Form T99A, T2 tax calculation information


Many related forms are discussed in this appendix and must be taken into account to calculate T2

reassessments on Form T99A and to update the corporation’s file. For forms available on

InfoZone, go to Forms and publications.

Form T99M, T2/T1/T3 supplementary tax calculation information, was eliminated in April 2013

and is no longer needed to complete Form T99A, which has been revised to reflect eliminated

Form T99M. Tax calculation information T2 reassessments

In preparing Form T99A, ensure that the information used is based on amounts as originally

assessed or as revised by the latest reassessment.Identification area

• Auditor identification information – Enter the auditor identification information:

Auditor’s name;

TSO identifier;

Section identifier;

Group and unit identifier;

Auditor’s telephone number; and

Date that Form T99A is completed.

• Corporation identification information – Enter the corporation identification information:

Name of corporation;

Taxation year (fiscal period start and end); and

Enter the mailing address if the mailing address is different from the head office address

(refer to amalgamated corporations in the case of a corporation where there has been an

amalgamation).

• Corporation type – Enter one of the following codes (type of corporation that is changed),

if changed:

Code 1 – Canadian-controlled private corporation;

Code 2 – Other private corporation;

Code 3 – Public corporation;

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Code 4 – Corporation controlled by a public corporation; or

Code 5 – Other corporation.

A change of corporation type may bring significant tax consequences. If the type of

corporation changed during the tax year, state the effective date of the change and the

corporation type on a previously filed return in Area N.

• Late filing penalty code - Where the return is subject to a penalty, enter Code 1.

Where a penalty was erroneously assessed and the penalty is to be cancelled, enter

Code 2, otherwise, leave blank.

Business number;

AIMS file number;

Statute-barred date – Enter the statute-barred date; and

Waiver of interest – Enter waiving period.

Areas A to M

Tick () the "Yes" boxes in Areas A to M if an item has been changed or has been affected by a

change. For example, if taxable income is being revised and this change affects the small

business deduction, tick the "Yes" box in Area E. Then, enter the revised amount on the

applicable revised schedule.

If there is no change to the amount originally claimed by the taxpayer or the amount previously

assessed, do not tick the "Yes" box and leave the data field blank.Area A – Multiple

jurisdictions

The audit of the provincial income allocation is necessary to ensure the interests of the agreeing

provinces (all provinces except T2 – Alberta and Quebec, T1 – Quebec) are protected. For more

information, go to Income Tax Audit Manual, Chapter 12.14.0, Multiple jurisdictions and

allocation of income.

Auditors should be concerned about allocations as total taxes may not change but the allocation

of taxes to particular provinces may be affected. In addition, some provinces use the provincial

income allocation formula for the determination of their capital taxes and HST allocations,

making an accurate determination even more important to the agreeing provinces. If taxable

income was allocated to more than one jurisdiction on a previous assessment or reassessment,

Form T2SCH5, Schedule 5, Tax calculation supplementary – Corporations, will be in the file.

Where the jurisdiction has changed from a multiple to a single jurisdiction, tick the "Yes" box

and enter the name of the new jurisdiction.

Where a single jurisdiction has changed to a new single jurisdiction or to multiple jurisdictions

(MJ), tick the "Yes" box and enter the name of the new jurisdiction or MJ. If a single jurisdiction

has changed to MJ, complete Form T2SCH5 and attach it to Form T99A.

Where there are changes to multiple jurisdictions, tick the "Yes" box and complete Form

T2SCH5 and attach it to Form T99A.Area B – Functional currency

For tax years that start on or after December 14, 2007, corporations resident in Canada

throughout the tax year can elect to report in a functional currency, except for:

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• investment corporations;

• mortgage investment corporations; and

• mutual fund corporations.

A functional currency is a currency of a country other than Canada that is:

• a qualifying currency (at time of writing, the British pound, the euro, the Australian and

the U.S. dollar); and

• the primary currency in which the taxpayer maintains its records and books of account for

financial reporting purposes for the tax year.

Form T1296, Election, or Revocation of an Election, to report in a functional currency, must be

filed to elect to report in a functional currency.

If an election was made under section 261, tick the "Yes" box and indicate the functional

currency used from line 079 of the T2 return:

01 – United States dollar (USD);

02 – Great Britain pound sterling (GBPS);

03 – Australian dollar (AUD); or

04 – European Monetary Union (EURO).

Even if corporations elect to report in a functional currency, they still have to complete lines 840

and 898 of the T2 corporation income tax return in Canadian currency. They cannot change a

functional currency once an election is made. If corporations cease to qualify as a functional

currency reporter, they must revert to determining their Canadian tax results in Canadian dollars,

and cannot make the election again.

Area C – Changes in investment income and income from an active business

Enter revised net income for tax purposes according to Form T7W-C, Explanation of changes on

reassessment.

Deduct these items from revised net income:

• Taxable capital gains minus allowable capital losses;

Dividends deductible from income, Income Tax Act sections 112 and 113, and subsection

138(6);

Property income minus property losses;

Property income from an interest in a trust;

Foreign business income;

Income from a specified investment business; and

Income from a personal service business.

The resulting amount is the total income from active business to enter on Form T99A.Area D –

Calculation of taxable income – Loss carry-back

Initial carry-back of losses from subsequent year

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Enter the fiscal period end (FPE) of the subsequent year and effective interest date (EID).

Increase in the initial carry-back from subsequent year

Enter the FPE of the subsequent year and EID. The increase will be considered as a separate

payment with its own EID if the taxpayer has applied the amount when filing.

Determination of Effective Interest Date (EID)

The rules for determining the EID vary according to the FPE of the tax year in which the loss or

tax credit being carried back arose.

The EID is 30 days after the latest of four (4) dates described in paragraph 161(7)(b) of the ITA:

(i) the first day immediately following that subsequent taxation year;

(ii) the day on which the taxpayer's or the taxpayer's legal representative's return of income

for that subsequent taxation year was filed;

(iii) where an amended return of the taxpayer's income for the year or a prescribed form

amending the taxpayer's return of income for the year was filed in accordance with

subsection 49(4) or 152(6) or paragraph 164(6)(e), the day on which the amended return

or prescribed form was filed; and

(iv) where, as a consequence of a request in writing, the Minister reassessed the taxpayer's

tax for the year to take into account the deduction or exclusion, the day on which the

request was made.Area E– Small business deduction (SBD)

Corporations that were Canadian-controlled private corporations (CCPCs) throughout the full

taxation year may be entitled to claim a reduction. Where two or more CCPCs are associated

with one another, the annual business limit must be allocated among them. If associated, enter

the amount allocated in Form T2SCH23. For more information, go to Form T2SCH23, Schedule

23, Agreement Among Associated Canadian-Controlled Private Corporations to Allocate the

Business Limit, at www.cra-arc.gc.ca/E/pbg/tf/t2sch23/README.html.

Effective January 1, 2008 the SBD rate is 17%. The rate is prorated for tax years that straddle

December 31, 2007.

The SBD available is 17% of the least of the:

• income from active business carried on in Canada;

• business limit;

• taxable income; and

• reduced business limit.

Active business income

Enter the amount of active business income according to Form T7W-C. The corporation

calculates this amount on Form T2SCH7, Schedule 7, Aggregate investment income and active

business income, available at www.cra-arc.gc.ca/formspubs/prioryear/t2sch7/README.html.

Active business income is any income earned from a business, including any income incidental

to the business but does not include income from a specified investment business or from a

personal services business.


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For a complete definition of active business income, see paragraphs 4 to 8 in Income Tax

Interpretation Bulletin IT73R6, The Small Business Deduction, at www.cra-

arc.gc.ca/E/pub/tp/it73r6/README.html. Paragraph 10 of IT73R6 explains the meaning of

“carried on in Canada.”

Business limit for the year

Enter the amount of business limit according to Form T7W-C.

If a corporation is not associated with any other corporation, their business limit for the purposes

of claiming an SBD is:

• $200,000 in 2002 and previous years;

• $225,000 in 2003;

• $250,000 in 2004;

• $300,000 in 2005 and 2006;

• $400,000 in 2007 and 2008; and

• $500,000 in 2009.

Note: The business limit will be prorated for taxation years that are not calendar years.

CCPCs that are associated with other CCPCs must file Form T2SCH23, Schedule 23, Agreement

Among Associated Canadian-Controlled Private Corporations to Allocate the Business Limit, to

allocate the business limit among the associated corporations. For instructions, see Schedule 23

in Chapter 2 of Tax Guide T4012, T2 Corporation - Income Tax Guide, at www.cra-

arc.gc.ca/E/pub/tg/t4012/README.html.

Associated corporations can elect not to be associated for the purposes of the SBD by filing

Form T2SCH28, Schedule 28, Election not to be an Associated Corporation, available at

www.cra-arc.gc.ca/E/pbg/tf/t2sch28/README.html. For instructions, see Schedule 28 in

Chapter 2 of Tax Guide T4012, T2 Corporation - Income Tax Guide, at www.cra-


Large CCPCs that have taxable capital employed in Canada of $15 million or more do not

qualify for the SBD:

• For CCPCs with taxable capital employed in Canada between $10 million and

$15 million in the preceding taxation year, the business limit is reduced on a straight-line

basis.

• Associated groups of CCPCs with combined taxable capital employed in Canada of more

than $10 million will have a reduced business limit.

For the formula to calculate a large CCPC's reduced business limit, see Line 425 in Chapter 4 of

Tax Guide T4012, T2 Corporation - Income Tax Guide, at www.cra-


Taxable income

Write in the amount of taxable income for the purposes of calculating the SBD. Area F –

Manufacturing and processing profits deduction (Form T2SCH27, Schedule 27)



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Enter the revised Canadian manufacturing and processing profits.

Income that is eligible for the small business deduction is not eligible for the manufacturing and

processing profits deduction.

Give the details (by preparing a revised schedule) for the revised calculation of manufacturing

and processing profits. If the net income of the corporation is changed, the manufacturing and

processing profits should be re-calculated and shown on T99A.Area G – Part IV tax (private

and subject corporation at any time during the year)

When the corporation was a private or subject corporation at any time in the tax year, tick the

"Yes" box and enter the revised amount of taxable dividends received that is subject to Part IV

tax (subsection 186(1) of the ITA) in 1 of Area G.

Enter the revised amount of non-capital loss and/or revised farm loss claimed or to be claimed

for purposes of Part IV tax in 2 of Area G.

If losses are applied from a subsequent year, enter the FPE and EID (See Area D).Area H –

Dividend refund

When the corporation was a private or subject corporation at the end of the tax year, enter the

amount of taxable dividends paid in the tax year.Area I – Surtax credit (applicable to taxation

years 2006-2008)

Enter Part 1.3 tax payable for the year.

From above, deduct the following:

• Surtax credit: current year;

• Carry-forward from preceding years; and

• Carry-back from subsequent years.

Enter the balance on total surtax credit (not to exceed Part 1.3 tax payable less Part 1.3 tax credit

utilized before 1992).

For more information, go to Form T2SCH37, Schedule 37, Calculation of unused surtax credit,

at www.cra-arc.gc.ca/E/pbg/tf/t2sch37/README.html.

NOTE: Part I.3 tax is repealed for taxation years that begin after 2005 but remains

relevant to calculate the unused surtax credit for years 2006 – 2008. After 2008, the

unused surtax credits cannot be carried back. However, the surtax credit can also be

applied against Part VI tax until 2015.Area J – Federal investment tax credit

(subsection 127(5) of the ITA)

If federal investment tax credit applies, complete Form T2SCH31, Schedule 31, Investment tax

credit – corporations, available at www.cra-arc.gc.ca/E/pbg/tf/t2sch31/README.html, and

attach to Form T99A.

Follow the detailed instructions included with the form.Area K – Section 163 of the ITA

penalties

The auditor will provide an analysis of the total income subject to a penalty by type:

• Active business income or non-qualifying business income;



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• Part IV Dividends;

• Canadian investment income;

• Foreign income from:

• Business income; and

• Non-business income.

• Other income.

When the active business income includes adjustments to Canadian manufacturing and

processing profits or taxable production profits from mineral resources or gas & oil wells,

provide a further analysis of the active business income under Area N Special

instructions.Section of federal act

Enter the applicable section.Province and section of provincial act

Enter, where applicable, the section of the provincial and territorial act under which the penalty

is being levied and the name of the province and territory. For more information, go to:

• 28.3.8, Provincial and territorial income tax provisions regarding repeated failure to

report amounts; and

• 28.4.20, Provincial and territorial income tax provisions regarding gross negligence

penalties.

Additional tax deductions

Enter the changes to the additional tax deductions or credits related to the penalized income

added on reassessment.

When a penalty was levied on a previous reassessment and additional tax deductions were

allowed, those tax deductions should be included in the additional tax deductions applied on

the latest reassessment.Non-penalized adjustments

"Non-penalized adjustments" box – if one of the three items was ticked, the lower base tax will

be re-calculated excluding the particular item.

A ticked Yes box means that deductions or credits were claimed in error by the corporation on

initial assessment or the latest previous assessment. Tick the identified adjustments not subject to

penalty because of the nature of the item or amounts. This will cause the tax calculation unit to

undertake a lower base tax computation excluding these items.

For example, if the "small business deduction" box is ticked, the lower base tax will be computed

without the benefit of the small business deduction. Since this box will be completed in a

situation where the particular item is being disallowed for reasons not amounting to gross

negligence, the result will be a reduced penalty under subsection 163(2) and/or 163(1).

For more information, go to Chapter 28.0, Penalties.Area L – Appeal

Tick "Yes" box, if the file is under a Notice of Objection or under Appeal.

Area M – Other tax credits

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If there are changes to provincial or territorial tax credits or rebates, tick the "Yes" box and

complete Form T2SCH5, Schedule 5, Tax Calculation Supplementary - Corporations, available

at www.cra-arc.gc.ca/E/pbg/tf/t2sch5/, and attach it to Form T99A.

If there are changes to federal foreign and/or federal logging tax credits, tick the "Yes" box, and

complete Form T2SCH21, Schedule 21, Federal and provincial or territorial foreign income tax

credits and federal logging tax credit, available at www.cra-

arc.gc.ca/E/pbg/tf/t2sch21/README.html, and attach it to Form T99A.Area N – Special

instructionsSpecial taxes

Non-Canadian corporations carrying on business in Canada – Provide the amount of Part XIV

tax if applicable. AIMS will pre-calculate federal Part I tax and provincial tax at the auditor’s

request.Tax credits

Provide details of Part XIII tax and non-resident tax deductions supported by NR4 slips.

Provide the amount of patronage dividend tax deductions under subsection 135(3) of the ITA

which is supported by a T4A slip, Statement of Pension, Retirement, Annuity, and Other

Income.Specialty corporationsInvestment corporation (public corporation)

• Provide the amount of the investment corporation deduction, if applicable.

A Canadian public corporation that is an investment corporation, as defined in subsection

130(3), can claim a deduction from Part I tax that the corporation would otherwise have

to pay. This deduction is equal to 20% of the taxable income for the year that is more

than the taxed capital gains for the year.

• Provide the amount of the "taxed capital gains," if applicable.Mutual fund corporation

(public corporation)

• If the mutual fund corporation qualifies as an investment corporation, provide the

investment corporation deduction amount as outlined previously for investment

corporations.

• Provide the amount of taxed capital gains.

• If the corporation has redeemed any of its shares in the year, enter the amount of capital

gains redemptions determined by the formula under subsection 131(6) of the ITA, and

attach the calculation worksheet to T99A.Non-resident-owned investment corporation

• If applicable, provide the amount of the net capital gains on taxable Canadian property.

• Provide the amount of the allowable refund, if the non-resident-owned investment

corporation has paid a dividend in the year. The allowable refund will be calculated in

accordance with subsection 133(8) of the ITA.Cooperative corporation

• Provide the amounts of taxable dividends paid in the year for tax years; and

• Note the amount of the net taxable gains.Credit unions

• If applicable, provide the amount of taxable dividends paid in the year, and the additional

deduction from tax otherwise payable under Part I as calculated under subsection 137(3)

of the ITA. General insurance corporation

State the type of corporation in Area N. Delete any dividends previously shown in Area H of

T99A if a corporation is an insurance corporation.

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Note: An insurance corporation, as defined under subsection 248(1), is not subject to Part

IV tax on taxable dividends pursuant to paragraph 186.1(b) of the ITA.Part II tax

Part II tax (Tobacco Manufacturers’ Surtax) may become payable as the result of audit issuing

reassessments. Every corporation shall pay a tax under this Part for each taxation year equal to

50% of the corporation's Part I tax on tobacco manufacturing profits for the year.

Review each reassessment separately to determine if any Part II tax is payable as it is not

automatic for a reassessment to trigger Part II tax. The auditor must, in addition to advising

AIMS, inform the taxpayer that Part II tax is payable as the result of the reassessment.Waiver

If a "Waiver" was obtained for a particular year, it should be indicated on top of the T99A for

that year or in Area N of this form.General instructions

• Provide the taxable amounts for elective sections (for example, CCA recapture) and

attach the calculation worksheet or a revised schedule (that is, Form T2SCH8, Schedule

8) to Form T99A. It will be the responsibility of the auditor to ensure that all information

required from prior years is attached when the file is forwarded to the AIMS unit.

• Advise the AIMS unit of any change in the type of the corporation when it is different

than indicated on page 1 of the T2 return.

• Taxable dividends received under subsection 113(2) of the ITA will be noted under

Area N.

• If there is a "NIL Notice of Reassessment to be issued," note it in Area N.

• Loss applications of subsequent years – To enable accurate calculation of the late filing

penalty and interest calculations, provide the amount of any losses being applied from a

subsequent year.

• All files originating from Appeals should show "Appeals" in Area N.

• If there is a request to transfer tax refunds, provide the amount and to whom the amount

should be transferred.

• Where the return is the first return of a newly amalgamated corporation or that of a parent

corporation for its first tax year after winding-up a wholly-owned subsidiary, provide the

date of the amalgamation or winding-up, and the names and account numbers of the

predecessor or subsidiary corporations.

Note: For amalgamations and wind-ups, both predecessor and successor corporation

returns have to be sent to the Tax Cal unit together, whether there are changes to the

returns or not (re: carry-over of balances).

• If changes must be made, but no reassessment is issued, (for example, if taxes are

involved in statute-barred year), prepare Form T99A to update data, and also enter a

notation in Area N: For update purposes only.

• CORTAX printout – Whenever an adjustment is made involving a carry forward from

another year, such as a capital or non-capital loss or investment tax credit, obtain a

printout to verify the information in the system. Include only the printout affecting the

proposed adjustments.

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• Provide an Appeals case number and Taxpayer Relief Registry entry number regarding

the Proactive Taxpayer Relief for the processor in Area N, if applicable.

A-11.2.13 Form T718, Memorandum to Collections Section – Under review


Stall code procedures – Form T718

The on-line CINDAC stall code system and procedures relative to the principal users of this

system is described below.

Automated on-line CINDAC stall code procedure

The first phase of a fully automated on-line CINDAC stall code procedure was scheduled to

become available in mid-February 1985, after Year End Conversion. Access instructions and

responses are contained in TOM 9530.

This facility requires the use of user identification and password through the RAPID IBM

System, which enables employees to set or delete a stall code on a CINDAC account, as well as

issue an appropriate acknowledgement to the taxpayer. Each TSO, TC, and Headquarter Division

must allocate, through their security administrator, sufficient passwords and user identification to

all employees who usually have contact with taxpayers.

The benefits of this procedure are:

• Paper transcripts T718A, T718B, T502 Special and DC 208, for stall codes only, are no

longer required to be completed and processed.

• Immediate notification and correction of either invalid account numbers or preparation

errors.

• Stall codes can now be set on accounts in Tax Services Office Request status and

messages are produced to the TSO whenever the stall code is deleted.

• Assistance with follow up lists as the area resolving the matter is identified by an element

description and this data will be combined with information available from either the

reassessment program (RAP) Suppress data or T1 Charge Out system.

Employees in a TSO, TC, or HQ with proper password authority enter the stall code by:

• Accessing the RAPID Screen format.

• Keying in the taxpayer's account number.

• Keying 1 in the Action Code, to set the stall code.

• Keying 1 in “Send Acknowledgment,” if an Acknowledgment is to be issued (from

CINDAC).

• Keying in the applicable Element legend number to identify where the matter is to be

resolved.

• Pressing Enter to transmit the keyed data that the RAPID system will verify for

acceptability. If the data is not acceptable, any errors can be corrected immediately and

the data is entered. Unacceptable data is highlighted on the terminal's screen.

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The taxpayer's name and city of residence are displayed at the bottom of the screen. This serves

as a confirmation of the correct taxpayer and that the input has been accepted. This feature also

provides assurance that the stall code will be set on the correct account. Inputting a delete

immediately in the same cycle will not correct the error. Corrections can only be made in the

subsequent cycle run. If the wrong Element was input, re-key and press Enter immediately.

As a result of the "Set" request, the CINDAC System will on the next cycle:

• Issue an acknowledgment to the taxpayer, if requested and applicable to the "Element"

indicated (that is, None if for Taxroll Tracing).

• Set a Stall Code on the account if there is a debit arrears balance, regardless of status.

"STALL CODE O/S" will appear in the upper part of printouts and RAPID displays of

the CINDAC Account.

• Post a transaction "Stall Code (Element)" on the CINDAC account. Stall code element(s)

are:

• Minister's Mail;

• Appeals;

• Audit;

• Taxroll Tracing;

• TC-Assessing;

• Revenue Collections;

• Accounts; and

• Other.

• Produce a message printout to advise TSO Revenue Collections that a Stall Code has

been set on an account TSO Request status.

• Put out Follow-Up lists at prescribed intervals, on outstanding Stall Codes, using the

"Element" Identification in the transaction area, along with data from either the

reassessment program (RAP) suppress data or the T1 online charge out system. This

information will indicate the TSO/TC Work Section, which may be processing an

adjustment or have the T1 Return or both.

When there is no adjustment or the matter is resolved, other than by a reassessment, the stall

code will be deleted by accessing the On-Line System and:

• Keying the taxpayer's account number.

• Keying 2 in the Action Code to Delete.

• Press Enter to transmit this data.

• The taxpayer's Name and City of residence will appear at the bottom of the screen. This

confirms the taxpayer and that the input has been accepted.

• The system will verify if the transaction is acceptable or not. If not accepted, any errors

can be corrected immediately and the data retransmitted.

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As a result of this Delete request, the CINDAC System will on the next cycle:

• Delete the stall code on the account. stall code O/S will no longer appear on either

printouts or RAPID displays of the CINDAC account.

• Post a transaction stall code deleted on the CINDAC account.

• Produce a message printout to advise TSO Collections that the stall code has been deleted

on an account in TSO Request status.

For details on the use of RAPID system, refer to TOM 95 Option L.5.

Stall code follow-up lists

Stall Code follow-up lists will be issued to both TSOs and TCs based on the Element registered

in the CINDAC Stall Code transaction. Accounts and TC Assessing Elements will be listed out

to TCs and the remaining elements to the TSOs.

Listings will be sorted so that all similar Elements are grouped together and in alpha sort by

taxpayer surname. The lists will be produced separately for accounts with arrears balances within

Minor Balance limits and balances greater than the Minor Balance limit. Listing dates will be

February 28, April 30, June 30, August 31, October 31, and December 31.

Accounts with stall codes outstanding will be listed initially 60 days after the stall code is set, on

the immediate subsequent first listing date and then 60 days later on the second listing. Where an

account's arrears balance is within Minor Balance limits and the stall code is still outstanding 60

days after its' second listing, the stall code will be automatically deleted and the account's status

made Minor Balance, except for Appeals Element stall codes. Accounts with Appeals Element

stall codes will continue to be listed until the stall is Deleted through RAPID. When the arrears

balance is greater than the Minor Balance limit and the account is in a DCR status with a stall

code outstanding 60 days after the second listing, the account status will be made TSOR (TSO

Request).

Any CINDAC account in TSOR status with a stall code outstanding will continue to be listed on

the Second Follow-Up lists until the code is deleted. It is important therefore, that whenever the

matter in question is resolved by other than the reassessment program (RAP) transaction, with

exception of Appeals Element stall codes, that the code be deleted immediately. Otherwise, the

stall code will remain and the account will continue to appear on the follow-up lists.

Input of an Intercept Option Code "6" will cause a stall code to be set on a CINDAC account, if

there is an arrears balance outstanding and will be recorded as "TC-Assessing." Any accounts on

which a stall code was previously set by a T718A, will be recorded as "OTHER" on the lists.

In addition to Account Number, Name, City/Province, Status and Balance, four new features

have been incorporated into the lists.

• SET BY – The 2 digit TSO or TC Code of the originating Office of the Stall Code

transaction most recently posted to the account. HO will be identified as 29.

• DATE – The day, month, year when the most recent stall code transaction was set.

• RAPCD – "C" indicates that the T1 return is presently charged out. "R" indicates that a

reassessment may be pending. Accessing the T1 On-line Charge-out will provide more

detail.

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• ELEMENT – This information replaces the former "REASON." It is obtained when the

stall code is set and reflects where the stall should be resolved.

If additional information is required access TAPMA-IDENT (RAP-Suppress), or leave blank if

not applicable. This data is provided so that the list reviewer may determine if the account is the

object of an action by another section and provides a contact name.

Form T718, Memorandum to Collections Section

With the implementation of the Automated CINDAC stall code System transcripts T718A and

T718B have become obsolete. This form will now have limited uses with regard to individual

taxpayer's CINDAC accounts and will be used predominantly for CORPAC and Sub-Ledger

accounts.

Boxes have been included to identify:

• Minister's Mail received;

• Request for Adjustment received;

• Notice of Objection received;

• Notice of Appeal received; and

• $10,000 + – This box will be ticked by Appeals Branch in the case of a Notice of

Objection or Appeal, when the arrears balance outstanding is $10,000 or greater, so that

the Appeals Section screener will determine its priority and assign the file immediately.

Form T718 is a three-page, carbon-sensitive form. The distribution is self-evident. The Possible

Decrease $ amount can only be accurately determined when an adjustment is prepared and will

be indicated on copies 2 and 3.

The Notice of Confirmation date and Tax Court of Canada (TCC)/Federal Court of Appeal

(FCA) decision date relate to Notices of Objection or Appeal and will be inserted by the Appeals

Section. These dates are required by Collections because legal action to collect amounts in

dispute will be delayed 90 days after the CRA has formally responded to the taxpayer's

objection. If the taxpayer appeals the CRA's response to the courts, collection proceedings will

be further delayed until a court renders its decision.

Preparation and distribution

CORPAC, PAYDAC or Sub-Ledger Accounts

The memorandum will be completed at the:

• Commissioner's Office for Minister's Mail;

• Audit Section or T2 Assessing for Request for adjustment on Corporations;

• Source Deductions Review and Control for Request for Adjustment on PAYDAC

Accounts;

• Accounts Sections for Request for Adjustments on Sub-Ledger Accounts; and

• Appeals Branch for Notices of Objection or Appeal.

Copy 1 will be detached and forwarded to the applicable TSO Revenue Collections Section.

Copies 2 and 3 will remain with the correspondence, request or notice.

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Copy 2 will be completed and forwarded to Revenue Collections:

• By the Commissioner's Office when they are advised that the reply to the taxpayer has

been signed and released.

• By Audit Section, or T2 Assessing, or Accounts, or Source Deductions' Review and

Control to advise that there is either No Adjustment, or an adjustment is prepared and the

Possible Decrease.

• By the TSO or TC Appeals Section, in the case of a Notice of Objection to provide a

Notice of Confirmation date for upholding or adjusting the assessment or reassessment.

Legal Collection Action can resume 90 days later.

• By the TSO or TC Appeals Section, in the case of a Notice of Appeal to provide the

Decision Date from the Tax Court or Federal Court.

CINDAC Accounts

Appeals will complete the memorandum when a Notice of Objection or Appeal is received (the

stall code will be set through the automated CINDAC System). Copy 1 will be detached and

forwarded to the appropriate Revenue Collection Section. Copies 2 and 3 will remain with the

Notice of Objection or Appeal. In the case of a Notice of Objection, the TSO or TC Appeals

Section will provide a Notice of Confirmation date on Copy 2, when the assessment or

reassessment is upheld or adjusted. For a Notice of Appeal, they will indicate the Decision Date

from the Tax Court of Canada or the Federal Court of Appeal. As a result of either of the

foregoing situations, Revenue Collections can delete the CINDAC stall code and proceed with

collection action.

Assessing, or Audit will complete Copy 2, when an adjustment is prepared for an individual,

whose CINDAC Account is in TSO Request Status, to advise Revenue Collections of the

Decrease amount so that action on the remaining arrears balance can resume. Copy 1 will be

destroyed and Copy 3 can be retained for their records. It is not necessary to complete this form

when the account is not TSO Request or there is no adjustment. If there is no adjustment

Assessing or Audit should delete the stall code, since a reassessment program (RAP) Adjustment

will delete it automatically.

Accounts will complete Copy 2 when an adjustment or transfer is prepared on a CINDAC

account in TSO Request status to inform Revenue Collections of the Decrease amount.

A-11.2.14 AIMS information


Closing a file

All files in a case should be processed as a package for ease in the final review and recording of

results. However, in some situations it may be necessary or preferable to process a return or a file

before the remainder of the file or the case (e.g. one return in a file is nearing a statute-barred

date, or a secondary file is ready for processing but the principal file will not be ready for some

time). In these situations, consider the guidelines that follow:

• If one return is nearing a statute-barred date, process all returns in that file at the same

time if unable to obtain a waiver. If not practical, control the processing of the single

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return by making it a separate Secondary file, or by maintaining an alternate method,

such as using the Comments area of Screen 4.

If a secondary file is processed:

• Add it to the case by selecting Screen 2: Add A File (Option F6), and note the new File

No. Ensure that the information entered only relates to the single return processed (e.g.

Gross Income, ITC, Audit Period, Statute-Barred Dates, Waiver). Then, select Screen 5:

Update File Results (Option F7) and enter the information required to complete the new

file.

• Update the original inventory file by selecting Screen 2: Update File (Option F7). Ensure

that the information to reflect the remaining returns is revised (e.g. Audit Period, Statute-

Barred Date).

• Remember that there is more than one file when finalizing the case.

If a secondary file is not initiated:

• When processing the remaining returns at a later date, include the priority year in the

Years to be Reassessed fields when completing Screen 5.

• Include the results in the Code and Amount fields at the bottom of this screen.

• If all returns associated with a "fast-track" or secondary file are ready for processing

substantially in advance of the principal file, complete Screen 5 to remove it from

inventory. However, until the case is either complete or in error status, a completed file

will still be included in inventory reports and assigned Status Code 9.

• If an Audit case has been referred to and subsequently accepted by Enforcement, the

referring auditor is not to complete the audit results Screen as Enforcement will do so

when issuing the civil reassessments. AIMS will obtain certain information from the

Supp (SI) to indicate that the Audit portion of the case is finished for purposes of

recording results. For more information, go to10.11.8, Referrals to the Enforcement

Division.

A case cannot be closed with zero hours, except for Program 71, SR & ED non-refundable

claims, against which only science hours may be charged.

A file cannot be closed if an attached Supp is outstanding. This process does not apply if:

• A Supp (TA) is attached to a T file, because it is a different principal file, or

• A Supp (SI) is involved, because the civil activity (Screen 5) is completed after the

criminal activity:

• the date File referred to Justice is present and there is an entry in # Years and Tax

recommended for Justice;

• the date Supp completed in stage 3 and SI Supp completion date is present with a

completion type of 12, 14, or 21;

• the date of civil reassessment is present; or

• the status code is either 04 (down-screened) or 09 (completed).

Function keys

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AIMS uses standard function keys in addition to the Enter key to generate certain actions; these

function keys are standard throughout AIMS. Function keys that are valid for a particular screen

are displayed on the bottom line of that screen; all other function keys are invalid and will

produce no action. If display space does not permit, the CLEAR key reference is not shown;

however, the function is still valid.

The list that follows, details the function keys used within AIMS (note that these keys are

different when working in Platinum):

F1: Help

F2: Force Save

F3: Previous Menu

F4: Main Menu

F5: Français / English

F6: Add a new case, file, or Supp

F7: Update an existing case, file, or Supp

F8: Down-screen a case, file, or Supp

F9: Browse a case, file, or Supp

F10: New Action

F11: Delete a record (error correction menu only)

F12: Browse all related files, Supps

PA1: Page Up / Back (previous page)

PA2: Page Down / Forward (next page)

Enter: Validate / Proceed

Clear: Exit AIMS

Order of keying

The following table is a summary of the required order of keying depending upon the various

actions available; remember to note the new number(s) generated when adding a case, file, or

Supp (App)/(Val)/(TA)/(Int):

Screen Action No Keying Order Function Key

Case Add 1 F6

Update 1 Case No; File No F7

Down-screen 1 Case No; File No F8

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File Add 2 Case No F6

Update 2 Case No; File No F7

Down-screen 2 Case No; File No F8

Update assignment 3 Case No; File No F7

Update comments 4 Case No; File No F7

Update file results 5 - 8 Case No; File No F7

App Add A Case No; File No F6

Update A Supp No; File No F7

Down-screen A Supp No; File No F8

Val Add B Case No; File No F6

Update B Supp No; File No F7

Down-screen B Supp No; File No F8

TA Add C Case No; (P) File No F6

Update Info C Case No; (TA) File No F7

Update Delays D Case No; (TA) File No F7

Int Add E Case No; File No F6

Update E Supp No; File No F7

Invest Add Principal G Case No; (P) File No F6

Update G-K Case No; File No F7

SR & ED Add L Case No; File No F6

Update L Case No; File No F7

FTC Add N Case No; File No F6

Update N Case No; File No F7

Screen 5 – Recording Audit Results and Making Entries

When making an entry in screen 5:

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• Enter amounts in dollars only. If an adjustment exceeds nine digits (i.e. is $1 billion or

over), enter 9s to completely fill the amount field. It is not necessary to fill all spaces.

• You must use a + or – sign for each code. The + sign indicates that taxable income or tax

payable will be increased; the – sign indicates a decrease.

• An entry is not required in every field; entries are required only to record each applicable

code.

• The order in which the fields are completed and the codes listed is not important;

however, use each code only once.

• To revise or delete a code, sign or amount, use the EOF or Delete key, or type over the

existing entry.

• If there are insufficient fields to record all applicable codes, use the priority indicated

below. If there are insufficient fields within each grouping, use the codes having the

greatest impact on tax results (+ or –).

Priority grouping Type code range

RAPs and results 001 – 163, 324 – 325, 379 – 380

Non-RAP results 201 – 299

App and Val results 301 – 312

Provincial results 334 – 338

All others

Check-digit

Code 999 is hard-coded on the screen and represents a check-digit to verify the accuracy of the

entry of the other reason codes. AIMS will also calculate this amount and advise of an entry

error.

If File Concurrence is greater than 0 (i.e. a change file), the 999 amount must equal the net total

for all other Reason Codes.

Three-part entry

If an entry in this area is made, the file must have all three of the following components:

• A valid reason code;

• A sign + or –; and

• An amount.

Results Missing

If there is a valid entry in "Years to be Reassessed," there must be at least one Reason Code other

than 999.

Incompatible Concurrence and Reason Codes

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If File Concurrence = 0 (i.e. a no-change file), no entry has to be made in any Reason Code

except codes 288, 407, 647, 901where applicable.

If File Concurrence is greater than 0 (i.e. a change file), there must be at least one Reason Code

other than 999.

Supp Value Change

If a value change has been recorded on a Supp as a result of a referral on the file, certain reason

codes will be inserted in this area by AIMS as a reminder. Enter the amount related to each code

and delete the others. If no codes are applicable, delete them all by using the EOF key, do not

enter + 0 for these reason codes. This applies to the following referrals:

Sup Section Reason Codes

App Real Estate Appraisals 304, 306, 310, 312

Val Business Equity Valuations 301, 303, 307, 309

Int International Audit (Tort) 316, 349

Penalty 234 or 289

With Penalty Code 3, an entry for Reason Code 234 or 289 must be used.

If Reason Code 234 or 289 is used, it means that a penalty has been applied; consequently,

Penalty Code must be either 3 or 4.

Initial Assessment 274 or 299

If there is a valid entry in Years to be Initially Assessed, the Reason Code 274 or 299 must be

used.

If the Reason Code 274 is used, the amount must not be greater than the amount for Reason

Code 001 applicable to the initially assessed year.

The use of Reason Code 274 or 299 means that there is an initial assessment; consequently Years

to be Initially Assessed must contain at least one valid entry.

Tax Expected – 001, 101, 111, 299

A valid entry in Federal Tax Expected must use at least one of the Reason Codes – 001, 101,

111, or 299.

With the use of one of these four Reason Codes, there must also be an amount in Federal Tax

Expected.

Transfer to Enforcement 248 or 298

If a case has been referred to and accepted by Enforcement, this screen is completed by

Enforcement when issuing the civil reassessment. Consequently, reason codes 248 and 298 are

no longer valid codes for data entry; the amount for code 298 will be system-generated for

reporting purposes.

Reason Codes for Recording Audit Results

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For details, see the Computerized Coding System (CCS) Manual, or T20ST Area ‘D' Coding

System training course manual, revised February, 1990.]

YA = years audited/adjusted

SY = subsequent years

Income Tax Codes

Income Tax

YA SY YA SY Description

001 003 Changes to taxable incomes

101 103 Part I tax changes

111 113 Parts I.3, II, IV, VI, & XIV tax changes

121 123 All other tax changes

151 153 PG1 tax changes/GST/HST rebate changes

161 163 PG5 tax changes/CPP and UIC changes

011 013 131 133 Appeals/prior audit adjustments

021 023 141 143 Taxpayer requested adjustments

201 203 207 209 Adjustments transferred to others: T1 returns

211 213 207 209 Adjustments transferred to others: T2 returns

221 223 207 209 Adjustments transferred to others: other returns

224 225 279 280 Taxpayer requested adjustments denied

224 225 279 280 Taxpayer requested adjustments denied

234 289 Penalties

288 Interest

235 239 Revisions to TAPMA or CORPAC data

244 Reimbursements of SH appropriations allowed

245 Net amounts of slower/faster write-offs

247 297 Competent Authority referrals

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248 298 Adjustments referred to Enforcement (See Note 1)

274 299 Initial assessments/delinquent returns

Note 1: Code 298 is system-generated when an Audit case is accepted by Enforcement.

301 303 307 309 Assistance from Business Equity Valuations

304 306 310 312 Assistance from Real Estate Appraisals

316 349 International transactions (Tort)

317 359 Assistance from Tax Avoidance

318 369 Assistance from ECAS

319 370 SR & ED changes processed by program type other than

70

324 325 379 380 Adjustments transferred from other Audit sections

371 Assistance from Science Advisors

334 MJ income reallocation: to agreeing provinces

335 MJ income reallocation: from agreeing provinces

336 389 Changes to agreeing provinces' taxable incomes/tax credits

337 MJ reallocation: to/from foreign jurisdictions

338 MJ reallocation: among non-agreeing provinces

407 Changes to Provincial tax

601 FTS non-qualified renunciations: CEE

601 FTS non-qualified renunciations: CDE

603 FTS non-qualified renunciations: COGPE

604 FTS non-qualified renunciations: CRCS

605 FTS non-qualified renunciations: DCEE

647 Adjustments referred to Tax Avoidance

648 CBITC non-qualified ITC not revoked

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649 Changes to capital gains deductions

651 Sales Reported in Audit Period

652 Unreported Sales Assessed

GST/HST/Excise Codes

GST/HST & Excise

YA SY YA SY Description

901 Total revenue change (total adjustments + administrative

penalty + interest + Section 285 penalty)

A-11.2.15 Instructions for completing Form T287, Priority assessments and reassessments

control


The auditor completes three-part Form T287, as follows:

• Statute Barred Date;

• Follow-up Date – Insert date that is ten (10) working days prior to State Barred Date;

• Name of Individual, Corporation, or Trust;

• SIN, corporation number, or Account No.;

• Notice to be issued not later than – Insert last day on which notice may be issued;

• Date of last (Re)Assessment;

• Type of Return;

• Year(s) of return(s);

• Tax Direction – Increase or Decrease;

• ORIGINATED BY, Name, and Tel. No.;

• Reason for Priority; and

• Date in and Date out – Insert date form initiated; and date sent to calculation unit.

A-11.2.16 Permanent document folder and retention period – Under review


For T1 and/or T3

Information to be retained for a period exceeding five years or indefinitely

Documents that have a useful life in excess of five years or considered to have an indefinite life

by the originator include:

1. Special elections, agreements, and returns:

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Form Title

T123 Election on Disposition of Canadian Securities

T664 Election to Report a Capital Gain on Property Owned at

the End of February 22, 1994

T997-2 Employment Tax Credit Discrepancies

T1157 Election for Child Support Payments

T1158 Registration of Family Support Payments

T2011 Election to Average Income by Farmers and Fisherman

T2022 Election in Respect of the Sale of Debts Receivable

T2023 Election in Respect of Loans from Non-Residents

T2029 Waiver in respect of the normal reassessment period or

extended reassessment period

T2034 Election to Establish Inventory Unit Prices for Animals

T2047 Agreement in Respect of Unpaid Amounts

T2049 Agreement in Respect of Unpaid Remuneration

T2057 Election on Disposition of Property by a Taxpayer to a

Taxable Canadian Corporation

T2058 Election on Disposition of Property by a Partnership to a

Taxable Canadian Corporation

T2059 Election on Disposition of Property by a Taxpayer to a

Canadian Partnership

T2060 Election for Disposition of Property upon Cessation of

Partnership

T2061 Election to Defer Capital Gains on Property Otherwise

Deemed Disposed of

T2062 Request by a Non-Resident of Canada for a Certificate of

Compliance Related to the Disposition of Taxable

Canadian Property

T2062A Request by a Non-Resident of Canada for a Certificate of

Compliance Related to the Disposition of Canadian

Resource or Timber Resource Property, Canadian Real

Property (Other Than Capital Property), or Depreciable

Taxable Canadian Property

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T2062B Notice of Disposition of a Life Insurance Policy in Canada

by a Non-Resident of Canada

T2064 Certificate with Respect to the Proposed Disposition of

Property of a Non Resident of Canada

T2065(A) Election by a Partnership in Respect of Adjusted Cost Base

of a Partnership Interest

T2065(E) and (F) Determination of Deemed Cost of a Partnership Interest

T2068 Certificate with Respect to the Disposition of Property of a

Non Resident of Canada

T2074 For 1990 and prior: Non Resident Commitment to Pay Tax

For 1991 and subsequent – Election, under Subsection

159(4) of the ITA, to Defer Payment of Income Tax on the

Deemed Disposition of Property

T2075 Election to Defer Payment of Income Tax, under

Subsection 159(5) of the Income Tax Act by a Deceased

Taxpayer's Legal Representative or Trustee

T2076 Valuation Day Value Election for Capital Properties

owned on December 31, 1971

T2079 Election Re: Expropriation Assets Acquired as

Compensation for or a Consideration for Sale of Foreign

Property Taken by or Sold to Foreign Issuer

T2091(IND) Designation of a Property as a Principal Residence by an

Individual (Other Than a Personal Trust)

T2101 Election for Gains on Shares of a Corporation Becoming

Public

T2140 Part V Tax Return - Tax on Non-Qualified Investments of a

Registered Charity

T2145 Election in Respect of the Leasing of Property

T2146 Election in Respect of Assigned Leases or Subleased

Property

T2201 Disability Tax Credit Certificate

T2211 Calculation of Deemed Proceeds and Capital Gain Deferral

on disposition of shares of a Small Business Corporation

T2216 Election in Respect of a Small Business Bond

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T2218 Joint Election in Respect of a Small Business Bond

T977 2 Employment Tax Credit Discrepancies

CPT16 Application for Exemption From Coverage under the

Canada Pension Plan on Account of Religious Beliefs

CPP2015 Statement of Earnings Source Deduction (Health and

Welfare)

E.P.1602 Notice of Acceptance of Pollution Abatement Property

CGC 5030-20

CGC 5030-21

2. Letters of authority regarding representatives, covering multiple periods;

3. Net capital losses carried forward;

4. Schedule of non-capital, and/or restricted farm losses;

5. Trust deeds, separation and divorce agreements;

6. Advance income tax rulings;

7. Other rulings and correspondence regarding transactions;

8. Pension plan funding;

9. Transactions with other parties (shareholders, goodwill, etc.);

10. Family court maintenance orders;

11. Legal document regarding custody and control of child;

12. Certificate regarding vow of perpetual poverty;

13. Correspondence regarding election for past services;

14. Revisions to the capital cost of depreciable property or to the adjusted cost base (ACB) of

other capital property;

15. Details on the ACB, capital cost, and undepreciated capital cost for the rollover of property

on death or by inter vivos transfer;

16. Formal requirement to keep books and records;

17. Basic herd information;

18. Particulars of election under subsection 44(1) exchange of property;

19. Documentation to support Indian Status;

20. Limited Partnership Agreement;

21. Information requested for Determination of Residence;

22. Penalty Reports and advice to taxpayers;

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23. Collection documentation relating to problems involving extensive research, or other selected

accounts whether or not they have tax outstanding; and

24. Remission order.

Information to be retained for a five year period

25. Special elections, agreements and returns:

CPT20 Election to Pay Canada Pension Contributions

T1-OVP Individual Tax Return for RRSP Excess Contributions

T1E-OVP Individual Tax Return for RESP Excess Contributions for ____

T123* Election on Disposition of Canadian Securities

T202 Bankruptcy Discharge Order, including Pre and Post Bankruptcy

information

T913 Part XI.2 Tax Return - Tax for the Disposition of Certain

Properties

T2016 Part XIII Tax Return - Tax on Income from Canada of Approved

Non-Resident Insurers

T2022* Election in Respect of the Sale of Debts Receivable

T2023* Election in Respect of Loans from Non-Residents

T2026 Part XII Tax Return - Tax on Payments to the Crown by a Tax-

Exempt Person

T2034* Election to Establish Inventory Unit Prices for Animals

T2047 Agreement in Respect of Unpaid Amounts

T2049 Agreement in Respect of Unpaid Remuneration

T2057* Election on Disposition of Property by a Taxpayer to a Taxable

Canadian Corporation

T2058* Election on Disposition of Property by a Partnership to a Taxable

Canadian Corporation

T2059* Election on Disposition of Property by a Taxpayer to a Canadian

Partnership

T2060* Election for Disposition of Property Upon Cessation of

Partnership

T2065* Determination of Adjusted Cost Base of a Partnership Interest

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T2100 Joint Election in Respect of an Insurance Business Transferred by

a Non-Resident Insurer

T2140 Part V Tax Return - Tax on Non-Qualified Investments of a

Registered Charity

T2211* Calculation of Deemed Proceeds of Disposition and the Amount

of Capital Gains Allowed for Deferment Upon the Disposition of

Shares of the Capital Stock of a Small Business Corporation

T2216* Election in Respect of a Small Business Development Bond

T2218* Election in Respect of a Small Business Bond

T2220 Transfer from an RRSP or a RRIF to another RRSP or RRIF on

Breakdown of Marriage or Common-law Partnership

T3012A Tax Deduction Waiver on the Refund of Your Unused RRSP

Contributions Made in ____

TD3F Fisher's Election to Have Tax Deduced at Source

Note: *Invalid elections only

26. Net worth statements (no working papers);

27. Audit Reports (no working papers);

28. Waiver on Deductions at Source;

29. Request for refund of instalments;

30. Election to defer taxes payable over time;

31. Rulings cross referenced with T4 File;

32. Change in fiscal year ends;

33. Permission to destroy books and records;

34. Multiple unit residential construction certificates;

35. T3012A Copy 4 of all approved and denied T3012As;

36. TX73 Delinquent action docket for detailed examinations;

37. T980 Office examination/assessing review report;

38. Taxpayer relief provisions;

39. Letters requesting refund be applied to a spouse or common-law partner; and

40. TX20/TX21 for which there is no T1 Return.

For T2


Special return file storage

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This schedule indicates in which permanent document (PD) folder the following special returns

are to be stored and their retention period after they are processed.

Form Type Stored in the PD folder of the: Retention

5 years Indefinite

See Note 1

T1E-OVP return individual X

T123 election taxpayer X

T913 return institution or public authority X

T1046 election corporation acquiring property and of

the disposing taxpayer X

T2004 election credit union X

T2010 election acquiring corporation and of the

disposing taxpayer X

T2012 election mortgage investment corporation X

T2016 return non-resident insurance company X

T2022 election (joint) vendor and of the purchaser taxpayers X

T2023 election resident corporation and of the

subsidiary corporation X

T2026 return tax exempt person X

T2027 election parent corporation and of the

subsidiary corporation X


T2035 election joint exploration corporation and of

the shareholder corporation X

T2043 return private corporation X

T2044 return financial institution X

T2045 agreement financial institution X

T2046 return stored in HQ Charities Division X

T2047 agreement

(joint)

debtor and of the creditor taxpayers X

T2049 agreement debtor and of the creditor taxpayers X

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(joint)

T2053 election private corporation X

T2054 election private corporation X

T2054A election private corporation X

T2055 election mutual fund corporation X

T2056 return private corporation X

T2057 election (joint) taxpayer and of the corporation X

T2058 election (joint) partnership (or partners) and of the

corporation X

T2059 election (joint) taxpayer and of the partnership (or

partners) X

T2060 election former partners X

T2063 election non-resident owned investment

corporation X

T2067 election corporation (public) X

T2073 election corporation (private) X

T2076 election individual X


T2096 return return of income of the taxpayer N/A

T2099 return return of income of the corporation N/A

T2100 election (joint) non-resident insurer and of the related

corporation X

T2101 election individual X

T2107 election resident corporation X

T2140 return stored in HQ Charities Division X

T2141 return return of income of the corporation X

T2142 return corporation X

T2143 election mutual fund corporation or of the

investment corporation X

T2147 return large corporation X

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T2148 return financial institution X

T2149 return insurance corporation X

T2150 agreement related corporation X

T2152 return labour-sponsored venture capital

corporation X

T2156 agreement

(joint)

debtor and of the related corporation

or partnership X

T2211 calculation both parties to the transfer X

T2216 election lender and of the borrower X

T2218 election lender and of the borrower X

T3009 election employer's corporation and with the

T4A file X

T3018 election trust X

S 20(24) election both parties to the election X

S 132.2 election both parties to the election X

S 184(3) election corporation with the T2054 that it

relates to X

S 184(3.1) election corporation with the T2054 that it

relates to X

S 184(3.2) election corporation with the T2054 that it

relates to X

Reg. 500 election non-resident owned investment

corporation X

Reg. 501 election corporation X

Note 1: five years if the form is invalid


A-11.2.18 Sample notice of assessment

Appendix removed

A-11.2.19 Sample notice of reassessment

Appendix removed

A-11.2.20 Revenue and deduction codes

Appendix removed

A-11.2.21 Penalty Recommendation Report

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Published May 2015


For the imposition of a penalty under subsection 163(2) of the Income Tax Act.

(1) Taxpayer:

Name: ProgrAmaccountName

Number: Tax_Sin Bin_Corp_No

Tax Years: Tax_Audit_Period_From, to Tax_Audit_Period_To

(2) Address:

Tax_Address1

Tax_City

Tax_Province Tax_Postal_Code

(3) Type of business:

(4) Source of lead:

(5) Nature and explanation of adjustments for penalty considerations:

(6) Audit evidence of "knowingly" or "gross negligence":

Provide rationales to responses for (6-a) to (6-l). All statements must be well-documented and

supported by facts.

(6-a) Is the adjustment material?

(6-b) Was the taxpayer involved in maintaining the books and records and preparing their

returns? If not, who maintained the books and records and prepared their returns?

(6-c) Was the taxpayer knowledgeable in tax matters?

(6-d) Did the taxpayer have sufficient knowledge of their income and expenses?

(6-e) Was the taxpayer aware that a certain degree of care must be taken to prepare their

returns?

(6-f) Did the taxpayer have prior contact with the Canada Revenue Agency and know the

importance of filing returns?

(6-g) Has the taxpayer reported similar income or deducted a similar amount in the past?

(6-h) Did the taxpayer examine and sign their returns (if not, why not)? For electronically

filed returns, which forms did the taxpayer sign? For NETFILE returns, did the

taxpayer electronically certify their returns were complete and accurate?

(6-i) Did the taxpayer provide proper information to their representative?

(6-j) Did the taxpayer keep adequate books and records? If not, did the taxpayer agree in

writing to maintain better books and records?

(6-k) Is there an increase in net worth or lifestyle that is not compatible with the taxpayer's

reported income?

(6-l) Other:

(7) Taxpayer’s contact and representations:

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(8) Description and location of documentary audit evidence:

(9) Conclusion:

Prepared by : ___________________________________

Auditor

Date: _________________

Recommended by: ___________________________________

Team Leader

Date: _________________

Approved by : ___________________________________

Manager or Assistant Director, Audit

Date: _________________

A-11.2.22 REOP Report – Under review

REOP Report

Taxpayer/Registrant:

Address;

BN/SIN:

Case No.: File No.: Date:

Type of Operation:

Period under Review:

Procedure Comments WP Ref

1. Analysis of losses.

2. Profit and loss experience

in past years.

3. Education, background,

training and experience.

4. Development of the

operation to date.

5. Planned and intended

course of action.

6. Capability of the venture

as capitalized to show a

profit after charging

capital cost allowance.

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7. Significance and growth

of gross revenue.

8. Extent of activity in

relation to that of a

business of a comparable

size.

9. Time spent on the

activity in comparison to

time spent in employment

or other income

producing activity.

10. Personal benefit enjoyed

by the taxpayer/registrant

because of the activity.

11. Other Issues

12. Related Court Cases

Conclusion:

Recommendation:

Auditor: Date:

Team Leader: Date:

REOP Criteria Worksheet

132

Published May 2015

Criteria Yes No Comments/Explanation

1. Profit and loss experience

in the past

2. Taxpayer/registrant's

training

3. Taxpayer/registrant's

intended course of action

4. Capability after CCA

5. Significance and growth of

gross revenue

6. Extent of activity in

relation to businesses of

similar size

7. Time spent on the activity

in comparison to that spent

in employment or other

income producing activity

8. Personal benefit enjoyed by

the taxpayer/registrant

resulting from the activity

9. Other considerations

specific to the file

A-11.2.23 Farm Loss Report – Under review


The purpose of the following checklist is to obtain the necessary information to determine the

appropriate treatment of farm losses for income tax purposes.

General information

Taxpayer/registrant's Name:

Address:

BN/SIN #:

Years audited:

Declared farm losses:

Farming business

Comments and

WP Ref.

1. Farm name and address.

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2. How were the farm, land, and buildings acquired

(purchased, inherited, etc.) etc.?

a) purchase price

b) date of acquisition

c) property taxes

3. Details about the land:

a) condition of the land

b) location of the land in relation to urban development

c) area of land that is:

i) cultivated

ii) not cultivated

iii) not in use

iv) total area

4. The farm:

a) type (dairy, ranch, grain, fruit, etc.)

b) details about the operation

c) significant changes in operation

5. Description and condition of the buildings:

a) house

b) barn(s)

c) other buildings

6. Farm machinery:

a) machines used

b) date of acquisition

c) general condition of each

7. Livestock:

a) type

b) number of head

c) class at the end of each year being audited

d) estimated value, if possible

8. Racehorses:

a) inventory at the end of each year

b) list of horses that took part in a race [name of the horse,

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number of races, amount of winnings, lineage (if known),

and amount paid for the horse ]

c) number of horses that did not take part in any races and the

reasons why

d) training received by each horse

9. Other inventory:

a) Nature

b) Quantity

c) Value

10. Crops:

a) type of crop

b) number of acres cultivated

c) production (yield per acre)

11. Trees:

a) types of trees

b) approximate quantity of each type

c) approximate value of each type

d) date when the trees were planted

e) reason the trees were planted (was it to avoid erosion?)

f) time when the taxpayer/registrant intends to market the

produce

g) estimate of the production per fruit tree in quantity and

value

12. Describe other farming activities including custom combining,

crop share arrangements, etc.

13. Measurement of farm activity compared to activity on farms

of a similar nature.

14. Accounting method used to report income, i.e., cash or

accrual.

Losses

1. Loss history.

2. Reasons for losses in early years.

3. Way in which the losses in preceding years were

assessed, i.e. full loss, restricted loss, or no

allowable loss.

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4. Amount of loss deducted by the

taxpayer/registrant in the current year and the

extent of the deduction, i.e. full loss, restricted

loss, etc.

5. Reasons for any changes in the treatment of farm

losses, i.e. full loss, restricted loss, or no allowable

loss.

6. Reasons for significant changes in farm income or

expenditures (i.e., hail, fire, illness, etc.) or for

unusual income.

Profitability

1. Proposed action plan to make the farm profitable.

2. Financial details of potential profitability and the

amounts at issue.

Working Capital

1. Amount of available working capital

2. Does the taxpayer/registrant have the capital

needed to finance expansion of the farm?

Loans

1. Bank loans:

a) date obtained

b) purpose

c) amount

2. Other loans:

a) lender

b) date obtained

c) purpose

d) amount

Other Information for Farm Loss Analysis

1. To what extent does the taxpayer/registrant live

on the farm: all year, certain seasons, weekends,

etc.?

2. Distance between the taxpayer/registrant's

principal residence and the farm if the

taxpayer/registrant does not live on the farm all

year.

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3. Distance between the residence and place of

employment or chief employment.

4. Does the taxpayer/registrant manage the property

to retire there or to sell it? If so, provide details.

5. Number of riding horses used for personal

purposes and kept on the farm.

6. Does the taxpayer/registrant have a swimming

pool or a pond? If so, provide details.

7. Describe the taxpayer/registrant's agricultural

experience and training.

8. Personal expenses deducted (type and amount).

9. Capital deductions (type and amount).

10. Personal consumption (quantity and value).

11. Describe other sources of income, if applicable.

12. Source and amount of the spouse or common-law

partner's income in the current year.

13. Did the taxpayer/registrant receive or is the

taxpayer/registrant eligible for grants from a

provincial government or other organizations? If

so, provide details.

Additional information with respect to section 31 of the ITA

1. Extent of the review conducted to determine the

personal or capital items included in expenses.

2. Exceptional circumstances especially losses due

to the loss of livestock, the development of

animal races or grain types, adverse economic

conditions, etc.

3. Details of the capital invested and income for the

farm, for other sources of income, and for other

non-income-producing investments, particularly

the principal residence.

4. Details of the time devoted to farming in

comparison with the time devoted to other

income-producing activities.

5. Extent to which the taxpayer/registrant relies or

can reasonably expect to rely on farming as a

livelihood.

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6. Details of the taxpayer/registrant's plans to

develop the farm and the progress achieved so far.

7. Details of the taxpayer/registrant's chief

occupation and future prospects.

8. Details of all apparent changes in occupation. For

more information see 29.4.0, Farm losses and

restricted farm losses.

9. Nature of the scientific research program.

10. Details of important events between the end of the

period being audited and the date of the actual

audit.

Conclusion

Yes No Ref. WP

1. The taxpayer/registrant belongs to the following

classes of farmers:

• Class 1: taxpayers whose farming losses are

fully deductible in the year against the

taxpayer's income from any other source.

• Class 2: taxpayers whose farming losses

while deductible in the year, are restricted

under subsection 31(1) to a maximum of

$8,750, with any excess loss, referred to as a

"restricted farm loss," deductible from any

farming income in future years.

• Class 3: Those taxpayers whose farming

losses are not deductible at all as there is no

reasonable expectation of profit from the

taxpayer's farming activities.

2. Farm losses were restricted for one of the

following reasons:

• The taxpayer/registrant is not operating a

farming business – paragraph 18(1)(h) of

the ITA.

• The farming activity is insufficient to realize

a profit or does not hold a reasonable

expectation of a profit – paragraph 18(1)(h)

of the ITA.

• The farming business is a secondary activity

of a farmer who belongs to class 2 – section

138

Published May 2015

31 of the ITA.

3. An inventory adjustment is necessary.

4. Expenses were disallowed for the following

reasons:

• personal expenses

• unreasonable expenses

• capital expenditures

Auditor: Date:

Team Leader: Date:

Comments re Specific farm losses checklist items

Number 3: "Details of the capital invested and cash receipts for the farm, for other sources of

income, and for other non-income-producing investments, including the personal residence"

• Capital expenditures intended primarily to increase the value of the property must be

distinguished from expenditures intended primarily to generate farm income; e.g.

expenditures on a residence or landscaping vs. expenditures on a barn and farm

equipment.

Number 4: "Details of the time devoted to farming in comparison with the time devoted to other

income-producing activities"

• If the taxpayer claims to devote a considerable number of hours a week to the farming

business, obtain a breakdown of the hours spent on the major activities to determine

whether the time spent is reasonable. If the taxpayer is self-employed, it may also be

necessary to verify the time devoted to that business or profession.

• The comparison between the time devoted to the farm and the time devoted to the other

principal occupation may be the determining factor as to whether farming is the primary

activity.

Number 5: "Extent to which the taxpayer relies or can reasonably expect to rely on farming as a

livelihood"

• If the farming business is operated to its full potential, will the income equal employment

or business income, or will it be sufficient to maintain the lifestyle to which the taxpayer

has become accustomed? To answer these questions:

• determine the potential farm income and the approximate cost of the current lifestyle;

and

• note the personal consumption, in any, of products from the farm.

Number 6: "Details of the taxpayer's plans to develop the farm and the progress achieved to date"

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• Describe the progress in the taxpayer's plan to develop the farm and compare the

projected financial performance with that achieved so far in the Audit Report.

• State whether the projected financial performance is reasonable, and the estimated time

required in attaining the optimum operational level.

• If developing the farming business involves considerable capital expenditures, determine

if financing is required and what other sources of funds are available.

Number 7: "Details of the taxpayer's principal occupation and future prospects"

• If the taxpayer is self-employed or a majority shareholder of a corporation, the auditor

should describe the kind of business or profession, provide a brief history of what has

been achieved to date, and enumerate the taxpayer's plans.

• If the taxpayer is an employee, the auditor should provide a brief description of the job

and of any plans that the taxpayer has.

Number 10: "Details of all important events between the end of the period being audited and the

date of the actual audit"

• The auditor should comment on any significant events between the end of the period

being audited and the date when the audit is carried out. These events include such things

as:

• an increase or decrease in farm activity or the capital invested;

• changes in the taxpayer's personal involvement in the farming operations; and

• changes in the taxpayer's principal occupation.

A-11.2.24 Income Tax Audit Division Internal Taxpayer Relief Recommendation Form


SECTION 1: FILE INFORMATION Income Tax Account Number:

Account Name:

Trade Name: Income Tax Return Type:

Income Tax Year(s) Audited: Period(s) To Be Waived: From: To: YY/MM/DD YY/MM/DD

Case Number(s):

File Number(s):

TAXPAYER RELIEF REGISTRY NUMBER(S):

(Completed by Taxpayer Relief officer upon file closing)

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Published May 2015

REQUEST TYPE(S) √

Period(s): From: To:

YY/MM/DD YY/MM/DD

Cancellation/Waiver of Penalties and/or Interest

Refunds/Reduction Beyond the Three Year Period

Late, Amended or Revoked Elections Please Note:

Request type Refunds/Reduction Beyond the Three Year Period is only valid for revenue type T1, T3 or TFSA.

Request type Late, Amended or Revoked Elections is not valid for revenue type TFSA.

REASON TYPE(S): √

Period(s): From: To:

YY/MM/DD YY/MM/DD

CRA Error

CRA Delay

Death/Accident/Serious Illness/Emotional or Mental Distress

Civil Disturbance

Voluntary Disclosure

Financial hardship/inability to pay

Financial hardship extension

Natural or man-made disaster

Other Circumstances Please Note:

Reason types Financial hardship/inability to pay and Financial hardship extension can only be used with request type Cancellation/waiver of penalties and/or interest.

Reason types Voluntary disclosure and Financial hardship extension cannot be combined with any other reason types.

SECTION 2: RELEVANT FACTS

Facts and Supporting Information

Provide relevant facts and details as to why the request is being made.

Include the timeline from the initial interview, proposal, representations, and closing of the file.

Provide a brief history indicating the hours spent on the file and whether other sections and/or other auditors have worked on it.

Provide the location of supporting documentation.

SECTION 3: ANALYSIS AND RECOMMENDATION

Analysis Provide an explanation of the reason the facts support a waiver of penalties and/or interest that will support the recommendation.

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Published May 2015

Recommendation Please ensure that the items in red have been customized to your file and that this line is deleted: The taxpayer relief guidelines found in Income Tax Information Circular, IC07-1, Taxpayer Relief Provisions allow penalties and/or interest to be waived under certain circumstances. I recommend that penalties and/or interest be waived on the year(s) Income Tax Returns for the period from (date) to (date).

Income Tax Auditor Name: Signature: Date:

SECTION 4: INCOME TAX TEAM LEADER APPROVAL

Decision of Income Tax Audit Team Leader: □ Recommendation Approved □ Recommendation Not Approved Comments:

Income Tax Audit Team Leader Name: Signature: Date:

SECTION 5: INDEPENDENT THIRD PARTY REVIEW

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Decision of Independent Third Party Reviewer: □ Recommendation Approved □ Recommendation Not Approved Comments:

Independent Third Party Reviewer Name:

Signature:

Independent Third Party Reviewer Title:

Date:

A-11.2.25 Assessment after Normal (Re)Assessment Period Recommendation Report

Recommendation report

(For the imposition of subsection 152(4) of the Income Tax Act (ITA) and, or subsection 298(4)

of the Excise Tax Act (ETA))

(1) Taxpayer:

Name:

Number:

(2) Address:

(3) Type of Business:

(4) Source of Lead:

(5) Nature and Explanation of Adjustments affected by misrepresentation or fraud:

(6) Audit evidence of “misrepresentation” or “fraud”:

Note: To reassess beyond the normal (re)assessment period, it is not necessary to assess the

“false statements or omissions” penalty of subsection 163(2) of the ITA or section 285 of the

ETA. Statute barred years may be opened whether or not this penalty has been considered.

Providing there is proof of misrepresentation attributable to neglect, carelessness or, the more

serious, wilful default, statute barred years may be opened up. Refer to the Penalty

Recommendation Report if the “false statements or omissions” penalty under subsection 163(2)

is warranted.

(6-a) Materiality of Amount:

(6-b) Preparation of Books, Records, & Tax Return(s):

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(6-c) Taxpayer’s Knowledge of Tax Matters:

(6-d) Taxpayer’s Knowledge of Income:

(6-e) Taxpayer’s Awareness of Degree of Care Required:

(6-f) Prior Contact with Agency:

(6-g) Similar Income in Past:

(6-h) Examination of Return Prior to Filing:

(6-i) Proper Information to Agent:

(6-j) Proper Books and Records:

(6-k) Increase in Net Worth that is Incompatible with Reported Income:

(6-l) Other:

(7) Taxpayer Contact, Representation and Defence:

(8) Description of documentary audit evidence and its location:

(9) Conclusion:

Prepared by : _____________________________________

(Auditor)

Date: _____________________

Approved by : _____________________________________

(Team Leader)

Date: _____________________

Appendix 11.3.0 Examples of forms and procedures used locally


The following forms and procedures are examples of those that have been developed locally to

assist with the administration of the audit at the finalization stage. They are included here as they

may have application in other TSO settings.

A-11.3.1 Routing slip for audit paper relating to paper returns

Explanatory notes for the Routing Slip:

1. Attach the Routing Slip to each principal file.

2. List the files that are sent to audit review with the principal file.

3. Indicate the date the case was sent out.

4. Attach a photocopy of the Routing Slip to each file that is included in the case that

is sent to audit review. Identify the file by circling which type of return. It is at the

left side of the taxpayer's name.

5. Audit review will detach the Routing Slip to keep it for its records.

ROUTING SLIP

From: Audit

Employee's Name: Group and Level:

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Telephone: Section and group:

File T1 T2 Other Taxpayer's Name Account No. Years

Principal

Secondary

Secondary

Secondary

Secondary

Secondary

Secondary

Secondary

Secondary

Secondary

Reference

Reference

Reference

Reference

Reference

Date sent out:

Check if applicable T287

Initial assessing: Years

A-11.3.2 Routing slip for audit papers relating to E-filed returns

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Published May 2015

A-11.3.3 Request for loss determination – T1

(Revised July 2013)

REFERRAL TO T1 NOTICE PRODUCTION

To: Notice Production Area

Tax Centre From:

Section:

Phone #:

Attention: Notice Production

146

Published May 2015

Section:

Re: Loss Determination or Redetermination

Please Issue a T67AM [ ] Notice Of Determination Of Loss, Or

[ ] Notice Of Re-Determination Of Loss To

Client's Name:

Sin or Bn #:

Address:

Year(s) Applicable:

T1 Calendar Year(s):

Non-capital loss is $

Net capital loss is $

Restricted farm loss is $

Farm loss is $

Limited partnership loss is $

Note: Complete only the section(s) that is(are) applicable.

A-11.3.4 Request for loss determination – T2

(Revised July 2013)

REFERRAL TO T2 NOTICE PRODUCTION

To: Notice Production Area

Tax Centre From:

Section:

Phone #:

Attention: T2 Notice Production

Section:

Re: Loss Determination or Redetermination

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Published May 2015

Please Issue A T67AM [ ] Notice Of Determination Of Loss, Or

[ ] Notice Of Re-Determination Of Loss To

Taxpayer's Name:

Corp or BN #:

Address:

Year(s) Applicable:

T2 Fiscal Year(s) Ending:

Non-capital loss is $

Net capital loss is $

Restricted farm loss is $

Farm loss is $

Limited partnership loss is $

Note: Complete only the section(s) that is(are) applicable.

A-11.3.5 Procedures and supporting forms – Pro-forma returns


This appendix relates to procedures and supporting forms for processing Pro-forma returns under

subsection 152(7) of the ITA.

When an auditor prepares either a T1 or T2 return or obtains a signed T1 or T2 return, an Initial

Assessment Update Information should be completed immediately to update RAPID. The auditor

should send the completed form to the Non-filer section, holding the return(s) until that section

returns the form. This form is filed with the working papers if the case is to be processed through

AIMS. If the case is not processed through AIMS the form is attached to the income tax return

and sent to the TC.

Initial Assessment Update Information Form

Initial Assessment – Update Information

To: Non-Filer Unit From:

Date:

Phone #:

Request for RAPI update regarding initial assessment

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Published May 2015

Please update the RAPI system with the following information about a tax return received from a

taxpayer or prepared by a tax auditor {RAPI must be updated within 60 days of receiving or

preparing the return(s)}:

Taxpayer Name: Account Number

Tax year(s) of the tax return(s) to be assessed is (are) as follows:

1. T-1 Calendar year(s)

2. T-2 Fiscal year(s) ending

The tax return(s) to be assessed is (are):

T-1 or T-2 return(s) received from the taxpayer

or

T-1 or T-2 return(s) prepared by the auditor under ITA 152(7)

The upper right hand corner of the tax return(s) was (were) stamped by the

auditor in red ink as received by the CRA (which reflects the "filed" date) as

of:

The tax return(s) to be assessed are:

Attached for forwarding to the tax centre for initial assessing {auditor is not

claiming any tax earned by auditor (TEBA) with respect to these returns}.

or

Retained by the auditor for processing at a later date as the auditor will be

preparing an Audit Report, inputting AIMS File Results, and claiming TEBA with

respect to these returns.

Auditor's Signature Date

AIMS/On-Line RAP Clerk Date RAPI Updated

Updating the taxpayer's account

The non-filer section can only update the current, and up to three previous, tax years. To update

other years, an RTM is required to process a manual update as follows:

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Published May 2015

• For T1 returns, send the RTM to SPECIALITY SERVICES, TAX CENTRE. Provide the

taxpayer's full name, SIN, tax years to be updated, and the date received for each return.

Also, indicate if RAPID should be up-dated "Filed" or "152(7) Arbitrary Pending."

• For T2 returns, send the RTM to CORPORATION RECORDS, TAX CENTRE. Provide

the taxpayer's full name, account number, fiscal period ending (provide complete date)

and date of receipt of each return. Also, indicate if RAPID should be updated "Filed" or

"152(7) Arbitrary Pending."

An additional RTM should be sent to the Corporate Records Section of the Tax Centre for the

following situations:

• RAPID option RR.1 indicates Master Type "Charter Surrender" or "Surrender Pending;"

• Fiscal Period Ending is being revised; or

• First return for company and no account number has been created.

To reflect the income and tax changes as a result of unassessed returns in the Audit Report and

on AIMS, the auditor obtains and completes an Initial Assessment from Audit Action form. All

areas are to be completed including the date that the Initial Assessment – Update Information

form was sent to the non-filer section. The completed Initial Assessment from Audit Action form

should be stapled to page 1 of the unassessed return, and passed to the auditor's team leader for

approval.

Where more than one return is obtained or prepared, all returns should be fastened together with

the most recent return and the form on top. After approval the form will remain stapled to the

front of the tax return.

Initial assessment from audit action form

BN/SIN:

Taxpayer name:

Initial assessment:

a) Signed returns obtained by the auditor Year(s) ______________

b) Returns prepared by the auditor Year(s) ______________

c) Reason for including results in an Audit Report (explain briefly whether audit work was

required for obtaining the returns)

_____________________________________________________________________

_______________

_____________________________________________________________________

_______________

_____________________________________________________________________

_______________

_____________________________________________________________________

_______________

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Published May 2015

_____________________________________________________________________

_______________

Auditor Name:

Auditor Signature:

Section/Group: Date:

Team Leader Approval:

Date:

Date Update Information form sent to Non-filer

Section:

Date Update Information form forwarded to

AIMS/On-line Section:

Processing internally prepared returns

A tax return intercept should be requested if the auditor suspects that the taxpayer may send the

return directly to the TC. A round trip memo addressed to Taxpayer Services/Accounts should be

sent to the TC requesting an account intercept for the specified year(s) and should also indicate

what is to be done with the return (e.g. send to the auditor). An account intercept is required by

the TC to prevent the return(s) completed by the taxpayer from being processed.

If the return(s) completed by the taxpayer is/are processed by the TC before they are intercepted,

the statistics can still be recorded on AIMS using the coding for "Adjustments Transferred to

Others for Processing."

Review of the following screens in RAPID will verify the update:

• T2s – Option RR.1 will show "T2 Filed" opposite the fiscal year (page forward to get this

screen).

• T1s – Option 1 provides the complete filing history.

In situations where the returns will not be processed immediately, the returns should be sent to

the TC. The auditor can reserve the returns using RAPID Option A.3 (T1s) or Option UU.1

(T2s). After the returns have been initially assessed they will be returned to the auditor.

RAPID requires updating where the taxpayer's account was updated to indicate a subsection

152(7) return was pending and returns are received while the audit is in process. The original

Initial Assessment-RAPID Update Form must be forwarded to the non-filer section with an

attached T2003 (mailing slip) stating:

• Update the Rapid system as the taxpayer has now prepared returns for the years

indicated.

• The previous subsection 152(7) of the ITA return was date stamped on day/month/year.

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Documents required to process internally prepared returns

Where the income and tax changes of the unassessed returns are processed as an audit

adjustment, the auditor prepares form T7W-8, Explanation of assessment or of change made, for

T1s or T3s and forms T7W-9 and T99A for T2s.

Processing initial assessments where no audit action was taken

The originating auditor should apply the date and penalty stamp to the left of the keying field and

above the refund calculation information on page 4 of the T1 return and in the "For CRA Use"

box on the front of the T2 return. The date used should be the date that the auditor prepares the

return or the date that the taxpayer gives the unassessed return to the auditor.

The Initial Assessment Update Information form should be completed immediately and sent to

the non-filer section to update RAPID. The auditor should hold the return(s) until this form is

returned.

If the auditor wants to retain the return(s) for processing with the audit file, put the Initial

Assessment Update Information form with the working papers once it has been returned from the

non-filer section. When the form is returned, it will be attached to the income tax return and sent

to the TC.

A round trip memo should be sent to Corporate Records in the following situations for T2

returns:

• RAPID option RR.1 indicates Master Type "Charter Surrender" or "Surrender Pending;"

• Fiscal Period Ending is being revised; or

• First return for company and no account number has been created.

Review of the following screens in RAPID will verify the update:

• T2s – Option RR.1 will show "T2 Filed" opposite the fiscal year (page forward to get this

screen).

• T1s – Option I provides the complete filing history.

In situations where the returns will not be processed immediately, the returns should be sent to

the TC. The auditor can reserve the returns using RAPID Option A.3 (T1s) or Option UU.1

(T2s). After the returns have been initially assessed they will be returned to the auditor.

Preparation, updating and changing returns and forms

T1 returns prepared by the auditor

To readily identify an arbitrarily assessed return, where there are taxes payable, "152(7)" should

be entered in bold red to the immediate right of "Calculation of Total Income" on the T1 return.

For unassessed returns where a valid refund is due to the taxpayer, do not enter "152(7)." The

initial assessing system will not assess returns noted "152(7)" where a refund is due to the

taxpayer.

Where more than one initial assessment return is involved, there may be an offsetting effect to

income tax payable and refundable. For example, a taxpayer with three unassessed years, one

with tax refundable and two with taxes owing may result in net income tax payable over the

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three years. To ensure the return with the refund is assessed but not paid out, the auditor will

alert the TC by attaching a T2003 mailing slip to the return, explaining the offset required.

Circle the "R" in the word "Return" on page 1 of the T1 income tax form in red ink. If

computerized returns are generated, write the words "T1 Return" (using red ink) at the top of the

first page. Prepare the return in accordance with these instructions. Ensure that the return is

penalty stamped in accordance with the processing instructions.

If a blank copy of a T1 return cannot be obtained for the correct year being initially assessed,

ensure that the year on the return being used is crossed out and the correct year is clearly entered.

Completing T1 returns

T1 returns are to be completed as follows:

• Identification Area

• Name and Address – enter the full name and address of the taxpayer.

• Social Insurance Number – enter if available.

• Enter all other available identification information in the applicable areas (i.e. 152(7),

"R," province of residence, date of birth, etc.).

• Identify that Audit has prepared the return by entering explanation code 70030 in

Field 600 at the bottom of page 1. Code 70030 is a standard explanation code that

prints out on the following notice of assessment:

"We have used the information in our records to prepare an assessment of your

federal and provincial/territorial taxes payable for XXXX (year). If you disagree with

the amounts shown on this notice, please complete a tax return. Send it, together with

all the necessary documents, to your tax centre."

• Income Area

• Enter all income amounts, ensuring that entries are in the correct fields.

• Field 102 – Ensure that commission income is dressed at field 102 when commission

income is included at field 101.

• Ensure that the Gross Income box at field 162 to 170 is complete if a corresponding

entry is made to the Net Income box at field 135 to 143.

• Deductions Area

• Enter all known allowable deductions, ensuring that the entries are in the correct

fields. No expenses against income should be allowed unless they are documented.

• Deductions from Net Income

• Calculate and enter Taxable Income at field 260.

• Enter all known non-refundable Tax Credits.

• Field 338 – Enter 17% of amount in field 335.

• Calculate and enter the total non-refundable Tax Credits at field 350.

• Tax Calculation Area

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• The tax calculation areas that are the responsibility of the auditor are covered in fields

C through F of Form T99. Corresponding tax calculation areas of the return and

schedules must be completed.

• Where special forms such as T2038 Investment Tax Credit or T657 Capital Gains

Deduction are required, the information from these forms should be included on page

3 of the return.

• Page 4 Coding

• In the "Do Not Use This Area" section at the bottom of page 4 of the T1, enter code

‘699' in one of the blank boxes and enter the filing date in year/month/day format in

the corresponding box to the right of this code. The date should agree with the date of

the penalty stamp on page 1.

Prepare form T7W-8, Explanation of assessment or of change made, to explain the assessment.

T2 returns prepared by the auditor

To readily identify an assessment under subsection 152(2) of the ITA where there are taxes

payable, "152(7)" should be entered in bold red to the immediate right of "Calculation of

Taxable Income" on the T2 return.

For unassessed returns where a valid refund is due to the taxpayer, do not enter "152(7)." The

initial assessing system will not assess returns noted "152(7)" where a refund is due to the

taxpayer.

Where more than one initial assessment return is involved, there may be an offsetting effect to

income tax payable and refundable. For example, a taxpayer with three unassessed years, one

with tax refundable and two with taxes owing may result in net tax payable over the three years.

To ensure the return with the refund is assessed but not paid out, the auditor will alert the TC by

attaching a T2003, explaining the offset required.

Completing T2 returns

T2 returns are to be completed as follows:

• Identification area

• Business Number – enter if available. The Business Number can be located through

RAPID Option FF or Option TT. If the Business Number cannot be located in these

options, a round trip memo to T2 Taxroll at the TC should be prepared providing the

following information:

• Request for corporate business number not available on option TT;

• Corporate name;

• Corporate address and mailing address;

• Fiscal years being initially assessed; and

• Incorporation date.

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This round trip memo should be prepared as soon as the auditor becomes aware that a Business

Number is not available. This will give the TC time to search and provide a Business Number to

the auditor before the returns are sent for initial assessment.

• Enter the full corporate name and the address of the Head Office. If the mailing address is

different from the Head Office address, complete Mailing Address Area.

• Complete "Return for tax year" area.

• For "Type of corporation at end of tax year," use the information currently available or

indicate the corporation type as on previously filed returns.

• Enter all other available identification information in the applicable areas (for example,

152(7)).

• Computation of Taxable Income

• enter Net Income at field 111;

• enter deductions applicable in fields 115 to 126; and

• enter Taxable Income in field 127.

• Summary of Tax and Credits

• enter amounts payable in fields 129 to 143; and

• enter applicable credits in fields 145 to 157.

T99A – T2 tax calculation information

It is required to complete Form T99A for initial assessments. Place special attention on Areas A,

B, D, F, and K. To the extent possible, complete the identification area on Form T99A, including

corporation Business Number.

Complete all applicable items on Form T99A that are the auditor’s responsibility. The auditor

should ensure that the same items are completed on the T2 and T2 schedules.

Form T7W-9

Prepare Form T7W-9 to explain the assessment. An explanatory note should be added to the

bottom of the T7W-9 as follows:


subsection 152(7) of the Income Tax Act. The tax payable amount in the Notice of

Assessment reflects our action taken."

Updating and changing T1 and T2 returns prepared by the taxpayer

Updating is required when the taxpayer:

• Fails to enter information in the identification area;

• Fails to enter an item in the income, deductions, non-refundable tax credits, or total tax

payable area that has been included in the calculations but has been omitted from the

return;

• Has entered an amount in an area other than the proper field;

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• Updating results in no change to the taxpayer's taxable income, tax payable, or refund

due.

Auditors should use a red pen to make changes or corrections.

T1 returns

Updating

The auditor will update a signed return obtained from a taxpayer during the course of an audit:

• To delete an amount that the taxpayer has entered in the wrong location, draw a line

through the taxpayer's entry.

• If it is necessary to relocate the taxpayer's figure to a field that has no entry, the return is

updated by entering the amount in the correct field.

• If the applicable field already has an entry, draw a line through the existing figure and

enter the correct total to the immediate left of the keying field.

Updating a return must not change the total amount of the taxpayer income, deductions, or

calculation of income tax payable.

Changing

If there is a need to make changes to any amount in a signed return obtained from a taxpayer

during the course of an audit, the auditor will circle the keypunch field number and enter the

correct amount to the immediate right of the keying field. If the area to the immediate right is not

blank, place the entry above, below, or to the left and connect to the proper space by drawing an

arrow.

Since this action changes the total amount of the taxpayer's income, deductions, and/or

calculation of tax payable, the auditor prepares form T7W-8, Explanation of assessment or of

change made, to explain the changes.

If one or more of the years being initially assessed are being changed, form T7W-8 is required

for each year. Three examples of situations when forms T7W-8 and T7W-C are prepared

include:

Example 1 – Form T7W-C, Explanation of changes on reassessment, required

1994 and 1995 returns are to be reassessed; 1996 and 1997 returns are to be initially assessed as

filed (no change).

• Form T7W-C is required for the reassessed 1994 and 1995 tax years.

• Form T7W-8 is not required for the 1996 and 1997 tax years, since these returns will be

sent to the TC for initial assessing.

Example 2 – Form T7W-8, Explanation of assessment or of change made, required

1994 and 1995 returns to be initially assessed with changes; 1996 and 1997 returns are to be

initially assessed as filed (no change).

• A T7W-8 will be required for all years so that the returns go as a package.

Example 3 – Form T7W-8, Explanation of assessment or of change made, not required

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1996 and 1997 returns are to be initially assessed as filed (no change).

• A T7W-8 will not be required since the returns will be sent to the TC for processing.

T2 returns

Updating

The auditor will update and correct a signed return that was obtained from a taxpayer during the

course of an audit.

Where the taxpayer has not completed a field:

• if the amount is NIL, leave the field blank

• if the amount is a loss, enter the correct amount of the loss in the field and circle it; and

• if the amount is positive, enter the correct amount in the field.

When an updating action is required to delete an amount that the taxpayer has entered in the

wrong location, draw a line through the taxpayer's entry and enter the amount in the correct field.

If the applicable field already has an entry, draw a line through the existing figure and enter the

correct total to the immediate left of the keying field.

Changing

Where correcting action is required, draw a line through the incorrect amount and enter the

correct amount immediately to the left of the keying field. If the area to the immediate left is not

blank, place the entry above or below to the left and connect to the proper space by drawing an

arrow.

Since this action will change the corporation's taxable income and/or tax payable, the auditor will

prepare a T7W-9 to explain the changes as well as a T99A.

If one or more years being initially assessed are changed, a T7W-9 will be required for each

year.

Non-capital loss application on Form T7W-8, Explanation of assessment or of change

made, or Form T7W-9

When a non-capital loss arises in a year being initially assessed and the taxpayer has requested

the loss be applied to the previous year also being initially assessed, forms T7W-8 or T7W-9 for

the previous year will not include the loss carry-back. A round trip memo to the TC – Initial

Assessing – T1 or T2, is required so that the return will be reassessed at a later date to apply the

loss carry-back. The round trip memo includes this information:

• Taxpayer's name;

• Social insurance number (T1) or business number (T2);

• The amount of the loss from ______ (year) that the taxpayer is requesting be applied to

______ (year) $___________;

• If the taxpayer is a corporation, the complete fiscal date should be stated using the format

day/month/year; and

• The date the loss carry-back was requested (effective date for interest calculation

purposes).

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Penalties

Penalties under subsection 162(1) of the ITA should be applied on all initial assessments where

the tax return was filed late and there was income tax payable. Subsection 162(2) may apply

where the taxpayer has repeatedly filed returns late.


• 28.3.0, Repeated failures – Subsection 163(1) of the ITA; and

• 28.4.0, False statements or omissions.

Where a taxpayer provides the auditor with an unassessed income tax return and subsequent

audit action results in an increase to the reported income, consider applying penalties. If penalties

are not applied, the working papers disclose that penalties were considered and the reason for not

applying penalties. Future occurrences may result in the application of penalties under subsection

163(1) if there is unreported income in one of the next three tax years.

Penalties under section 163 do not apply where a taxpayer is assessed under subsection 152(7)

since the taxpayer had not previously filed a return for that year.

i (1)

Appendix A-11.2.1, Form T7W-C, Explanation of changes on reassessment, for T1 and

Appendix A-11.2.3, Form T7W-C, Explanation of changes on reassessment, for T2

ii (2)

Appendix A-11.2.2, Sample format for form T7W-8, Explanation of assessment or of

change made; Appendix A-11.2.4, Sample format for form T7W-9; Appendix A-11.2.5, Sample

pro-forma form T7W-8, Explanation of assessment or of change made ; Appendix A-11.2.6,

Sample form T7W-8, Explanation of assessment or of change made ; Appendix A-11.2.7,

Sample form T7W-9 ; and Appendix A-11.2.8, Sample – Form T7W-9

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