CRA data mining sweep ‘ingenious and eminently logical’

By Staff

Contractors who are part of the cash economy and have registered with North America’s largest home improvement retailer can expect to be audited by the Canada Revenue Agency (CRA), Canadian tax lawyer David J. Rotfleisch tells The Lawyer’s Daily.

Rotfleisch, founding tax lawyer with Rotfleisch & Samulovitch Professional Corporation, writes in the online legal publication that such contractors can elect to submit a voluntary disclosure application to the CRA to avoid prosecution or gross negligence penalties. They will also be reassessed retroactively and will have to pay their back taxes, he says.

Rotfleisch writes in The Lawyer’s Daily that the home renovation giant informed its commercial credit cardholders in September that the CRA has compelled it through a federal court order to disclose information on their purchases, including business name and address, and the “total annual amount of transactions charged to the account of each commercial account holder between January 1, 2013 and December 31, 2016.”

“The Canada Revenue Agency has identified the underground economy as a priority audit target. One of their approaches, which is quite ingenious and eminently logical, is to seek information about the underground economy from sectors of the economy that supply it,” Rotfleisch writes in the online publication.

As a result of its “shopping trip,” the CRA will acquire a database of commercial purchasers and will launch — or more likely has already begun — a commercial customer audit project, he says.

“A dedicated team of tax auditors will examine the tax returns of the (the company’s) commercial customers and compare the reported income to the purchases (from that company),” Rotfleisch writes. “They will apply some assumptions about what percentage of total project purchases came from (the international retailer) versus other suppliers and about normal profit margins in the construction industry. If reported sales are less than the CRA’s computed sales amounts, an audit of that contractor will commence.”

A Statistics Canada report released in October of 2018 states: “Underground economic activity in Canada totalled $51.6 billion in 2016, or 2.5 per cent of gross domestic product (GDP). ... In 2016, three industries accounted for more than half of underground economic activity: residential construction (26.6 per cent), retail trade (13.5 per cent) and accommodation and food services (12.1 per cent). These industries have continued to be the main contributors to underground economic activity in Canada since 1992 — the first reference year of this study.”

Rotfleisch says the audits generally begin with a comprehensive questionnaire to detail the construction projects initiated during the audit period. He says a thorough audit analysis of the contractor’s records and books will follow.

The CRA may choose to move directly to an “in-depth audit examination” should the gap between estimated and reported sales be quite large, he tells The Lawyer’s Daily.

“The typical way in which unscrupulous contractors do cash business is to charge cash for some or all of the contract, and to pay some or all of their sub-trade costs in cash,” Rotfleisch writes in the legal magazine.

“While material purchases are sometimes made in cash as well, frequently those purchases are made on commercial accounts, which provide discounts to the contractor. Hence their vulnerability to this audit methodology. The result of the cash transactions is unreported income and GST/HST liability.”

This is not the first time the federal agency has used “data mining” to ensnare contractors, he says.

In 2017, the Federal Court of Appeal granted the CRA access to another big box renovation company’s contractor information, and earlier this year, it gained a similar window into the contractor clients of a large Ontario roofing supplier.

“The electronic world is a double-edged sword: it is very convenient, but it is also harder to cheat the taxman, once he wakes up from his stupor. Electronic transactions are paid for by credit cards and are kept in electronic databases — all of which can be audited,” Rotfleisch says.

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