Tax Policy & Controversy Briefing | July 2013


The Canada Revenue Agency takes new Approach

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In an interview that we published in our February 2011 issue, then-Canada Revenue Agency (CRA) Commissioner and CEO Linda Lizotte-MacPherson announced that the CRA would begin phasing in its new risk-based Approach to Large Business Compliance (ALBC) over the next five years.1 The CRA is now well under way in rolling out this new audit approach across the country, beginning with a pilot project of 50 large businesses from 2011 to 2012. The new approach is of interest and relevance far beyond Canada because it shares a number of characteristics of new audit approaches being used by other tax authorities, particularly in other Organisation of Economic Co-operation and Development (OECD) countries.

To date, taxpayers’ reaction to the new approach in Canada has been mixed, but it generally can be characterized as cautiously optimistic. Therefore, this is an opportune time to more closely examine the approach and experiences to date, set out the likely implications for large taxpayers with operations in Canada, and provide some advice and suggestions on what steps they should consider taking in response.

A good place to begin is by explaining which taxpayers are affected, what approach the CRA had used previously to enforce large business compliance, why it changed its approach and what it is doing differently under the new approach.

Which taxpayers are affected?

The CRA uses an administrative definition of “large business” for purposes of corporate tax audit selection and coverage. Any business with C$250 million or more in annual gross revenues is considered to be a large business for audit purposes.2 At present, this large taxpayer audit population comprises about 1,100 businesses in Canada.

An evolution in CRA’s Approach to Large Business Compliance (ALBC)

Traditionally, the CRA maintained more or less continual audit activity and presence in virtually all 1,100 large businesses with wall-to-wall field audits conducted by separate teams of auditors with different specializations, including international tax, transfer pricing and tax avoidance.

However, that audit approach started to evolve as a result of several developments. The first was significantly increased supplemental funding for the CRA in the 2005 and 2007 federal budgets that was aimed at combating a perceived increase in international aggressive tax planning.3

At the same time, the CRA implemented an organizational realignment as a result of undertaking a “functional activity review” that was designed to achieve greater synergy in the deployment of audit resources in high-risk areas. In the Compliance Programs Branch at CRA headquarters, the previously separate Tax Avoidance Division and International Tax Directorate were combined with the Large Business Division to form the new International and Large Business Directorate (ILBD). These previously separate programs were also integrated operationally in the field. 

With the additional funding, the CRA also created 11 Centres of Expertise for international tax across the country. These allowed auditors with specialized knowledge and experience to work together on industry- and issue-specific areas of research and provide guidance in the conduct of audits in the area of aggressive international tax planning.4

The CRA also designated certain local tax services offices across the country as Industry Coordinating Offices for audits of the pharmaceutical, financial institutions, oil and gas, and automotive industry segments.

Global trends in large business tax compliance: the “enhanced relationship”

The CRA did not undertake these developments in isolation of changes that were occurring in other tax administrations internationally. Just as large businesses have recognized they have to operate globally to expand and remain competitive, tax authorities have realized the need to work together on a worldwide basis and have responded to globalization with increased international cooperation and collaboration.

They have accomplished this in part by gathering and sharing information on a bilateral basis, using a rapidly growing network of tax treaties and tax information exchange agreements (TIEAs). Canada, for example, currently has a network of 90 bilateral tax treaties and 16 TIEAs in force (3 TIEAs are signed but not yet in force, and another 11 are under negotiation).5

Perhaps more significantly, though, collaboration has been facilitated by membership in an expanding number of multilateral forums designed for that purpose. One example is the Joint International Tax Shelter Information Centre (JITSIC) created in 2004, whose original purpose was to:

  • Share expertise, best practices and experiences to identify and better understand abusive tax transactions and emerging schemes, as well as those who promote them
  • Exchange information about specific abusive transactions and their promoters and investors
  • Carry out individual abusive transaction enforcement activities more effectively and efficiently6

In terms of leadership and guidance concerning approaches to large business compliance, the most influential forum has arguably been the Forum on Tax Administration (FTA), which the OECD established in 2002 to develop effective responses to tax administration issues in a collaborative fashion. 

At the third meeting of the FTA, in Seoul, South Korea, in September 2006, tax commissioners from 35 OECD and non- OECD countries met to discuss how to improve the relationship between revenue bodies, large corporate taxpayers and tax intermediaries. This idea of an “enhanced relationship,” as it was subsequently coined, was formalized into a conceptual model in a Study into the Role of Tax Intermediaries report released by the FTA in January 2008.7

The report recommended that tax authorities place greater reliance on risk management techniques as an essential tool to stratify large business taxpayers into different risk categories and then allocate audit resources accordingly. It underlined the need for revenue bodies to obtain information to effectively carry out these risk assessments through statutory obligations, mentioning advance disclosure regimes already in place in certain jurisdictions, such as Canada in particular.

The report also encouraged taxpayers to provide information voluntarily, while noting at the same time the fact that important sources of information on large corporate taxpayers are those that are publicly available through accounting requirements — such as the FASB Interpretation 48 (FIN48) rules that were in place in the US by then and Australia’s Reportable Tax Positions (RTP) program, both of which require the disclosure of uncertain tax positions.

The report went on to state that “a more collaborative, trust-based relationship can develop between revenue bodies and large corporate taxpayers who abide by the law and go beyond statutory obligations to work together co- operatively. This is the enhanced relationship. It is a relationship that favors collaboration over confrontation, and is anchored more on mutual trust than on enforceable obligations.”8

When it released its Study into the Role of Intermediaries at the conclusion of its fourth meeting in Cape Town, South Africa, which 45 countries attended, the FTA issued a communiqué reiterating the Study Team’s recommendations that FTA countries risk-assess large corporate taxpayers and develop appropriate compliance responses. At the same time, the FTA acknowledged that the relationship between tax  administrations and taxpayers varies between countries in accordance with different administrative and legal frameworks.9

These recommendations were in turn followed by the release of the report Corporate Governance and Tax Risk Management in July 2009.10 The report noted that many large businesses have changed the way they approach corporate governance and tax compliance, reflecting an environment of heightened community sensitivity to social responsibility. It pointed out that leading practice corporate boards are mandating that tax risk must be managed like any other enterprise risk.

The FTA report contained case studies from three member countries describing different experiences in promoting good corporate governance and enhancing relationships with large business. One of these case studies was from Canada. It stated that: 

“The Canada Revenue Agency (CRA) is revising its audit program to recognize the differences among large businesses with respect to the strength of their governance and their willingness to deal with CRA in an open and transparent manner. In brief, audits will be eliminated or targeted to specific issues where there is evidence of strong governance and a willingness to work with CRA on an open and transparent basis. Agency resources that are saved from this reduction in auditing will be re-focused to address taxpayers whose governance is weak, or purposely risk tolerant, as well as taxpayers who do not operate in an open and transparent manner. An important feature of this approach will be that CRA will advise the taxpayer of how the Agency perceives their governance, openness and transparency, along with other risk factors and accordingly, the compliance approach that will be utilized.”11

Thus, although it was not launched until 2011, the foundation for the CRA’s new ALBC was actually being laid through international collaboration with other FTA countries from 2006 to 2009. This in turn highlights the long development cycle of such fundamentally different approaches. Therefore, one might also assume that similar approaches are being developed elsewhere.

CRA’s new ALBC

One of the cornerstones of the CRA’s new ALBC is an increased reliance on risk assessment tools and techniques to help ensure that the compliance approach to each taxpayer is commensurate with its own risk profile and, similarly, to allocate audit resources across broad groups of taxpayers in accordance with the risk of non-compliance that they represent. 

Under this new approach, the CRA assesses the risk of non-compliance associated with each large taxpayer, beginning with internal information drawn largely from the tax returns filed by the taxpayer, including supplemental information from reporting requirements contained in the Income Tax Act. This internal information is largely quantitative and does not necessarily provide much insight into the company’s internal controls, corporate culture and appetite for tax risk.

For this reason, it is supplemented by information that is more qualitative and behavioral in nature, which is obtained from the company’s answers to a questionnaire sent by the CRA and accompanied by a letter addressed to a senior executive of the company, sometimes the CEO.  

The questionnaire focuses on the company’s tax risk management approach and corporate governance, the second cornerstone of the ALBC. Among other things, it asks whether the company has a formal framework for identifying and assessing major tax risks associated with its normal ongoing operations; how material risk is reported, managed and monitored; what steps are taken when material risk is identified; whether its tax strategy is consistent with its overall business strategy; and whether it has a risk management committee.

With the information it has assembled, the CRA assesses the risk for each large business using the National Risk Assessment Model (NRAM) to consider the following main risk factors: 

  • Audit history
  • Corporate governance (tax and or audit committee, oversight)
  • Corporate structure (e.g., controls)
  • Openness and transparency (relationship with the CRA)
  • Participation in aggressive tax planning schemes
  • Unusual and/or complex transactions
  • Major acquisitions or disposals
  • Industry sector issues
  • International transactions 

Companies in a given industry are stratified into high-risk, medium-risk or low-risk categories, in a similar (but slightly different) model to that used by Australia’s ATO, where large companies are assigned to one of four “quadrants.” 

The letter accompanying the questionnaire requests a follow-up meeting with company executives, sometimes requesting the attendance of one or more members of the C-suite, including the CEO, CFO or a member of the audit committee. During the meeting, the CRA provides a general overview of the new ALBC and then shares its initial risk rating with the company officials. The risk rating exercise and meeting is intended to be a recurring event with each large business and is designed to improve transparency and build a more collaborative, less adversarial relationship with the tax administration.

Consistent with this philosophy, over time the CRA has stated its intention to reallocate large business audit resources away from low-risk taxpayers to high-risk taxpayers. However, it has not yet articulated how or when this will happen. “The multiyear strategy to implement the ALBC is progressing well,” Lucie Bergevin, Director General of the International and Large Business Directorate at CRA, told EY. “The approach is based on risk assessment of every large business, using a wide range of risk factors, followed by the segmentation of the population into risk segments with corresponding tailored programs. Over time, we are actively advancing our efforts in exploring the potential for implementing some form of enhanced relationship initiative in Canada.”

Reaction to the ALBC to date

Taxpayer reaction to the new approach has been mixed, which isn’t surprising. After all, this new approach is somewhat unconventional and is purely administrative in nature. It is neither based on nor supported by any accompanying changes in legislative powers or authority. For this reason, some taxpayers are skeptical that the existing relationship will change much. Others feel the ALBC may be a passing fad not worth investing much time in. A few are openly cynical of the whole exercise.

It would be unrealistic to expect the entire large business community to unreservedly embrace the new approach. Having said that, the most common taxpayer reaction has been cautious optimism. A majority believes that this new approach represents a significant improvement over the past that should result in a more commercial awareness by the tax authority and a more business-like approach to tax compliance. They believe it is possible to establish a more transparent and less adversarial relationship, which in turn should result in lower compliance costs, more audit currency and greater tax certainty for their company.

Peter van Dijk, Senior Vice President of Tax at Toronto Dominion Bank Group, falls into this group. “There are some significant challenges with the new approach to large business,” he says. “Among the most significant is the level of cultural change that is necessary both within the corporation as well as the tax authority. That said, I think that overall it’s an efficient way of focusing very limited tax authority resources on the most aggressive taxpayers and issues.

For those taxpayers that have strong governance processes, don’t engage in aggressive tax behavior and maintain transparent, cooperative relationships with the CRA, one would expect a more limited and focused review of their tax position. That seems like a good use of time and resources.”

Pathway to success

The success of this new approach ultimately hinges on the ability of both taxpayers and tax administrators to adapt appropriately. Resistance to the type of behavioral change required to make the ALBC a success is not limited to taxpayers. The new approach requires a change in traditional attitudes inside the tax administration as well. As former Commissioner Lizotte-MacPherson recognized, “Building an environment of mutual trust is not easy... and involves a degree of cultural change by all parties, including our own CRA managers and officers.”12

Discussing the relationship between tax administrators and taxpayers in the context of the OECD’s enhanced relationship initiative, Jeffrey Owens, the former Director of the Centre for Tax Policy Administration at the OECD and now Senior Advisor to the Vice-Chair — Tax of EY, sets out this mutual challenge nicely in observing: 

“There is also the shared risk that the change in attitudes will not go beyond the Commissioner office or the corporate boardroom and that neither side will devote the resources initially required to facilitate the necessary cultural change. The behavioral change also needs to extend down the chain of command to those that are engaged in audit activities, and this communication between executive and field office has long been a source of frustration for tax administrators and taxpayers alike.”13

Conclusions and recommendations

While the ALBC is conceptually similar to the OECD’s enhanced relationship initiative, the CRA itself acknowledges that it has not yet implemented a full- featured enhanced relationship program covering all aspects of annual compliance obligations, such as the Compliance Assurance Process program in the US or the Horizontal Monitoring program in the Netherlands.

Unlike the ALBC, which is being applied universally across the entire large business audit population, participation in these two latter programs is voluntary on the part of the taxpayer. They also have entry requirements, promise immediate benefits and are based on a formal memorandum of understanding or compliance covenant between the two parties.14

The CRA should reorient the ALBC in the direction of these programs, or initiate a smaller pilot program, in order to move more quickly to reward compliant taxpayers with tangible results in the form of more certainty, fewer and less intrusive audits, and lower compliance costs. At the same time, it should reallocate the audit resources that are freed up toward those taxpayers and areas of concern that represent higher risk.

EY’s periodic tax risk and controversy surveys of tax directors and corporate executives in large businesses have shown that corporate boards and their audit committees are spending more time on a wide range of tax concerns as global tax risks increase and have a higher profile and priority.15 Initiatives such as the CRA’s ALBC provide an additional incentive for them to increase this oversight.

Large businesses should respond by not only continuing but also accelerating this trend. They should also implement formal tax risk management frameworks with the capacity to identify and manage key tax risks across the tax life cycle, making sure that they become a standard part of tax governance. This is perhaps more important than ever given the current volume and complexity of global change.

Ultimately, success will be measured by whether tax risk is managed in a way that meets both the needs of business and the expectations of revenue authorities. The goal is to achieve a level of certainty about tax positions, tax reporting and tax planning that aligns with the principles of good corporate governance and satisfies the concerns of both parties.

End notes 

  1. “An interview with Linda Lizotte-MacPherson, Commissioner and Chief Executive Officer of the Canada Revenue Agency,” Tax Policy and Controversy Briefing, Issue 6, February 2011, pages 6–14.
  2. Subsection 225.1(8) of the Income Tax Act defines a “large corporation” as any corporation whose taxable capital employed in Canada, plus the taxable capital of any related corporation, exceed $10 million. However, this legal definition applies for specified legislative purposes including tax remittance, collection of reassessed tax, objections and appeals and failure to file penalties, not for audit selection or other administrative purposes.
  3. The Budget Plan 2005: Delivering on Commitments,” tabled in the House of Commons by the Honourable Ralph Goodale, P.C., M.P., Minister of Finance, 23 February 2005, Annex 8, Tax Measures: Supplementary Information and Notices of Ways and Means, page 408; and “The Budget Plan 2007: Aspire to a Stronger, Safer, Better Canada,” Tabled in the House of Commons by the Honourable James M. Flaherty, P.C., M.P., Minister of Finance, 19 March 2007, page 244 and Annex 5: Tax Measures and Supplemental Notices of Ways and Means, page 419.
  4. Canada Revenue Agency, News Release, “Minister McCallum announces the creation of 11 Centres of Expertise to Address Aggressive International Tax Planning,” 9 August 2005. In 2010 the number of Centres was reduced from 11 to 6. Department of Finance Canada, “Tax Information Exchange Agreements, Notices of Developments.”
  5. Canada Revenue Agency, News Release, “Canada, Australia, United Kingdom and the United States agree to establish a Joint International Tax Shelter Information Centre,” 3 May 2004.
  6. Study into the Role of Tax Intermediaries, Organisation for Economic Co-Operation and Development, 2008, Ibid, page 39.
  7. See Fourth Meeting of the OECD Forum on Tax Administration, 10–11 January 2008, Cape Town Communiqué, 11 January 2008, Appendix. 
  8. FTA, Information Note, General Administrative Principles: Corporate governance and tax risk management, July 2009.   
  9. “An interview with Linda Lizotte-MacPherson, Commissioner and Chief Executive Officer of the Canada Revenue Agency,” op cit, page 9. 
  10. Jeffrey Owens, “Tax Administrators, Taxpayers and Their Advisors: Can the Dynamics of the Relationship Be Changed?” Bulletin for International Taxation, International Bureau of Fiscal Documentation (IBFD), September 2012, pages 516–518.  
  11. See IFA Initiative on the Enhanced Relationship: Key Issues Report, Version 3.3, International Fiscal Association, August 2012.  The International Fiscal Association created an ad hoc committee on the Enhanced Relationship and requested IFA branches, including the Canadian Branch, to respond to a questionnaire on the current status of the relationship in their jurisdictions. The Key Issues Report contains the responses to the survey. IFA also held a session on the Enhanced Relationship at its 2012 Congress in Boston. 
  12. EY 2011–12 Tax risk and controversy survey.


  • Fred O’Riordan
    National Advisor — Tax Services EY LLP, Canada
    +1 613 598 4808