10.0 Conducting the audit Disclaimer Interviewing the taxpayer Introduction Interview query sheet

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1 Conducting the audit (Revised April 2015) Disclaimer Hyperlinks to external or unaffiliated websites are for information purposes only. The Canada Revenue Agency (CRA) is not responsible for the content or practices of such websites. While efforts are made to ensure that hyperlinks are current and up-to-date, it is not guaranteed Interviewing the taxpayer (Revised July 2014) Introduction Conduct interviews and discussions with the person or persons that are knowledgeable about the business and the related tax matters. In small to medium-sized audits, the interviews will usually be with the taxpayer. In situations where the taxpayer's representative is interviewed, the appropriate third-party authorization must be available and in the audit file. Being prepared for the interview ensures that the auditor asks the appropriate questions and provides the taxpayer with assurance that the audit is conducted in a professional and efficient manner. The auditor must not communicate information received during the interview with anyone other than the taxpayer or an authorized representative. The taxpayer must sign the appropriate third-party authorization even when the third party attends a meeting at the taxpayer s request. The requirement to sign an authorization includes attendance at the interview by the taxpayer s spouse or common-law partner. For more information, go to: Authorize or cancel a representative, at Form T1013, Authorizing or cancelling a representative (including trust accounts), at Form RC59, Business consent form, at For guidelines that apply when conducting enforcement actions under unusual circumstances, go to 4.6.0, Auditing under unusual circumstances Interview query sheet (Revised July 2014) The majority of questions asked during the initial interview are common to most audits. Additional questions often result from information gained in the preliminary review of the available information. Prepare an interview query sheet prior to visiting the taxpayer based on the preliminary Audit Plan. Record the taxpayer's responses to the questions at the time of the interview to ensure accurate and complete information. In most cases, it is best that the auditor ask the taxpayer to clarify comments and responses at the time of the interview, rather than at a later time. Changes to questions may be required depending on the taxpayer's responses to the initial questions.

2 2 If new issues arise, the preliminary Audit Plan will need to be amended. Changes to the Audit Plan require team leader approval. If the team leader sends a detailed to the auditor approving the Audit Plan, a copy of that , imported into WinALS, is accepted as approval Templates and interview working papers (Revised December 2012) The team leader should encourage the use of the standard templates to document the information gathered during the interview. WinALS has several forms in its template library to document the interview with the taxpayer, including: Forms - Tax Forms -Audit Query Sheet T997 Programs and Procedures Taxation Specific Audit Program SAP T682 Interview Questionnaire Programs and Procedures Planning Notes and Queries Develop custom forms where necessary and store in the Custom Procedures section of WinALS Programs and Procedures. Specific audit program interview questionnaire Refer to WinALS Taxation Specific Audit Program SAP T682 during the preliminary stages of the audit. The program is a standardized T1 audit program that includes a minimum of required audit steps and procedures, including specific audit steps for certain industries. The SAP T682 interview questionnaire includes sections on: business banking business history the extent and type of books and records maintained non-business history other considerations Summary of initial working papers (Revised July 2014) The following table summarizes the WinALS working papers that are usually prepared prior to visiting the taxpayer. Working Paper Notes and adjustments sheet Purpose This working paper is a reminder of the items requiring clarification or verification.

3 3 Audit Plan Interview query sheet Tour of premises (Revised December 2012) Prepare a preliminary Audit Plan based on information available prior to visiting the taxpayer; include standard audit procedures and issues of concern noted during the preliminary review. Team leader approval of the Audit Plan is required prior to contacting the taxpayer. If the team leader sends a detailed to the auditor approving the Audit Plan, a copy of that , imported into WinALS, is accepted as approval. This working paper may be in the form of a checklist and includes those issues/items that the auditor should query upon arriving at the taxpayer's place of business. The tour of the premises is vital to obtain information about the taxpayer's business activity. It provides verification of the business activity and assists in verifying that assets and operations are as described by the taxpayer. The tour may take considerable time to complete and is often conducted after the initial interview but may be deferred until after a preliminary review of the books and records. A systematic tour that follows a logical sequence is preferred. For example, a tour of a manufacturing or processing business should start with receipt of raw materials and end with completion or shipping of the finished goods; a wholesale distribution centre should start with receipt of the goods and end with the shipping of the goods. Document all observations on the appropriate working papers. Showing an interest in the business operations often helps reduce the taxpayer's concerns with respect to the audit and aids in providing a comfortable atmosphere for both the auditor and the taxpayer. In some cases a tour may not be practical or feasible. If a tour is not possible, document the reasons in the appropriate working papers, the T2020, Memo for file, and refer to in the Audit Report. Examples of situations where a tour may not be possible include when a business has been sold or if a plant has been shut down. Where the taxpayer appears hesitant or refuses access to the business location, the team leader should be advised. Conducting the tour The appropriate personnel should accompany the auditor during the tour. In some cases it may be preferable to have several people conduct the tour, especially where operations are diverse and explanations of processes and procedures may be required to help the auditor conduct an efficient and effective audit. Information pertaining to the tour should be documented in the audit diary and in the appropriate working papers, upon completion of the tour. Note during the tour Items that may be noted during the tour include: Listing the various stages in the production process.

4 4 Listing the types of machinery and equipment and their location. A plant layout may be used to document the information. Notes regarding older machinery and equipment should be made to provide audit evidence that repairs may be required frequently and that the repairs result in high maintenance expenditures. Noting if supplies and/or processes as described by the taxpayer are consistent with observations made during the tour. Noting when expensive materials enter the manufacturing process. Is there a possibility of diverting materials to other uses at any point? Determining if work in progress is an important factor at any time. Recording how the taxpayer records costs during the production process. Who is responsible for recording labour and material costs? Noting if materials are stored and used in an orderly manner. Are requisitions for materials required? Questioning if production statistics are maintained. Is a cost accounting system used? Stating if there is any audit evidence of income or activities that are not recorded in the books and records. Audit procedures ensure that all sales of by-products and scrap material are recorded. Remarking if there is audit evidence that the taxpayer may be renting excess space to a third party. Recording where finished goods are stored. How is finished product shipped? Determine the documents used to record finished goods inventory and review samples of these documents at the various production locations, when possible, as part of the internal control review. Verify fixed assets Verify physical assets, including machinery and equipment, at the time of the tour. The tour provides audit evidence that the assets exist and confirms business activities. The tour may provide audit evidence of equipment used for business activities that may not have been apparent from the preliminary information or that the taxpayer has disposed of assets and not reported the disposition. Verify all acquisitions and dispositions. Including other locations in the tour In some cases it may be worthwhile to view the taxpayer's residence and nearby vehicles (such as automobiles, boats, trailers, etc.) by driving by the area. The standard of living observed might indicate undisclosed assets, but care must be taken in drawing conclusions, as there may be other reasons for these assets. Observed assets or standard of living beyond what is reasonable based on reported income should form part of the audit procedures conducted during the audit. In this type of situation, auditors must consider using assessing indirect verification of income (IVI) techniques. Document information gathered in the audit diary and in the appropriate working papers. For more information on assessing IVI techniques, go to , Indirect verification of income Evaluation of internal controls

5 5 (Revised April 2013) Evaluate and verify internal controls during the audit. The evaluation results determine the nature and extent of the audit procedures and testing required. If there are concerns, complete additional testing and update the Audit Plan. Document audit findings in the appropriate working papers, audit diary, and refer to on Form T20, Audit Report Books and records (Revised April 2015) Requirement to keep books and records (Revised November 2013) Subsection 230(1) of the Income Tax Act (ITA) requires every person who is carrying on business or is required to pay or collect taxes or other amounts to keep records and books of account, including an annual inventory to be kept in a prescribed manner in Canada or at other such place and on such terms and conditions as the minister may specify in writing. The books and records must enable the determination of any taxes payable, or taxes or other amounts that should have been deducted, withheld or collected. The ITA also requires registered charities, registered Canadian amateur athletic associations, registered political parties and the official agents of candidates in federal elections to keep certain records. Read this material together with Income Tax Information Circular, IC78-10R5, Books and Records Retention/Destruction, at Canadian taxpayers must also keep certain records on their foreign affiliates. For more information, go to Income Tax Information Circular IC77-9R, Books, Records and Other Requirements for Taxpayers having Foreign Affiliates, at Definition of person Subsection 248(1) of the ITA defines a person to include any corporation and any entity exempt from income tax under subsection 149(1) of the ITA. A partnership is not a person under the ITA; however, the income of a member of a partnership is computed as if the partnership were a separate person carrying on business in Canada. The partnership must keep books and records sufficient to enable the determination of the income (or loss), taxable capital gains and allowable capital losses allocable to the members. Definition of record Subsection 248(1) of the ITA defines a record to include virtually any record that contains information whether written or in any other form or format. Accordingly, a taxpayer's records can be considered to include not only the more traditional paper-based records such as books of original entry including cash receipts and disbursements, bank statements and paid cheques, but any information that has been directly entered into any device for electronic processing, manipulation, storage on electronic or optical media or reproduction to paper including computer programs and files.

6 6 When requesting books and records for audit purposes, auditors need to be as specific as possible. The specific records available will depend on the industry involved, the nature and the size of the taxpayer s business. Personal banking records Bank statements and accompanying paid cheques, savings account passbooks and any other personal banking records are regarded as part of the books and records of a business that the taxpayer operates as a proprietorship or business carried on by the taxpayer in partnership with others. Where the taxpayer is a closely held corporation, the examination of the books and records of the corporation may be extended to include the personal banking records of the principal shareholders. This is especially relevant when the activities of the business, whether carried on by a corporation or otherwise and those of the individual are so intertwined that there is little or no distinction. Inventory records Subsection 230(1) of the ITA includes detailed annual inventory records kept in prescribed manner as part of the books and records. Microfilm and electronic images All records and books of account that originate in paper format have to be kept unless the taxpayer has an acceptable imaging or microfilming program in place. For more information, go to Income Tax Information Circular IC78-10R5, Books and Records Retention/Destruction, at Electronic records The requirements for electronic or computerized records for income tax purposes are available in Income Tax Information Circulars: IC78-10R5, Books and Records Retention/Destruction, at IC05-1R1, Electronic Record Keeping, at As stated in Income Tax Information Circular IC78-10R5, the records must show an audit trail from the source documents to the financial accounts regardless of whether the transaction was documented on paper or electronically. For more information, go to , Auditing electronic commerce records. Legislation has been amended to provide greater certainty with respect to electronic records. Auditors should be fully aware of the following legislation: ITA Description 230(4.1) Electronic records Copies refers to document

7 Inspections includes documents 231 Definition a document includes a record Electronic commerce audit specialists A record includes anything containing information whether in writing or in any other form. At the time of initial contact with the taxpayer, information regarding the types of books and records available should be gathered to determine whether assistance is required from electronic commerce audit specialists (ECAS). Auditors should contact their local ECAS unit to request their assistance with obtaining information from the taxpayer. In some cases the electronic commerce auditor may be able to retrieve and begin manipulating the records before the auditor arrives at the taxpayer's place of business. For more information, go to: 9.2.0, Preliminary review , Assistance from Electronic Commerce Compliance Division audit specialists Records of foreign affiliates Canadian taxpayers that have foreign affiliates are required to maintain certain information regarding the affiliates in Canada for income tax purposes. For more information, go to Income Tax Information Circular IC77-9R, Books, records and other requirements for taxpayers having foreign affiliates, at As stated in Income Tax Information Circular IC 77-9R, the minimum records kept by a foreign affiliate should be sufficient to substantiate the computation of foreign accrual property income (FAPI) and any deductions claimed under subsection 91(5) or subsection 113(1) of the ITA in respect of dividends received from the foreign affiliate. Records must be retained beyond the mandatory retention period relating to the foreign affiliate's surplus accounts, foreign taxes paid, reorganizations, amalgamations and changes in participating percentage or surplus entitlement percentage and any other relevant information if these transactions have future income tax consequences. Non-residents carrying on business in Canada The CRA may request that Canadian residents or non-residents that carry on business in Canada provide foreign-based information or documents relevant to the administration or enforcement of the ITA, as required by subsection 231.6(2). Records of charities and Canadian amateur athletic associations Under subsection 230(2) of the ITA registered charities, including national arts service organizations and registered Canadian amateur athletic associations are required to keep books and records that will enable the determination of whether there are any grounds for revocation of

8 8 their registered status. They must also keep a duplicate copy of donation receipts and other information to permit verification of donations received. Records prepared by external accountants For CRA policy and procedures regarding the obtaining of information from a taxpayer's external accountant, including the serving of requirements, go to: , Obtaining information from accountants , Information gathering techniques , Requirement guidelines The CRA will continue to request that accountants produce specific working papers for examination that are required to reconcile the taxpayer's records or contain closing or balancing adjustments that are relevant to the tax returns. In these situations, the particular working papers relate to the taxpayer's records and accountants will be expected to produce them on request. The CRA can request working papers created by or for an independent auditor or accountant in connection with an audit or review engagement, advice papers, and tax accrual working papers. For more information, go to Communiqué AD-10-01, Acquiring Information from Taxpayers, Registrants and Third Parties. Records of registered political parties and candidates Subsection 230.1(1) of the ITA states that registered political parties and candidates in federal elections (or their official agents) have to keep books and records including details of contributions received, duplicate contribution receipts and details of expenditures made. For more information, go to Income Tax Information Circular IC75-2R8, Contributions to a Registered Party, a Registered Association or to a Candidate at a Federal Election, at The purpose of this requirement is to have the records necessary to verify that the registered parties are non-profit organizations and that the political contribution tax credit receipts issued are valid. Language requirements for books and records The ITA has no specific requirement that records be kept in either English or French. However, as the books and records must enable the determination of the taxes payable, withheld, etc., if an auditor encounters records kept in a language other than English or French, the auditor should request that the records be kept in English or French in the future. Jurisprudence The jurisprudence defining the adequacy and content of books and records is limited. Judges have frequently commented on the adequacy or inadequacy of records in specific circumstances, but a model of an adequate accounting system has not been suggested. Inadequate books and records frequently have an impact on court cases in the sense that if in the judge's opinion the records are inadequate and do not support the taxpayer's position, the minister's assessment is generally upheld. The courts have generally found that taxpayers must prove the minister's assessment wrong on the balance of probabilities.

9 9 For specific information about this and other aspects of books and records (such as access, location, penalties, etc.) that have been addressed by the courts, auditors should research specific court cases on an issue-by-issue basis Authority to examine books and records (Revised September 2013) Subsections 231.1(1) and 231.2(1) of the ITA provide the legislative authority for CRA auditors to examine books, records, information and documents. Subsection 231.6(2) of the ITA applies to foreign-based information or documents requested from Canadian residents or non-residents carrying on business in Canada. Essentially, subsection 231.1(1) provides the auditor with the authority to inspect, audit or examine the books and records of a taxpayer for any purposes related to the administration or enforcement of the ITA. It also provides the authority for the auditor to enter the premises where business is carried on or inventory is kept, and to require a taxpayer to provide all reasonable assistance and answer all proper questions. Disputes over what books and records will be provided are often motivated by the taxpayer's concerns over privacy and confidentiality or a desire by the taxpayer to restrict information provided to the auditor. Requests for information must be relevant to the administration or enforcement of the ITA. In situations where the taxpayer is reluctant to provide some or all of the requested documents or other information, the first course of action is to discuss the situation with the taxpayer and explain the reason for requesting the records, the legislative authority of the ITA, and then to address any concerns that the taxpayer has regarding the confidentiality of the information provided. The auditor should explain that all information is held in strictest confidence and that electronic information is encrypted to provide additional security. The Taxpayer Bill of Rights confirms the taxpayer s right to privacy and confidentiality. Make every effort, in a courteous but firm manner, to obtain the documentation and information that will ensure that the correct amount of tax payable, collectible, or refundable has been determined without having to resort to the issuing of formal demands, compliance orders, or requirements for the information. If the taxpayer refuses to provide the records, discuss the situation with the team leader to determine how important the information is to complete the audit and if it can be obtained from third parties or by other means. For more information, go to: Taxpayer Bill of Rights, at , Methods of obtaining information from third parties Communiqué AD-10-01, Acquiring Information from Taxpayers, Registrants and Third Parties To achieve the CRA's objective, all information and documents allowed by legislation and relevant to the audit must be examined in the least intrusive manner and, whenever possible, without confrontation. If the information is required for the completion of the audit and there are no other means to obtain the information, deliver a written request to the taxpayer outlining the documents and

10 10 other information that is required. For sample letters to request information, go to Appendix , Letters, and the WinALS letter templates. Compliance order or requirement to provide information If the taxpayer does not comply with the formal request for information, the auditor and team leader should determine whether a compliance order or a requirement should be pursued. Appendix and WinALS provide sample letters. For more information on issuing requirements and compliance orders, go to: , Requirement guidelines , Compliance order guidelines Requesting foreign-based information Requirements to produce information or documents that may be available or located outside of Canada can be served under authority of subsection 231.6(2) of the ITA Requirement to keep adequate books and records (Revised December 2012) Under subsection 230(3) of the ITA, the minister has the authority to require a taxpayer to keep adequate records and books of account to determine their liability or entitlements under the ITA. This action can only be taken after an examination of existing records establishes their inadequacy for purposes of the ITA. There are no specific statutory requirements as to the precise nature of the books and records that a taxpayer must keep. The auditor, together with the advice and assistance of the team leader, has to make this determination using professional judgment and after taking into account the facts and circumstances of the particular situation. Factors to be taken into account when determining the adequacy of the records include the size of the business, the accounting abilities of the employees, the type of industry and the industry's accounting practices. The record-keeping requirements of other organizations that the taxpayer deals with, such as banks, landlords, other creditors, and statutory or regulatory bodies, can also be considered when determining the adequacy of the books and records. Dealing with inadequate books and records When records are inadequate, the auditor must determine whether the audit can proceed satisfactorily with the records in their current state or whether it should be postponed until the taxpayer corrects the deficiencies. The inadequacies in the books and records and the importance of keeping proper records must first be discussed with the taxpayer as well as any necessary corrective measures and the time frame for completing the corrective action. At the same time, the auditor should provide a letter to the taxpayer that lists the inadequacies and confirms the request for corrective action. The letter must include a reasonable deadline for the implementation of the required improvements. For letters for informal requests, go to Appendix , Letters, as well as WinALS. Guides, memoranda, circulars, and bulletins that are public documents may be provided for information purposes.

11 11 A letter of agreement, that the taxpayer signs and returns acknowledging that the inadequacies will be corrected should be included with the letter requesting the improvements. Ensure that the additional requirements are inserted as required in the letter. If the taxpayer has not returned the agreement within 60 days, a follow-up letter with another copy of the confirmation letter should be sent. In some cases, a follow-up visit is recommended after 60 days to ensure that the improvements have been implemented. The assistant director of audit (ADA) is responsible for establishing a control register and a follow-up system for matters relating to books and records. A letter may be sent to the taxpayer requesting confirmation of the date that the changes were implemented. Two copies of the letter should be sent so that one copy can be signed and returned to the TSO. If the corrections have not been made by the agreed date, the auditor should discuss the case with the team leader and the possibility of allowing the taxpayer more time to correct the deficiencies. It may be advisable to proceed with any assessments or reassessments, including disallowing the expenses claimed based on the audit work completed and available information, if no extension is warranted. As an alternative, the condition of the books and records may warrant carrying out net worth procedures. For more information, go to , Net worth. Where a taxpayer has not complied in a timely manner with the requests to keep records and books of account, the auditor should prepare and serve the taxpayer a requirement to keep specific records and books of account. The auditor must ensure that the requirement to keep specific records and books of account is signed by a person with delegated authority. For more information, go to: , Authority and authorization to issue demands and requirements , Requirement to keep specific records and books of account For sample letters, go to Appendix , Letters, and WinALS Location of books and records (Revised December 2012) Books and records kept in Canada Subsection 230(1) of the ITA requires taxpayers to keep their records at their place of business or residence in Canada or at such other place as is designated or specified in writing by the minister. The taxpayer must request permission to keep records at a location other than the place of business or residence. Off-premise storage of backup information does not require authorization by the minister as long as the location is inside Canada. The backups of electronic records should be kept at an alternate place of business or place of residence, unless the minister's permission is obtained to store them elsewhere. Keeping records at another location in Canada A taxpayer may request permission to keep records in Canada at a location other than the place of business or place of residence. Requests to keep records at non-business locations should be

12 12 evaluated using criteria that are similar to requests to retain records outside Canada. Permission should be granted only where necessary under the circumstances of the case. Keeping records outside Canada Under subsection 230(1) of the ITA, permission to keep books and records outside Canada may be granted, subject to the terms and conditions specified by the minister. Requests must be in writing. For more information, go to , Maintaining records and /or conducting audits outside Canada Retention period for books and records (Revised January 2014) General rules Paragraph 230(4)(b) of the ITA provides the general rule that persons required to keep books and records must keep them for a period of six years from the end of the latest tax year to which they relate. Part 5800 of the Income Tax Regulations prescribes further requirements regarding the retention of books and records in certain situations, including corporations and unincorporated businesses that have ceased to carry on a business. A dissolved corporation that was not merged or amalgamated has to keep its records for two years. Alternatively, the corporation may request permission to destroy the records before the legislated time period expires. For more information see Request for Early Destruction of Records that follows. In cases of conflict between the ITA and ETA as to the length of the retention period in particular circumstances, the provisions of the relevant Act requiring the longer retention period prevails. For more information, go to Income Tax Information Circular IC78-10R5, Books and Records Retention/Destruction, at Retention period for persons not required to file income tax returns To determine the retention period for persons that are not required to file income tax returns, the person's fiscal year (as used for budgeting and reporting purposes) will be used. Persons not required to file income tax returns include municipalities, universities, schools, and hospitals (MUSH sector). It is important to note that the retention period for a specific record (transaction) is determined by the last tax year that the record may be required for the purposes of the ITA, not just by the year the transaction occurred. For example, a record documenting the acquisition and capital cost of a fixed asset should be kept for at least six years after the disposition of the asset since the acquisition information is needed at the time of disposition for income tax purposes. Request for permission to destroy records Taxpayers may request permission to destroy records before the legislated deadline by filing Form T137, Request for destruction of records, available at or by providing the same information in a letter addressed to the director of the TSO.

13 13 Form T137 refers only to Income Tax Information Circular IC78-10R5, Books and Records Retention/Destruction. However, the form can be used for all requests to destroy records before the required time period has expired. Taxpayer Services is responsible for the initial review of requests for early destruction and the reply to the taxpayer. If Taxpayer Services finds that the input of other units is required, then Form T29, Destruction of records recommendation, is routed to Appeals, Enforcement and Disclosures (referrals to Enforcement and Disclosures is under review), and Audit for approval. The reply to the taxpayer should note that the approval does not apply to other taxes and regulations of other administrations or to records relating to customs transactions, as the Customs Act does not provide for early destruction of records. The letter approving the destruction should include the following paragraph: "This permission to destroy the books and records mentioned above is given under subsection 230(8) of the Income Tax Act, subsection 83(3) of the Employment Insurance Act, subsection 24(2) of the Canada Pension Plan Act and subsections 98(2) and 286(6) of the Excise Tax Act. This permission does not apply to books and records required to be kept under the Canada Customs Act, or to any other federal, provincial or municipal government departments which require any person or corporation to keep such records or documents." Each TSO should have a unit responsible for reviewing requests forwarded from Taxpayer Services. The ADA may delegate the signing authority to the responsible section manager. Requests for early destruction of records (Revised January 2014) A taxpayer may dispose of books and records before the specified time for doing so, if the minister gives written permission. Each request should be treated as a request to destroy records for GST/HST, income tax, and excise tax since many records are common to all three. Justifiable reasons for early destruction include the lack of storage space without a reasonable alternative or the years to which the records apply have already been audited for all applicable taxes. The taxpayer must have a satisfactory history of compliance before the early destruction of records is considered. If the taxpayer is requesting permission to destroy records for periods that are not statute-barred, the returns as filed should be reviewed for all applicable taxes to determine whether any audit action is necessary. The reviewer must consider the filing date of the relevant income tax, GST/HST and excise tax returns. If the taxpayer has recently late-filed returns for any tax, early destruction should not be approved until the late-filed returns are statute-barred. If there are outstanding returns, the request should not be approved for the records pertaining to the unfiled periods. For income tax purposes, RAPID can be used to verify that all returns have been filed as required. For GST/HST purposes, the returns filed can be verified through the retrieve expected returns menu (RER) in the account main menu (AMM) of the GST/HST returns processing system (GHRAPS). The ECS system should be accessed for excise tax. Approval should not be given for early destruction if there is an audit planned or in progress. The reviewers must check the excise tax, GST/HST, and income tax audit status for all requests. The GST/HST case audit (CSAUV), the audit history (HRSLT) of the GST/HST audit system (AUVER), the RAPID T1 or T2 charge-out status screens, and the AIMS system (browse mode

14 14 screen 3) must all be checked. Other methods must be used to determine whether an audit has been scheduled but not yet assigned. The Notes for Business (NFB) on the Common Menu System which is available through the Business Menu (BMENU) or the Corporate Tax System (CORTX) may be useful to determine whether an audit has been recommended. The reviewer also checks the permanent document folders for both GST/HST and income tax to see if approval for early destruction has already been given for one of the other taxes. The destruction of records for years that are statute-barred should not be automatically approved. The provisions that indicate that the period is statute-barred may be different and depend on the specific situation. Factors to consider include the status of the taxpayer, individual or corporation; the nature of the transaction, such as international versus domestic; and the filing date of the returns for each respective tax. Where there has been neglect, carelessness, or wilful default on the part of the taxpayer, the provisions do not apply. An audit may include periods that are outside the normal record retention period. Partial approval to destroy records may be granted. For example, payroll records may be destroyed while the general ledger, long-term contracts and sales invoices must be retained. Permission to destroy certain records that could potentially be at issue on future audits should be denied. Requests from businesses that have ceased operations may be given favourable consideration where there are no concerns with respect to the preceding guidelines Borrowing books and records from a taxpayer (Revised January 2014) Circumstances where borrowing records is necessary It may be necessary to borrow a taxpayer's records to conduct an audit in certain circumstances. Examples include: the taxpayer has terminated operations and the records are in storage the taxpayer's head office is outside Canada and chooses to deliver the records to the TSO for purposes of conducting an audit using computer-assisted audit techniques (CAAT) suitable space for the auditor to conduct the audit is not available at the taxpayer's place of business Computer records Only copies of computer records are borrowed from the taxpayer. The copies are either destroyed or returned to the taxpayer at the end of the audit. For more information, go to , Computer assisted audit techniques. AIMS Record of borrowed records The RECORDS field on AIMS screen 1 is coded 7 when records are borrowed from a taxpayer. When the records are returned, enter one of these codes: Code Situation 1 Records are in a known non-resident country

15 15 2 Records are in an unknown non-resident country 3 Records are located both in Canada and outside Canada 4 Records at one Canadian location 5 Records at two Canadian locations 6 Records at three or more Canadian locations 7 Books and records borrowed from taxpayer 8 Books and records returned to taxpayer An entry of 1 through 6 also requires a valid entry in the AIMS NR COUNTRY field. Control of borrowed records Where records are borrowed, the auditor prepares a receipt for the borrowed records on Form T2213, Receipt for Borrowed Books, Records and Documents. The receipt provides a detailed description of the books and records received to preclude any future dispute over missing records. Copy 1 is given to the taxpayer. A control register system should be maintained to ensure that the borrowing and return of records is properly documented and includes a follow-up system to make sure borrowed records are returned on a timely basis. Copy 2 of Form T2213 is sent to the person responsible for maintaining the register. Keep Copy 3 with the records until they are returned. When the records are returned, the taxpayer should sign the copy to acknowledge receipt of the returned records. The auditor should then send a photocopy of Copy 3 to the control register clerk and attach the original to Form T20, Audit Report, in case of future disputes over the completeness of the returned records. The status of borrowed books and records can also be monitored by running platinum reports for those cases where the records field on AIMS screen 1 has been coded 7. The auditor must take extra care to safeguard the borrowed records. They are the property of the taxpayer and are to be returned in the same condition as when they were borrowed. The borrowed records and any boxes or other containers provided by the taxpayer should not be marked, altered, or damaged in any way. Clearly label the records with the name of the auditor and the taxpayer and keep in locked storage when not being used. When the auditor receives new records, the storage location should be included on Copies 2 and 3 of Form T2213 for reference to ensure that the records can be located when the auditor is unavailable. Source documents such as invoices that have been sorted chronologically or alphabetically by the taxpayer should be returned as received. If the invoices were re-sorted, the auditor should put them back in the order received if the taxpayer so requests. The security of taxpayer information is of primary importance and special care must be taken by auditors who are teleworking or travelling.

16 16 For more information, go to 3.4.0, Privacy and confidentiality. Returning books and records to the taxpayer (Revised January 2014) Return borrowed books and records to the taxpayer as soon as possible. Mailing records to a taxpayer, preferably by priority post, should only be done where personal delivery or courier is not practical. When returning books and records by mail or courier, the auditor encloses Copy 3 of Form T2213 with a letter requesting that the taxpayer sign and return it to acknowledge receipt. If the taxpayer fails to return the receipted copy, the auditor informs the control register clerk accordingly. The auditor informs the clerk of the date the records were returned and the method used. If priority post or a courier was used, the auditor may also obtain written confirmation of the delivery from the mailroom or courier company. Place copies of these documents in the audit file. When all borrowed records are not returned at the same time, the taxpayer should initial and date each item returned on Copy 3. The auditor keeps Copy 3 until all the records have been returned. Update AIMS screen 1 RECORDS field once the records have been returned. The coding is listed in the chart above, under AIMS Record of borrowed records. If the taxpayer cannot be located to return the records, suitably label, package, and keep the records in storage and place a memo in the permanent document folder accordingly. Also make a log entry in ACSES to advise that the borrowed records are in the CRA's possession. It is recommended that unclaimed records be kept for at least six years. Destruction of unclaimed records should be authorized by the ADA. Seizure of borrowed records from Audit by Enforcement and Disclosures Under review If Enforcement and Disclosures starts an investigation while the auditor still has possession of the taxpayer's books and records, Enforcement and Disclosures will formally seize the books and records from the auditor under the authority of subsection 231.3(1) of the ITA. If the taxpayer enquires about the status of the audit or the return of the books and records, refer the caller to Enforcement and Disclosures as the taxpayer will have been, or will have to be advised of their rights. Accordingly, no further discussions are to take place between the auditor and the taxpayer Copying books and records (Revised December 2012) An auditor has the authority under subsection 231.5(1) of the ITA to make copies of any documents belonging to the taxpayer that are being examined or otherwise audited, including copies of information in electronic format. The auditor also has the authority to make printouts of electronic records. As a matter of courtesy and in the interests of maintaining good relations with the taxpayer, the taxpayer should be informed that copies may be made of certain records and that an additional copy of any document or record copied or printed out will be provided to the taxpayer, if so desired.

17 17 If the taxpayer won't allow the use of their photocopier or doesn't have one, the records should be borrowed and copied at the TSO. Make every effort to ensure that taxpayers who are unwilling to allow copies to be made are fully aware of the auditor's right to do so and to secure the taxpayer's cooperation in this regard to avoid the time consuming and disruptive process of issuing a compliance order or a formal requirement for the documents Penalties for inadequate books and records (Revised December 2012) Consider penalties where the taxpayer has made no effort to maintain adequate records or the records do not support the returns as filed. For more information, go to: , Penalty Recommendation Report 28.0, Penalties Electronic transfer of accounting data Under review (Revised April 2015) Taxpayers can give CRA a copy of their electronic records through use of the electronic transfer of accounting data (ETAD) service that is available through My Business Account, at or Represent a Client, at During the initial contact (see , Contacting the taxpayer), if it is determined that the taxpayer has some of the books or records in electronic format, confirm whether the taxpayer is registered for either the My Business Account or Represent a Client. If the taxpayer is not registered for either, they should be encouraged to register. Pamphlet RC345, Electronic Transfer of Accounting Data, available at is a publication that explains the registration process and the initial file transfer process. The publication refers to a file number that will be provided by CRA; the file number is the AIMS file number. Receiving information through ETAD When information is received through ETAD, the internal system will generate an notification to the auditor. The contains a link to the data that has been uploaded by the taxpayer. In order to access the data, the auditor must provide an e-business Computing Infrastructure (ebci) password and accept the terms and conditions of use. Both the electronic commerce audit specialist (ECAS) and the auditor listed in AIMS will have access to download the information. The information is held for 60 days before being deleted. An is sent to the auditor when the information is received and, if it has not been downloaded, reminders are sent at 45, 30, and 15 days, in addition to another 24 hours prior to deletion. The 30-day reminder is also sent to the Compliance Programs Branch (CPB) National Helpdesk to notify the team leader in case the file needs to be reassigned to another auditor. Processing the information

18 18 When the information received is from Sage 50 (Simply Accounting), or some other accounting software package, follow your local procedures for referring a file to ECAS. Simply Accounting files will be transferred by ECAS to the ECAS national processing lab. Other accounting packages will be handled by the local ECAS team. Other file formats such as spreadsheet, image, or text documents are downloaded by the auditor and included in the file as necessary. Resources CRA Identity Manager to register for an ebci; Learning product TD , Introduction to Electronic Transfer of Accounting Data (ETAD); Authentication Management Services Section (AMSS), AMSS Online Tools, to understand the services available through My Account for Individuals, My Business Account, and Represent a Client; and , Assistance from Electronic Commerce Compliance Division audit specialists Maintaining records and/or conducting audits outside Canada (Revised July 2014) Canada Revenue Agency approval (Revised January 2014) Permission to keep records outside Canada generally should only be granted to foreign-based taxpayers doing business in Canada, or to Canadian-based taxpayers with branches outside Canada. Permission to keep records outside Canada may be granted to Canadian taxpayers if there is a valid reason as to why they are unable to keep records in Canada. Permission to keep records outside Canada will be granted provided that the taxpayer agrees to make them available to the CRA for examination and audit. The taxpayer may ship the records to the TSO and provide reasonable assistance necessary to complete the audit or, alternatively, reimburse the CRA for any costs incurred by the auditor and any other officers in travelling to where the books and records are kept to examine them. These conditions are stated in the letter confirming permission to keep records outside Canada that is sent to the taxpayer which has been signed by an official delegated by the minister under subsection 230(1) of the ITA. Place a copy of the taxpayer's request and a letter of approval or denial signed by the designated official in the permanent document (PD) folder. In evaluating the request to keep records outside Canada, consider: Does the taxpayer have a satisfactory history of compliance? Has the taxpayer previously requested and received authorization to keep records outside Canada for purposes of another tax administered by CRA? Has the taxpayer been denied a request to keep records outside the country in the past? If yes, obtain the details of the request and determine the reasons for the refusal. What is the taxpayer's volume of business in Canada? What are the restrictive policies of the country where records are to be kept?

19 19 The factors to consider when reviewing requests to maintain records outside Canada are also available in working paper format. For more information, go to Appendix A , Maintaining Records Outside Canada Checklist. Failure to request approval to maintain records outside Canada If a taxpayer does not maintain records in Canada or at a place outside Canada as designated by the minister, a requirement to provide information and documents may be issued under subsection 231.2(1) of the ITA. Where the taxpayer refuses to request permission to maintain records outside Canada or refuses to provide information after the requirement has been issued, further enforcement action will be taken. For more information, go to , Requirement guidelines. Electronic records Income Tax Information Circular IC78-10R5, Books and Records Retention/Destruction, at states that books and records kept outside Canada and accessed electronically from Canada are not books and records kept in Canada. The storage medium, such as tape, hard drive, CD-ROM, must be physically located in Canada unless the CRA has given permission to keep the records outside Canada. Where records are maintained electronically in a location outside of Canada, the CRA may accept a copy of the records, provided these are made available in Canada in an electronically readable and useable format for CRA officials and they contain adequate details to support the tax returns filed with the CRA. For more information, go to Income Tax Information Circular IC05-1R1, Electronic record keeping, at Foreign affiliates Income Tax Information Circular IC77-9R, Books, records and other requirements for taxpayers having foreign affiliates, at states that the record retention requirements of Canadian taxpayers set out in Income Tax Information Circular IC78-10R5, Books and Records Retention/Destruction, apply to the books, records and information maintained by the Canadian taxpayer on the affairs of a foreign affiliate. If the books and records are not kept in Canada, the taxpayer is responsible for the costs of carrying out the audit at the foreign location or for the costs of sending the records to Canada for audit. While the CRA recognizes that the requirement to keep the records of foreign affiliates in Canada may not be practical, the taxpayer must be prepared to make the records available in Canada on request Conducting audits outside Canada (Revised July 2014) Taxpayer consent Audits at foreign locations are not conducted without the prior written consent of the taxpayer. Discuss scheduling the audit with the taxpayer, and consider that the time needed to obtain the foreign country's approval of the audit trip is also a factor.