In response to the COVID -19 pandemic, the federal government put in place several support programs, the largest of which was the Canada Emergency Wage Subsidy (CEWS) program. After nearly two years of the pandemic, many recipients of this support will face an audit of their claims by the Canada Revenue Agency (CRA). Although some CEWS audits were conducted in the summer and fall of 2020, they resumed in late 2021 and these audits will continue for some time.
To help you and your organization prepare for such an audit, BDO's tax controversy team has prepared three helpful tips based on their experiences in assisting with COVID program applications.
Based on the audit letters that some have already received, taxpayers can expect a very detailed and comprehensive request for information. In general, each letter will follow a similar format mainly seeking information to verify the claimant's eligibility for the program. In addition, the letters will also seek information to verify the determination of qualifying revenue and eligible compensation for each claim period, as these each play a role in the quantification of claims. You will also need to provide information to support how you calculated revenue drop percentage and eligible remuneration amounts as well as any elections selected when making the claim. You can expect that the CRA will audit claims for several different periods and not just one or two claims.
The information requests will generally require source documents such as sales journals and payroll journals, as well an electronic copy of the general ledger, year-end and monthly trial balances, shareholder minutes and organization charts, and a copy of the taxpayer attestation which was made when filing the claim and which includes all elections made in making the claim. In addition, the CRA will likely ask for any governance documents in the organization's books as well as records related to the CEWS claims such as minutes of the board of directors about the CEWS applications. The CRA expects the claimant to provide all requested information and supporting documentation within 30 days.
It is important to know that with early action, there is the possibility of reducing the scope of the audit request. You and your BDO advisor can contact the auditor, to determine if there is selected information that you do not need to provide because it is not applicable to your business or is not relevant for the purpose of validating the exactitude of your claims. In addition, you can request an extension of time to provide the information.
Will CERS audits follow?
Very soon after the CERS was put in place, desk audits were conducted on some claims to validate the eligibility and legitimacy of the CERS claims. These audits were conducted at a high level and not intended to confirm all components of the CERS claims. Therefore, we must expect that the CRA will perform regular audits of the CERS claims even for periods that were covered by a desk audit.
The general guidance set out above with respect to CEWS audits also applies to CERS audits, except that instead of wages and compensation, taxpayers will be required to provide source documents—such as leases—to support qualifying rent expenses claimed in CERS claims. In addition, an attestation reflecting the same elections for CERS as were made for CEWS claims will also be required.
Ongoing ability to audit rent and wage subsidy claims
The legislative mechanism put in place in the Income Tax Act (ITA) to allow wage and rent subsidy claims to be paid to taxpayers was meant to allow these claims to create an overpayment on the claimants' tax account. This was put in place so that the claims would be paid by way of a refund of this overpayment.
Among amendments to the ITA to put the mechanism of these subsidies in place was one made to allow the CRA to—at any time—determine the amount of a taxpayer's CEWS or CERS claim that arose during a qualifying period, or to determine that no claim is allowed. When such a determination is made, the CRA will issue a notice of determination. When this notice is issued—for example, at the end of an audit—the taxpayer has 90 days to dispute the result of the notice of determination.
This new provision allowing a notice of determination at any time is very important. It could allow the CRA to audit the CEWS and CERS claims beyond the period of assessment normally allowed for corporations and individuals. For Canadian controlled private corporations (CCPCs) and individuals, the normal reassessment period is generally three years after the assessment of a tax return for a given year, or four years after a corporate tax return is assessed for other corporate taxpayers.
Consequently, we recommend that you assemble all the information and supporting documents that you used to make your CEWS and CERS claims at the time a claim is made in a permanent file rather than waiting until you receive an audit request. This will help ensure all details are included, since they are still fresh, and you are not scrambling to gather all relevant information. In general, the audits will be resolved faster when the information is provided in good form and when requested.
Although this article has referred to the CEWS and CERS programs, the issues will apply equally the Canada Recovery Hiring Program (CRHP) and to the new wage and subsidy programs that were introduced in October 2021. These new programs are the Tourism and Hospitality Recovery Program (THRP), the Hardest-Hit Business Recovery Program (HHBRP), and the Local Lockdown Support Program (LLSP). Please see our tax articles Government releases proposed legislation for further business COVID-19 support and Federal government expands access to local lockdown program, introduces CEWS restrictions and How the Canada recovery hiring program supports jobs and growth for further information on these specific programs.
Should you need any assistance with these audits, do not hesitate to reach out to your BDO advisor. Our experience in dealing with tax administrations on a regular basis can help you to minimize the time that it takes to deal with a CRA audit of these wage and rent subsidy claims.
The information in this publication is current as of February 4, 2022
This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.