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TAX MANAGEMENT
SELF ASSESSMENT TOOL
ICAA Council has approved the implementation of tax standards as a formal part of the ICAA
practice review program effective January 1, 2004. Although this tool does not mirror the practice
review program, it provides firms with a resource to monitor the firm’s tax management policies and
assess whether the firm is addressing the key risk areas in its tax practice.
This Tax Management Self Assessment Tool has been designed to assist the public accounting
firm in understanding the nature and extent of their own firms internal quality controls with respect
to tax services in order for the firm to determine if there are areas where improvements or changes
may be appropriate for the firm to ensure the firm is addressing all of the relevant key risk areas in
its tax practice.
It is acknowledged that some areas of the firms procedures will be minimal, for others
comprehensive depending on the nature of the firm’s tax practice and not all questions will be
applicable to all firms.
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SECTION I - BACKGROUND AND COMMENTS ON QUESTIONS IN THE TAX MANAGEMENT
SELF ASS ESSMENT TOOL
This section is intended to assist practitioners in filling out the Tax Management SELF ASSESSMENT
TOOL The purpose of each question is to make the questionnaire easier to understand and to serve as
a useful guide in assessing whether the firm is addressing the key risk areas in its tax practice.
1. Professional Accounting Firm (PAF) Resources
The firm should have current tax reference material. Practitioners should make every effort to
remain current regarding income tax matters by attending courses and having available tax
reference materials. Where the office does not have a full time tax member, the firm may
consider contacting individuals practicing tax full time (es pecially for more complex work).
2. Compliance with Filing Deadlines
A system is needed to ensure that filing deadline dates are met. This has been identified as a
major issue in professional liability insurance claims. Often, it arises surprisingly. For example, a
corporation’s only income is dividends which attract Part IV tax offset by a dividend refund.
Where the return is not filed within three years of the year end, the dividend refund is denied by
Canada Revenue Agency (CRA ), but the Part IV tax still applies. Nonresident corporations
carrying on business in Canada, but exempt from taxation by Treaty, are required to file Canadian
returns to report this. Special penalties apply, despite the fact no tax is payable, where these are
not filed by the usual deadline of 6 months after year end.
3. CRA Form 183 and other Consents
Authorizations are requirements of CRA and must be undertaken by the practitioner. This is the
only evidenc e that exists that the client has authorized the practitioner to represent the cl ients.
4. Client Tax Hi story – New Clients
This authorization will provide you with information relating to carry-forward information such as
ABIL, capital gains/losses, RRSP and others (CNIL, AMT).
5. Tax Filings Documents Review
Documents prepared by staff need to be reviewed and approved by a member.
6. Tax Software
Software will facilitate the practitioner in preparation of tax filings.
7. Di sclaimer S tatements
When ret urns are provided to those other than CRA (e.g. banks), disclaimers are important to
make it clear to all stakeholders that the particular return is prepared on the basis of information
supplied by the client. This is particularly true of personal tax returns. Often personal returns for
self-employed individuals (as an example) are prepared based solely on information provided by
the client.
It is highly recommended to have a disclaimer on all personal and corporate tax returns.
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8. Public Accounting Firm (PAF) Copies of Filed Returns
This is the only evidence that the retur n was prepared by you. It will facilitate responding to
questions from both CRA and your clients.
9. Client Copies of Returns or Summaries of Return Information
This assures that the client receives a copy of the return to assess completeness and accuracy of
information stated therein. It is important that clients are kept informed as to filing positions with
CRA.
10. Docum entation of Services
A clear understanding should be on file as to the nature and extent of services, which are being
provided. A written engagement letter is highly recommended. The letter should delineate, as
clearly as possible, services provided or not provided. Insurance claims often arise when the
client and the PAF have different beliefs as to what services are being provided. As an example,
a client might believe that his year end tax return engagement also covers GS T matters when the
PAF believes they have not been engaged to provide such servic es and consequently relied on
the client’s work.
11. Firm Address – Correspondence with CRA
This ensures that the client is able to respond on a timely basis, particularly in areas involving
requests for supporting documentation for claimed deductions and requests for payments. This
also allows ample time to file a Notice of O bjection within the prescribed time frame.
12. Bonus/ Dividends System
A system needs to be put in place to ensure that bonuses and/or dividends are reported.
Bonuses must be paid within 180 days of the corporate year end.
It is sometimes useful to prepare the T4s and T5s or a data sheet immediately and put the client
copies directly into personal tax files to ensure that this information is reported in the appropriate
taxation year. Another suggestion is to prepare a memo for the personal tax file to remind the
practitioner of the need to pick up the bonuses or dividends in preparing the client’s personal tax
return.
13. Carry Forward Amounts
This specific carry-forward information should be ret ained for each client to facilitate tax planning
and preparation of tax returns and forms. Where uncertainty exists, balances should be verified
with CRA.
14. Oral and Electronically Transmi tted Tax Advice
This documentation enables a practitioner to support the professional tax advice provided.
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15. Ri sk Areas
a) Section 84.1
Whenever there is a share disposition to a company with which the vendor does not deal with
at arms lengt h, Section 84.1 may apply to convert a capital gain to a deemed dividend, where
non-share consideration is received in excess of the vendor’s adjusted cost base. Consult
and review Section 84.1 carefully before proceeding with a share disposition.
b) Sections 85 & 97(2) Elections (T2057 & T2059)
The major issues are the late filing of these returns and the errors they contain regarding the
consideration received. The due date for these elections is by the earliest of the day on or
before which any taxpayer making the election is required to file a return of income.
c) Share Redemptions
Practitioners assume that a share redemption by a private corporation will give rise to a
capital gain which can be sheltered by the exemption. While this is true in some
circumstances, it is not the norm. Redemptions in excess of paid -up capital will give rise to a
deemed dividend. Proceed with caution in this area.
d) Section 15
Despite the existence of the shareholder benefit provisions of the Income Tax Act for many
years; this continues to be a troublesome area for practitioners. Of particular importance is
the area of shareholder loans. Generally, these must be repaid by the end of the fiscal period
following the year in which they arose. Otherwise, the amount must be reported as income
by the shareholder. This means if the shareholder subsequently repays an income inclusi on,
no deduction will be allowed if the repayment is made as part of a series of loans or other
transactions and repayments. Loans should be adequately documented as a loan, or repaid
within the current fiscal year.
In addition, it will be much more difficult to structure exempt loans to shareholders under
Subsection 15(2) after April 1995.
e) Capit al Gains Exemption
Care must be taken to ensure that the company upon which the exemption is being claimed
meets the tests outlined in Subs ection 110.6(1). This area is very complex and assistance
from a tax specialist should be considered. In addition, a prior year ABIL claim will reduce
the taxpayer’s entitlement to claim the full exemption. The practitioner must also take into
account the presenc e of a CNIL balance. AMT should be considered by the practitioner
whenever planning for the capital gains exemption.
Systems need to be put into place to ensure that a gain in the year is not omitted when
preparing the taxpayer’s personal return for that year.
f) Filing Returns and Forms Late
Filing ret urns and forms late is a very common type of professional liability insurance claim
made against members by their “former” clients.
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g) GST
Often GS T is overlooked on transactions such as Section 85 rollovers. Essentially, whenever
property is being trans ferred GS T needs to at least be considered. Consideration needs to be
given as to whether any particular election is necessary.
h) Capit al Dividend Elections
The most common concern is over-electing on the CDA balance. This will give rise to a
tax liability equal to 60% of the excess amount. Although an election can be filed to
treat this as an ordinary dividend, the amount will still be taxable, possibly resulting in
actions being taken against the practitioner. Timing of additions to the CDA is a
particular concern, especially with respect to sales of cumulative eligible capital, which
enhance the CDA only after the end of the fiscal year in which the sale takes place.
ii) Eligible Dividend
Practitioners are required to assist their CCP C clients in tracking the General Rate
Income Pool and any non-CCP C’s in tracking their Low Rate Income Pool. These
provisions are new (effective in 2006 and subsequent years), however, the
consequences of errors in this area could be similar to those related to capit al dividend
elections where excessive eligible dividends are paid or opportunities to pay eligible
dividends are overlooked.
i) Non-Resident Transactions
If dividends or interest are paid to a non -resident by a Canadian taxpayer, withholding tax
may be required. The domestic rates of withholding may be reduced by a tax treaty that
Canada may have with that country. Failure to withhold can result in large penalties to the
client and they may be required to pay the amount that should have been withheld. In
addition, transactions with certain non -resident persons may require separate disclosure with
CRA. These situations need to be reviewed carefully.
Trust and foreign affiliate reporting retroactive to taxation years beginning after 1995 will be
required to be filed with the earliest date being April 30, 1998. A Canadian resident taxpayer
must complete an information return with respect to interests in foreign affiliates (Form
T1134A) interests in controlled foreign affiliates (Form T1134B), loans or transfers to a
specified foreign trust or controlled foreign affiliate of the trust (Form T1141) and in respect of
a receipt of a distribution from or indebtedness to a non -resident trust in which a beneficial
interest is held. (Form T1142).
Information return Form T1135 requiring a Canadian taxpayer to describe foreign investment
property held, the cost of the property and income earned from the property. Foreign
investment property is a very broad category and includes portfolio investments in foreign
corporations, even where these are held in Canadian brokerage accounts and income
thereon reported on T5 slips.
Failures to report such transactions carry extremely large penalties. It may be necessa ry to
contact another member with international tax expertise.
Caution must be taken to ensure clients are made aware of these foreign reporting
requirements.
j) Notice of Objection
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Deadlines for filing a Notice of Objection should be logged and monit ored. This is a frequent
problem area and is a source of many court cases. All practitioners need to ensure that
objections are followed up within the prescribed time limits. For individuals and testamentary
trusts, the deadline is the later of:
1) the day that is one year after the taxpayer’s filing due dat e for the year in question, and
2) the day that is 90 days after the day of mailing of the Notice of Assessment.
For all other taxpayers, the due date is 90 days after the mailing of a Notice o f
Assessment.
k) Trans fer Pricing
Taxpayers who participate in cross-border transactions with non-arm’s length parties must
conduct such transactions on terms and conditions that would have prevailed had the parties
been dealing at arm’s lengt h with each other. Legislation requires taxpayers to doc ument
transactions and the steps taken to ens ure the terms and conditions of such transactions
satisfy the arm’s length principle. Penalties will be imposed where a taxpayer fails to make
reasonable efforts to determine and use arm’s length transfer prices or arm’s length
allocations in respect to transfer pricing transactions. Care must be taken to ensure clients
are made aware of thes e issues and of the impending complianc e requirements.
l) Non-Arm’s Lengt h Transactions
The Income Tax Act contains various provisions that may override an intended result with
respect to transactions between related or affiliated persons. Examples of this are the
superficial loss rules in Section 54 and the loss deferral rules under subsection 40(3.3) and
40(3.4) of the Income Tax Act. Care must be taken to ensure the intended result of such
transactions is not overridden by a specific provision of the Income Tax Act.
m) Inter-corporate Dividends
It is not unusual for a taxpayer corporation to attempt to reduc e an inherent capital gain in the
shares of a subsidiary company of payment of what is thought to be a tax -free inter-corporate
dividend prior to the sale of shares of the subsidiary. Section 55 of the Income Tax A ct must
be considered to ensure that the tax-free inter-corporate dividend is not reclassified as
proceeds on the sale of shares resulting in a taxable capital gain for income tax purposes.
n) Acquisition of Control Issues
The reorganization of a private corporation or a parent corporation of a subsidiary corporation
could have unint ended results if an acquisition of control is considered to have taken place.
Restrictions on the deductibility of non-capital losses, the elimination of net capital loss es,
deemed year end for income tax purposes, acceleration of payment of income taxes and
other implications must be considered if a reorganization results in an ac quisition of control.
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o) Forgiveness of Debt
Dealing with any changes in the relationship of debtors and considering the implications of
prior debt arrangements on current restructuring of businesses can be a significant issue if
not identified. The implications of Section 79 and Section 80 of the Income Tax Act must be
considered.
p) Attribution Rules
A loan or transfer of property bet ween related pers ons, including a loan or transfer of property
by an individual to a corporation or trust for the benefit of certain relat ed persons, can result
in the attribution of related income or capital gains to the individual who made the loan or
transfer.
With proper structuring of such transactions, which may include the payment of interest on
loans bet ween related persons by the lender to the borrower by a specified date, signific ant
income tax savings may arise. Practitioners must be aware of these rules when advising
clients, particularly the importance of meeting interest payment deadlines, etc. which if not
met, can jeopardize the plan put in plac e to minimize the impact of the attribution of i ncome
and/or capital gains.
q) Research and Development
This area can be complex, and determining the optimum choice for a given client can be
extremely difficult for practitioners who do not practice in this area on a regular basis. As well
the deadline for filing these claims, in general 18 months after year end, is enforced
rigorously by the CRA. Even when the returns are filed on time, it is not uncommon for CRA
to determine that some forms are incomplete and/or missing. They will not allow this to be
corrected subsequent to the 18 month deadline.
r) Remitting payments for clients
Some payments must be deposited by a specific deadline date to be considered “on time”.
Source deductions for some remitters are required to be made at a financial i nstitution, and
not paid by cheque delivered to the Canada Revenue Agency. Payments forwarded to CRA
risk not being deposited prior to the appropriat e deadline, resulting in penalties.
16. Public Accounting Firm (PAF) Checkli st
The use of a checklist for professional staff for T1 and T2 engagements will ensure that all key
points have been covered.
17. Client Checkli sts – T1 Filings
The use of annual checklists for clients helps them to review their financial affairs to identify tax
related matters.
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SECTION II - RECOMMENDATIONS
1. Professional Accounting Firm (PAF) Resources
A. Briefly describe the training & experience of those who practice tax in the firm? (E.g. completion
of CICA in-dept h tax course, attendance at seminars, and Canadian Tax Foundation
conferences, etc.).
If a sole practitioner, describe how you maintain the appropriate level of tax knowledge.
If a multi-partner firm, indicate whether a designated tax personnel exists and the firm policy as
to how the tax personnel maintain their current level of tax knowledge.
B. If the multi-partner firm does have a designated person, what is the firm policy/procedure as to
how tax issues are referred to the designat ed person?
C. What tax reference materials does the firm have available and what procedures are in place to
ensure reference materials are maintained on a current basis?
(e.g. CICA’s tax services and publications, CCH Tax Service, Video Tax News, etc.)
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2. Compliance with Filing Deadlines
T1 T2 T3 T4 OTHER
Is there a system in place to ensure
compliance with filing deadline dates? Yes/No/N/A Yes/No/N/A Yes/No/N/A Yes/No/N/A Yes/No/N/A
Please explain each system:
Is there a system in place to ensure Yes/No/N/A Yes/No/N/A Yes/No/N/A Yes/No/N/A Yes/No/N/A
follow-up of CRA enquiries,
correspondence etc?
Please explain each system:
3. CRA Form T183 and other Consents
Are the following forms maintained on file?
a) Client approval to e-file T1 (Form T183)? Yes No N/A
b) CRA Consent Form in prescribed format? Yes No N/A
(RC-59 Business Consent Form
T1013 – Authorizing or Cancelling a Representative)
4. Client Tax Hi story – New Clients
a) Is tax history obtained? Yes No
b) If “yes” indicate the nature/extent of history (CRA printout, CRA on-line access through “Represent a
Client ”, copies of client returns, etc.)
5. Tax Filings Documents Review
T1 T2 T3 T4 OTHER
a) Are tax filings reviewed?
Yes/No/N/A Yes/No/N/A Yes/No/N/A Yes/No/N/A Yes/No/N/A
b) Please indicate
i) Who is the reviewer?
ii) What are the qualifications of the reviewer?
iii) Describe the nat ure of the review.
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6. Tax Software
T1 T2 T3 T4 OTHER
Is tax software being us ed?
Yes/No/N/A Yes/No/N/A Yes/No/N/A Yes/No/N/A Yes/No/N/A
Indicate which software is being used for each type of return. If a manual system is used, provide a
description of the preparation process.
7. Di sclaimer S tatements
T1 T2 T3 T4 OTHER
Are standard disclaimers printed or
stamped on returns provided to other Yes/No/N/A Yes/No/N/A Yes/No/N/A Yes/No/N/A Yes/No/N/A
than CRA?
If so, please provide a copy of the wording of the disclaimer for each type of return.
If not, how has the firm’s level of involvement been communicated?
8. Public Accounting Firm (PAF) Copies of Filed Returns
T1 T2 T3 T4 OTHER
a) Are copies of filed returns for Yes/No/N/A Yes/No/N/A Yes/No/N/A Yes/No/N/A Yes/No/N/A
existing clients retained by the firm?
b) Are these copies: Yes/No/N/A Yes/No/N/A Yes/No/N/A Yes/No/N/A Yes/No/N/A
Paper? Yes/No/N/A Yes/No/N/A Yes/No/N/A Yes/No/N/A Yes/No/N/A
Electronic? Yes/No/N/A Yes/No/N/A Yes/No/N/A Yes/No/N/A Yes/No/N/A
If electronic, can returns be accessed Yes/No/N/A Yes/No/N/A Yes/No/N/A Yes/No/N/A Yes/No/N/A
and printed at a later date?
c) Are copies of supporting information Yes/No/N/A Yes/No/N/A Yes/No/N/A Yes/No/N/A Yes/No/N/A
(slips, financial information/
statements, etc.) retained by the firm?
Please provide a brief description of the types of information retained in the file.
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9. Client Copies of Returns or Summaries of Return Information
T1 T2 T3 T4 OTHER
Are clients provided wit h copies of filings? Yes/No/N/A Yes/No/N/A Yes/No/N/A Yes/No/N/A Yes/No/N/A
Complete (C) or Summary (S) copies C/S C/S C/S C/S C/S
(fill in the box with either a "C" or "S")
10. Docum entation of Services
T1 T2 T3 T4 OTHER
a) Are engagement letters obtained for
the following? Yes/No/N/A Yes/No/N/A Yes/No/N/A Yes/No/N/A Yes/No/N/A
b) Are engagement letters obtained for Yes/No/N/A Yes/No/N/A Yes/No/N/A Yes/No/N/A Yes/No/N/A
special tax work?
If yes, provide a brief description. Please also attach a copy of the firm’s engagement letters,
(including examples of specific letters of understanding for special tax work ) to this questionnaire.
11. Firm Address - Correspondence with CRA
a) Is the PAF’s address used as the client mailing address? Yes No
b) If “yes” are clients provided wit h copies of relevant correspondence
to/from the CRA? Yes No
c) If item b) above is “no” indicate the nature of the correspondence NOT being provided to clients.
12. Bonus/ Dividends
Is there a system to ensure that bonuses and/or dividends are report ed? Yes No
Please describe the system, emphasizing the features being relied on to preclude errors/omissions .
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13. Carry Forward Amounts
a) Indicate how the following carry forward amounts are identified for subsequent years.
i) A.B.I.L
ii) Capit al gains/losses
iii) R.R.S.P.
iv) Capit al Dividend account
v) General Rate Income Pool/Low Rate Income Pool
vi) Others (C.N. I.L and A.M.T)
b) State whether software or manual schedules are being maintained. If manual, pleas e describe the
system used.
14. Oral and Electronically Transmi tted Tax Advice
Is oral tax advice documented? Yes No
Please describe the system, particularly indicating the nat ure of the advice, on which the documentation
is done. Please provide a representative sampling of clients where oral advice was provided.
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15 Ri sk Areas
Please refer to Page 3 of the questionnaire explanations rel ating to each ri sk area. Please provide a
description of the system s that control the respective ri sk areas identified.
The following have been identified as high-risk areas of tax practice:
Tax Transaction Potenti al Error
a) Section 84.1 Capit al gain converted to deemed dividend
b) Section 85 & 97(2) Elections Late filings/considerations received
c) Share redemptions Dividend income - versus capital gains
d) Section 15 Debit balanc es in shareholders loans
e) Capit al gains exemption Eligibility & availability
f) Filing ret urns & forms late Who pays?
g) GST on unusual transactions There are many !
h)(i) Capit al dividend elections Over-electing
h(ii) Eligible dividend designations Over-designating
i) Non-resident transactions Elections, withholding requirements, reporting requirements
and loans
j) Notice of Objection Deadlines, content and proof of filing
k) Trans fer pricing Reas onableness
l) Non-arms lengt h transactions Is value reasonable?
m) Inter-corporate dividends Dividend income versus capital gain
n) Acquisition of control issues Identification and implications
o) Forgiveness of debt Identification and implications
p) Attribution rules Implications and deadlines
q) Research & Development Credits and deadlines
r) Remitting payments for clients Deadlines and mechanism
Do you practice in any of the above areas? Yes No
If “yes”, please answer the following questions:
a) Describe the controls in place to minimize the risk associated with these areas of practice?
(e.g.: Referrals to outside specialists, in-firm specialist review procedures, etc.)
b) What procedures are followed to ensure that any referrals are being performed as requested?
c) What procedures are followed to provide communication with clients?
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d) What procedures are in place for any required subsequent follow-up?
16. PAF Staff Checkli sts
Do checklists for professional staff exist? Yes No
If yes, attach a copy of the PAF’s Checklist(s) to this questionnaire.
17. Client Checkli sts - T1 Filings
a) Are clients given an annual checklist to assist them in providing
information for filings? Yes No
If yes, attach a copy of the PAF’s checklist to this questionnaire.
b) If “no”, describe the procedures followed to ensure all relevant information is obtained?
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