What to expect with CRA CEWS audit queries
The CRA has begun issuing audit queries with respect to the CEWS program.
By Daniel Sandler, Emily Gair and Laura Jochimski, EY Law
In early September, the Canada Revenue Agency (CRA) began issuing audit request letters to certain employers that had submitted Canada Emergency Subsidy (CEWS) claims. The CRA noted in their letters that these audits were commencing earlier than in normal circumstances due to the “unusual nature” of the CEWS program.
Indeed, large corporations typically receive such letters starting from one year after filing. In the case of the CEWS, however, the first audit letters were received less than six months after the inception of this emergency support benefits program, and in some cases within a few months of the claim having been made.
In August, the CRA announced that its post-payment audit of CEWS claims had begun, focusing at first on periods 1-4.1 In this announcement, the CRA also noted that it would be selecting a range of files for this first audit phase using a “random sampling methodology.” While the letters are still being sent out and the number of employers targeted is unknown, the scale of the requests for information is seemingly significant.
Some of the requests sent to employers span six pages and include more than 50 individual line items, with more information required if the employer opted to make some of the permissible elections offered in the CEWS legislation (e.g. if the employer elected to compute its qualifying revenue under the cash method as provided for in paragraph 125.7(4)(e) of the Income Tax Act).
Some of the specific items requested include:
- All revenue information for 2019 and 2020, including sales journals, bank statements and monthly sales reports breaking down sales by revenue type
- Various documents from minute books, including any agreements with respect to inter-company loans, partnership agreements and employee loans
- Detailed working papers substantiating the calculation of qualifying revenue
- Detailed payroll information, including employee contracts, proof of payment to employees and payroll journals
To many employers, the short timeline to respond to the request, typically 10 business days, was an immediate concern. The CRA has qualified this tight timeline by stating that where additional time is required to compile documents for the response, taxpayers can provide an explanation as to why additional time is required, and a “revised response date may then be established.”
The CRA’s rationale for the short timeframe is “if the electronic transmission of the information is a viable option and the information is readily available given that the CEWS claims have recently been submitted to the CRA.” The implication is that the taxpayer presumably compiled the information requested to prepare the CEWS claim, so the information should still be fresh at hand.
Responding to these initial sweeping requests may require extensive time and resources. Strategies to reduce the difficulty of responding include requesting that the CRA accept a representative sample of data instead of simply a document dump. Further, employers are well advised to ensure the information they provide to the CRA is reasoned, cohesive and easy to follow. The CRA has noted that during these audits they are “...not looking to punish businesses who have made an honest mistake.”2
Summary
If you have any questions about the CEWS audit request letters or the possibility of being audited, please contact one of our EY Law advisors: