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tax matters

Are you feeling wealthy yet? I think my neighbour Jack is. He's done something that he hasn't done in years: He paid a barber $26 to cut his hair (Jack usually cuts his own hair). And why not? Turns out that we're collectively getting wealthier. According to Statistics Canada, the household net worth of Canadians is now $6.2-trillion, a full 4.1 per cent higher than the pre-recession peak in the second quarter of 2008.

Perhaps you're what the Canada Revenue Agency (CRA) defines as high net worth. If so, you may be the target of a new audit initiative that the taxman is undertaking. Don't panic. Let me explain.


Most Canadians have had minimal interaction with the CRA beyond simply filing an annual tax return because the taxman has traditionally focused attention on auditing large corporations. But the audit winds are shifting. CRA is now turning its attention to auditing wealthy individuals, their families, and the various entities (including corporations, trusts and partnerships) that they may be connected with, in what the department is calling the "Related Party Initiative" (RPI).

The RPI stems from a study by the Organization for Economic Co-operation and Development in 2008, the purpose of which was to look closely at the size and nature of the high net worth segment of the population, including the tax risks that these folks pose.

The majority of wealthy Canadians will not be approached at this point. CRA's focus is on individuals and their related groups with a net asset value of about $50-million or more, and who have related entities that number about 30 or more. CRA wants to understand the affairs of these types of families and believes that, because of the many moving parts in the structures established by these families, there are tax dollars to be found.

The risks

This is all about proper compliance. If an individual, his family, and their related entities have dotted their I's and crossed their T's in their tax planning, and have documented the rationale for the tax filing positions they have taken, they should have little to worry about.

Having said this, CRA won't always play fair ball. The department is on a fishing expedition here. The audit process will begin with a request by the CRA to complete and submit a "Audit Query Sheet," more formally known as Form T997, along with a questionnaire that is about 20 pages in length. The questionnaire asks for information about your various entities, including a request for an organizational chart outlining your ownership interest in these entities and financial statements for the tax years under review. Some of the questions CRA may ask are vague, perhaps leading you to disclose information you don't need to disclose.

If you receive a request to complete and submit these documents, speak to a tax professional right away. Dealing with these kinds of requests is as much an art as it is a science.

The strategies

Regardless of whether you're part of the group who might be targeted under the RPI, following some best practices can help to ensure you're prepared if CRA ever comes knocking. Who knows? The wealth thresholds targeted by CRA could easily move lower. Consider the following best practices:

- Assess your areas of risk. Where have you been aggressive in your tax planning? Have you been lax in your documentation (trustee or director resolutions, promissory notes, signed agreements, etc.) to support that planning?

- Prepare documentation. Work with your advisers to ensure that all important documentation is prepared, organized, and available to defend any planning or tax filing positions.

- Plan what you'll share. Make sure you have a game plan today for what will and will not be provided to CRA.

- Plan who will represent you if you are contacted by CRA.

- Have a communication plan to alert appropriate family members who may also be at risk if an audit is initiated.

- Consider a voluntary disclosure if you've cheated on your taxes in the past.

- Don't panic. Preparation should leave you in good shape.