How general counsel can proactively prepare for tax controversy

Change, change and more change: that’s the one constant in the world of tax reporting and compliance. Tax authorities in Canada are digging more deeply into what have traditionally been pegged as “niche” areas — think offshore compliance or cryptocurrency tax reporting. That means organizations — and the General Counsel’s Offices (GCOs) that drive compliance — can mitigate the risk of tax controversy by planning proactively. Doing so also helps the GCO speed up processes, improve efficiency and dial down costs.

How is Canada’s tax landscape evolving in real time?

Year over year, provincial and federal budgets bring new tax measures — and the requisite reporting or regulatory requirement changes that come with updates like these. These regular updates become particularly poignant, though, in complex market environments like the one we’re experiencing now.

Economic and political pressures often lead to changes in tax policy and administration that impact markets, customers and businesses. And GCOs won’t want to be caught off guard should an uptick in tax controversy files emerge.

At EY, we typically see tax disputes unfold through three distinct but interconnected stages.

1.   First comes the audit itself. The tax authority might examine one particular issue, for example foreign tax credits or certain business expenses. In other cases, the authority might delve into a full-scope audit where they look much more broadly at everything claimed in a taxation year.

This second, more expansive audit can have additional implications. For example, the tax authority may expand the scope of the audit to include additional taxation years or the CRA may request a third party to provide information and documents for the purposes of the audit.

At this stage, it’s also important to understand the taxpayer’s bill of rights and be ready to answer questions and requests effectively to navigate the audit.

2.   Next is the Notice of Objection stage. Many organizations, GCOs and individuals may not be as familiar with this second-level review. Large corporations must be particularly mindful of the additional requirements to file a Notice of Objection, including the requirements to:

1. Reasonably describe each issue
2. Specify the quantum of the relief being sought for each issue
3. Provide the facts and reasons the corporation relies on for each issue under dispute.

After filing a Notice of Objection, an independent CRA officer is assigned to review the file.  Being ready to engage in a fulsome dialogue at this point is crucial; plenty of tax controversy files are resolved at the Notice of Objection stage, when the organization or GCO is well prepared and informed.

3.   Last comes litigation. Once in this realm, you’ll likely need — or in some cases, be required to have — legal representation to navigate this process. Having a supportive and experienced legal team can be a crucial factor in reaching a settlement before the file goes to court, or in managing the litigation process if the matter can’t be resolved beforehand.

With so much macroeconomic upheaval in recent years, and pandemic-era spending fueling a growing national deficit, audit activities may be on the rise. This reality reinforces the importance of being prepared to respond effectively, no matter what changes or market shifts come your way.

What should GCOs have top of mind to navigate this landscape well?

1.   Keep your documentation. Not all organizations realize the importance of maintaining documentation.  Certain documents should be kept for seven years while other documentation should be maintained indefinitely. Tax authorities may request information going back many years, and you want to be prepared to provide it should a dispute arise. Retaining documentation is a critical component of staying ahead of tax controversy and being able to reply effectively when disputes come up. Failing to retain documentation now could mean costly repercussions later on should you be unable to fully back your tax claims.

2.   Have a system in place. Businesses must think beyond retaining documentation and actually build a system that successfully manages this information. Technology platforms and generative artificial intelligence (gen AI) now offer a range of efficient ways to digitally store, track, source and access documentation. Using the right platforms makes it easier to quickly narrow down the right document at the right time. It also reduces the GCO’s reliance on manual processes, which can be time consuming, resource heavy and expensive — not to mention prone to errors.

3.   Plan ahead for potential disputes. Creating a clear internal process for how the GCO will navigate a potential dispute can save time if — or when — an issue arises. Planning this out strategically saves teams from scrambling in the moment, which eats up time and human resources. Know what steps you’ll take if a tax dispute occurs, assign clear ownership for various parts of the process and maintain up-to-date procedures that the team remains familiar with at all times.