Government to Review “Abnormal” Number of Tax Audits of Taxpayers in Northern Canada

written on behalf of Feigenbaum Law

CBC News reported this week that Northerners living in Nunavut have been overly reassessed (i.e. audited) on their income taxes.

National Revenue Minister Diane Lebouthillier visited Iqaluit in April to meet with territorial and business leaders. A prominent topic of discussion during the meetings was the number of Nunavut residents (Nunavummiut) who are reassessed on an annual basis.

Since then, Lebouthillier has promised to take a closer look at this matter and committed to provide statistics to show how widespread this problem may be. Among the individuals she spoke to was someone who has been reassessed each year for the last decade.

Lebouthillier told CBC that:

That’s not normal. It’s normal for the agency to do reassessments, but it’s not normal to reassess someone 10 times in 10 years in a remote region. So there’s work that’s going to be done on that.

The Northern Residents Deduction

Individuals who live in Nunavut, Yukon, and the Northwest Territories for at least six consecutive months qualify for the northern residents deduction, which they claim on their tax return. The deduction is $8.25 per day that they lived in the territory in the given tax year.

It is this deduction which has resulted in CRA reassessments. The most common complaint by northern taxpayers, particularly those who live in the territories full-time or who have lived in the territories their entire lives, is that they are being asked to prove that they live there.

Previous Concerns

In 2016, the federal taxpayers ombudsman told CBC that she was looking into a possible “systemic issue” for taxpayers in the North. The ombudsman’s office had received a number of complaints from northerners wondering whether their tax returns were being reassessed more often than those of taxpayers in southern Canada.

Northerners told the ombudsman that they have had to find past receipts, often going back years, to prove that they, actually live in the north. Many told the ombudsman that this happens annually, and that it seems as though the CRA is not looking at previous tax returns to see that this has already been proven many times.

At the time, a CRA spokesperson told CBC that there are specific criteria that must be present in order for a taxpayer to be reassessed but that claims can be selected at random. The spokesperson noted that more than a million reassessments are done annually, and that the CRA does not track how many are from the North versus other areas. She said that:

The CRA neither targets nor excludes any specific category of people when reviewing returns…[i]t treats all taxpayers equally using fair and non-discriminatory criteria when selecting returns for review.

The CRA ultimately released a report following some consultations with northern residents.

The ombudsman ultimately noted that she did not open a systemic examination as her office was satisfied with what had been done to date, and that they would wait and see what the CRA itself would do about the issue. She did commit to continue to monitor the issue and “keep an eye on what the CRA actually does to meet the action items they’ve raised and meet the issues and problems that we’ve heard about the northern residents deduction”.

Concerns about the overt scrutiny of Northerners by the CRA were also more recently raised. Last year, Nunavut MP Hunter Tootoo raised the issue in the House of Commons and asked Lebouthillier whether she would look into the process.

At the time, Lebouthillier sidestepped the question, telling Tootoo that every taxpayer is treated equally. Lebouthillier now says that since her recent discussions with Nunavummiut “things changed” as she had a chance to “get a real sense of what’s happening”.

Evidence of the Issue

There is some anecdotal evidence about Nunavummiut being overly reassessed in order to establish their claims for the northern resident’s deduction, but it is hard to put an actual number on the issue.

One of the largest accounting firms in Nunavut, Lester Landau (which handles about 10% of the income tax returns in the territory) had at one point tracked how many of its clients were being reassessed. The company told CBC that between 2005 and 2007 15 to 20% of its clients were being reassessed (about five times the national average).

Despite the CRA’s original contention that the Agency does not track how many returns are reassessed from different areas of Canada, a freedom of information request filed by the CBC subsequently revealed that the CRA did keep track of how many returns were reassessed specifically asking a taxpayer to support their claim for the northern residents deduction.

Some Statistics

CBC was able to collect some data on the number of returns that were reassessed in each territory ad nationally (for any reason, not just the northern residents deduction) for 2014 and 2015, and the total number of returns filed in each of these jurisdictions for 2016.

Assuming that the numbers have remained similar, the reassessment rate appears to be between:

• 12 and 15% in Nunavut;
• 11 and 14% in the Yukon;
• 13 and 16% in the Northwest Territories.

During the same period of time the national reassessment rate was around 4.6%.

We will continue to follow developments in this matter and will provide updates as they become available.

In the interim, if you need assistance with personal tax planning, speak to  Mark Feigenbaum. We offer customized solutions for each of our clients that streamline compliance requirements and set them up to take advantage of all possible current and future opportunities to reduce their tax burden. Contact us to learn more about how we can help or call us at (416) 777-8433 or toll free at (877) 275-4792.