Data Analytics and Information Systems in Tax
Solution 1
Friendly Patio Furniture Inc. (FPFI) Sample Solution Using MS Excel Data Analysis Tools
Stage 1: Business Understanding
Tax Issue Identified:
We are to prepare the T2 Schedule 5 Tax Calculation Supplementary-Corporations for the company for 2022
Context:
This schedule is the corporate tax return schedule which is used to allocate federal taxable income to provinces and other jurisdictions in which the company has a permanent establishment (PE) as defined in the Income Tax Regulations (ITR’s).
To prepare this schedule, we need to determine in which jurisdictions the company had PE’s during the year. Then, we will need to analyze the company’s data to allocate its gross revenues and salaries and wages to those jurisdictions consistent with the ITR’s.
Plan for Analysis:
1)Identify ITR’s relevant for determining the PE jurisdictions.
2)Determine the PE jurisdictions.
3)Determine the gross revenues allocable to the PE jurisdictions.
4)Determine the salaries and wages allocable to the PE jurisdictions.
5)Allocate the federal taxable income to those PE jurisdictions based on the formula in the ITR’s.
Stage 2: Data Understanding
Data Identification
To determine where PE’s are located, we will need to review where the company has fixed places of business. In addition, we will need to review the activities of its employees and independent contractors to determine their functions and activities.
We will need to gather data files on the company’s gross revenues and salaries and wages paid for the allocation process.
Data Collection
We gathered information on fixed places of business and the activities of its employees and independent contractors to determine their functions and activities.
We were provided with the following data files to do our analysis:
o The database schema of the company’s files needed for this problem with “FK” denoting “foreign key”. A foreign key acts as a cross-reference between tables that links to the primary key of another table.
o tSales file (this file shows the company’s 2022 sales transactions)
o tPayroll file (this file shows the salary and benefits of the employees in the year)
o tCustomer file (this shows customer billing and shipping addresses)
Introduction to Federal Income Taxation in Canada 43rd Edition 2022-2023 Edition by Nathalie Johnstone , Devan Mescall , Julie Robson Solution manual CHAPTER 22 Sample
o tEmployees file (this file shows extracts from the employee master file)
o tProducts file (this file shows the company’s products sold in the year and related prices)
o tLocationsfile (this file shows the company’s production and head office locations)
Data Explored
All of the data files were reviewed for errors by visually scanning the data files. In addition, the files were converted to tables in Excel to filter the data fields which facilitated the review of high observations, low observations, missing data and duplicates.
Stage 3 Data Preparation Data Cleaning
As per the instructions provided, no actual follow up was done at this stage and so no data was “cleaned”. All the data was retained as provided. The following items were identified for follow up in the tSales file:
B)The following represent items on which we should follow up to determine if there are errors in the data before we finalize the results shown above for use in the preparation of the tax return for the year: (all the data files were reviewed for errors by visually scanning the data files and doing summary statistics such as high obvservations, low observations, missing data and duplicates.
tsales file
i) There were missing invoices from 3101 to 3201 -this issue was located by determing that the difference between the invoice numbers at beginning of the year and the end of the year was higher than the number of invoices in the year.
ii) There is a duplicate invoice #3100 which was located using the conditional formatting function in excel.
iii) There are a few invoice numbers with no data. An example is the first one shown below: Inv # Inv Date
iv) The following invoices have negative sales quantities:
v) The following invoices have significantly higher sales quantities and sales amounts compared to the rest of the sales in the year:
vi) The following invoices do not have salespeople assigned to them:
This appears to be the only file with follow up items and potential errors.
Constructing and Integrating Data
a)To proceed with the salaries and wages per PE, the following steps were necessary in Excel:
43rd
Introduction to Federal Income Taxation in Canada
Edition 2022-2023 Edition by Nathalie Johnstone , Devan Mescall , Julie Robson Solution manual CHAPTER 22 Sample
2239 2022-01-04
salesID customerID salesDate productID locationIDQuantity WholesalePriceemployeeID 3317 81 2022-08-23 4 3 -1 1225 21 3332 77 2022-08-27 3 4 -2 1000 24 3345 58 2022-08-30 4 4 -3 1225 21
salesID customerID salesDate productID locationIDQuantity WholesalePriceemployeeID 2801 10 2022-04-30 6 3 88 1800 27 2807 45 2022-05-01 6 4 61 1800 32
salesID customerID salesDate productID locationIDQuantity WholesalePriceemployeeID 2382 15 2022-02-10 8 4 9 2400 NA 2433 39 2022-02-25 7 4 7 2000 NA 2479 15 2022-03-07 10 4 8 2500 NA 2580 15 2022-04-01 7 3 10 2000 NA 2833 38 2022-05-09 6 4 3 1800 NA 2879 38 2022-05-22 4 3 19 1225 NA 3087 15 2022-07-21 3 4 17 1000 NA 3204 39 2022-07-25 2 4 6 780 NA 3240 38 2022-08-04 9 4 15 2500 NA 3313 45 2022-08-21 6 4 11 1800 NA 3409 38 2022-09-15 2 3 17 780 NA 3420 15 2022-09-19 7 4 11 2000 NA 3461 39 2022-09-30 1 4 5 600 NA 3606 38 2022-11-08 6 3 3 1800 NA 3675 39 2022-11-30 8 4 19 2400 NA
1.create a copy of the tPayroll file for analysis so the original data is not affected by the analysis to be done
2.calculate gross salary and wage by employee
3.use ““vlookup”” function from the tLocation file to allocate employees to provinces
The following shows the first 2 lines of this new file:
b)To proceed with the gross revenues per PE, the following steps were necessary in Excel:
1.tSales file was copied into a new Excel file for analysis so the original data is not affected by the analysis activities
2.gross revenue was calculated for each invoice
3.tCustomer file was copied into this Excel file in a new tab, and “vlookup” function used to determine “ship to addresses” for each invoice required for allocation process
4.tEmployees file was copied into this Excel file in a new tab and “vlookup” function used to determine their reporting location for customer invoice allocation by reporting location, as necessary
5.tLocation file was copied into this Excel file in a new tab, and “vlookup” function used to determine where each invoice’s products were produced as necessary
The following shows the first 2 lines of this updated sales analysis file:
Stage 4 – Modeling
Firstly, we need to determine the jurisdictions where the company had PE’s. It appears that the company had PE’s in BC, NB and BC where it had fixed places of business. The company’s employees located in other jurisdictions and/or performing functions in other jurisdictions did not appear to have contracting authority or to have inventory from which they fulfilled customer orders, so there do not appear to have been any other PE’s than in those three provinces.
Given these three PE jurisdictions, we use Excel’s pivot table function to determine the salaries and wages and gross revenues attributable to each PE jurisdiction.
A)For salaries and wages, the analysis shows the following results:
B)For gross revenues, the analysis provides the following results depending on where the products were shipped:
Introduction to Federal Income Taxation in Canada 43rd Edition 2022-2023 Edition
by Nathalie Johnstone , Devan Mescall , Julie Robson Solution manual CHAPTER 22 Sample
PayrollID employee periodStartperiodEndsalaryWagesbonus taxableBenefitsjobDescriptiongross salary and benefits work locationlocation province 235 Arliene Mundie1/1/2022 12/31/2022 79999 15999.8 3999.95 salesPerson 99,998.75 $ St. StephenNBFactory 236 Lek Bathowe1/1/2022 12/31/2022 91899 16379.8 4094.95 salesPerson 112,373.75 $ St. StephenNBFactory salesID customerIDsalesDate productID locationID Quantity WholesalePriceemployeeIDgrossrevenues shipcountry shipprov reportto whereproduced 2226 3 2022-01-01 4 4 10 1225 21 12,250 $ Canada NB NB BC 2227 2 2022-01-01 7 4 9 2000 33 18,000 $ Canada NB ON BC Row Labels Sum of gross salary and benefits BC 1416402.1 NB 1857610.05 ON 2357312.12 Grand Total 5631324.27
Introduction to Federal Income Taxation in Canada 43rd Edition 2022-2023 Edition by Nathalie Johnstone , Devan Mescall , Julie Robson Solution manual
CHAPTER 22 Sample
Shipments for Canadian Provinces
Note that row “0” represents non-Canadian province shipments (i.e., exports).
Salesperson Reporting Provinces
The above shows the sales in non-PE provinces attributable to salespeople reporting to locations in PE provinces. Again foreign sales are shown as 0 above.
Row Labels Sum of gross revenues 0 10730420 AB 1346250 BC 3211530 NB 2008860 NL 363005 NS 657885 ON 4160210 QC 1928640 SK 920935 Grand Total 25327735
for Non-PE Provinces Row Labels Sum of gross revenues 0 10730420 AB 1346250 BC 232595 NB 824200 ON 289455 BC 3211530 NB 2008860 NL 363005 NB 363005 NS 657885 BC 298040 ON 359845 ON 4160210 QC 1928640 BC 694195 NB 865935 ON 368510 SK 920935 BC 571050 NB 289760 ON 60125 Grand Total 25327735
US shipments Province Produced
The above shows sales to US customers and the PE province in which those sales were produced since the company does not have a PE in the US.
The gross revenues can then be allocated as follows based on the above 3 pivot table results:
Finally, the company’s taxable income would be allocated as shown below as per the ITR’s:
Stage 5 – Evaluation
The results of our analysis above appear to be reasonable based on the factors the ITR’s set out. We do need to ensure that we follow up on the items noted above in the data preparation process before we incorporate this information in the company’s 2022 tax return. Stage
6 – Deployment
As noted above, we need to complete the follow up on the tSales items noted above before using this information in the tax return. Assuming the ITR’s do not change in the future and the organization’s PE’s do not change, a similar analysis can be used in future years.
43rd
Introduction to Federal Income Taxation in Canada
Edition 2022-2023 Edition by Nathalie Johnstone , Devan Mescall , Julie Robson Solution manual CHAPTER 22 Sample
Row Labels Sum of gross revenues 0 0 0 0 Canada 14597315 US 10730420 BC 5283245 NB 5447175 Grand Total 25327735 PE Province Ships to Province Ships to Non-PE Provinces For Ships Sourced to PE Province Total Sales Allocated BC 3211530 1795880 5283245 10290655 ON 4160210 1077935 5238145 NB 2008860 2342900 5447175 9798935 Total 9380600 5216715 10730420 25327735 A)T2-Schedule 5 Federal Taxable Income 480,000 $ Allocation of Salaries and Wages % Gross Revenues % Average % Taxable Income BC 1,416,402 $ 25% 10,290,655 $ 41% 33% 157,877 $ ON 2,357,312 $ 42% 5,238,145 $ 21% 31% 150,101 $ NB 1,857,610 $ 33% 9,798,935 $ 39% 36% 172,022 $ Total 5,631,324 $ 100% 25,327,735 $ 100% 100% 480,000 $
Solution 2:
New Wave Computers Inc. (NWC) Suggested Solution Using MS Excel Data Analysis Tools
A)Types of Supplies and POS Rules
Types of Supplies
All sales of products (computers) and services (tech support) are considered taxable supplies, and all USA sales (computers and services) are zero-rated export supplies with all other sales fully taxed supplies. Provincial “Place of Supply” (“POS”) rules are not required for sales to USA customers since no tax is payable on exports.
Place of Supply Notes
We have summarized below Canada’s Place of Supply (“POS”) rules as set out in various Canada Revenue Agency (CRA) publications. Most importantly, we note that the rules related to collecting GST/HST on sales are different for sales of goods and sales of services. NWC sells both computers and customer support services. To do this analysis, we only require customer address information at the province/state and country level, and not customer name and street address information so the information provided in the files is sufficient for the analysis. For sales of goods and services to customers in Canada, sellers need to look to the POS rules for sales for products and services. Those POS rules determine the rate of GST/HST that should be charged to customers in different provinces. GST is charged at 5% for non-participating provinces (Quebec, BC, Saskatchewan, Manitoba and BC) and the Territories while HST is charged in participating provinces at 13% in Ontario and 15% in Nova Scotia, New Brunswick, Newfoundland and Prince Edward Island.
NWC supplies goods (computers) and services (tech support -customer assistance calls and emails are considered services here as are any remote assistance is done by phone/email/chat).
For the sale of goods like computers, the rules are quite straightforward-the rate of tax is determined by the province where the computers are delivered as the delivery and transfer of ownership occurs in that province.
For the sale of services, the rate of tax is determined by what information the company has on the customer as part of its normal order entry practices.
The POS rules for services indicate that where the company has one address for a customer from its normal information collection process, that address can be used for purposes of determining the province and related tax rate for GST/HST purposes.
Where more than one address is gathered for a customer, the address related to the “contracting decision” should be used. This is the home address for customers.
Where no address is obtained from a customer, the POS rules look at where the service is performed. For NWC sales to customers with no addresses, we have determined that all services are performed at the Etobicoke, Ontario location and products are delivered from that location as well.
B)Use of CRSP-DM Method to Assess GST/HST Reporting and Remittances Stage 1: Business Understanding Tax Issue Identified
We are to determine the excess or deficient GST/HST amounts the company billed to and collected from its customers for the 2022 fiscal year.
to Federal Income Taxation in Canada 43rd Edition 2022-2023 Edition
Introduction
by Nathalie Johnstone , Devan Mescall , Julie Robson Solution manual CHAPTER 22 Sample
Context
The determination to be made is part of the 2022 fiscal year audit. We have been provided with the amount of revenue and GST/HST charged to customers by relevant jurisdiction in the 2022 year. To perform this analysis, we will compare the amounts reported and collected by the company with amounts that should have been reported and collected based on the company’s files and currently existing GST/HST laws.
Plan for Analysis
1)Obtain information on the GST/HST rules relevant for determining the amount of GST/HST that should be collected on the sale of goods and services in Canada and for export.
2)Determine the GST/HST that should have been charged on sales of computers by NWC by jurisdiction.
3)Determine the GST/HST that should have been charged on sales of services by NWC by jurisdiction.
4)Prepare of summary of GST/HST that should have been charged in total by jurisdiction and compare those amounts to those actually billed and collected from customers.
Stage 2: Data Understanding
Data Identification
We will need to gather data files on the company’s sales for the year, its customer addresses and GST/HST rates for each jurisdiction in which the company sold products and services in the year.
Data Collection
We were provided with the following data files to do our analysis:
o Sales for 2020 to 2022 (“tSales”) that have been agreed to the general ledger and the GST/HST returns for the years
o Customer file (“tCustomer”) that provides information gathered by the company for all customers as part of its normal revenue generation process. Customer specific information has been encrypted except for province/state and country information that is required to complete this analysis.
o Product file (“tProducts”) that provides the company’s products for the 2020 to 2022 years. This file is used to generate the sales price charged to customers in each year.
o GST/HST rates by province (“tRates_01”) with the appropriate 2 letter provincial abbreviation used in various data files.
Data Explored
All of the data files were reviewed for errors by visually scanning the data files. In addition, the files were converted to tables in Excel to facilitate review of high observations, low observations, missing data and duplicates. Students may have used visualization tools available in programs such as Tableau or MS Power BI to explore the data at this stage.
Stage 3 Data Preparation Data Cleaning
As per the instructions provided, no actual follow up was done at this stage and therefore no data was “cleaned”. All the data was retained as provided. See response to part ( C) of the required for issues for follow up.
Constructing and Integrating Data
To proceed with the analysis, the following steps were necessary in Excel to construct and integrate the data provided (Students could use other tools such as MS Access, Tableau, Power BI or programming languages such as R or Python to construct and integrate the data):
1.create an Excel file for the sales data so the original data is not affected by the analyses undertaken
2.convert the data to a table
3.use filter on transaction date so we are only using the 2022 sales data
4.calculate the sales amount per transaction
5.use vlookup function of tCustomer file to determine the country of each customer
Introduction to Federal Income Taxation in Canada 43rd Edition 2022-2023 Edition
by Nathalie Johnstone , Devan Mescall , Julie Robson Solution manual CHAPTER 22 Sample
6.for USA customers, we know that the sales are zero rated and not subject to GST/HST, so we can focus from here on only Canadian customers and assign 0 to all USA transactions
GST/HST Owing on Product Sales
7.for Canadian customers, we can look at product sales GST/HST by using “if” statements and the “vlookup” function to determine the province where the products were delivered for each sale as this is the allocation factor as per the GST/HST Place of Supply (POS) rules
8.we can now use the “vlookup” function to set the rate of tax that should have been charged on each product sale based on province of delivery as per the tRates_01 file
9.the transaction sale amount determined as per above for each Canadian product delivery is multiplied by the rate of tax to calculate the GST/HST that should have been billed for each product sale
The following shows the first 8 lines of the updated sales analysis file showing the GST/HST that should have been charged by sales transaction (computer product sales) with USA customers showing no tax owing:
GST/HST Owing on Service Sales
10.for Canadian customers, we can look at techSupport sales GST/HST by using “if” statements and “vlookup” function to determine the province of the head office/home address for each customer sale consistent with the POS rules for services provided in Canada
11.we can now use the “vlookup” function to set the rate of tax that should have been charged on each techSupport sale based on home address province as per the tRates_01 file
12.the transaction sale amount determined as per above is multiplied by the rate of tax to calculate the GST/HST that should have been billed for each service sale
The following shows the first 8 lines of the updated sales analysis file showing the GST/HST that should have been charged by service transaction (tech support sales) with USA customers showing no tax owing:
13.for transactions where no province of sale for services is available in the system, the POS rules indicate that the rate of tax applicable in the province where the services were provided should be applied. In this case, that would be ON where the tech support service team is located and thus where the services are provided by phone, email, chat, and remote access. Some product (computer) sales did not have a delivery addresses. We have assumed that the products were delivered to customers in Ontario from the head office. We will need to confirm how these products were actually delivered without any addresses.
14.for Canadian customers without delivery addresses for product sales, we can use the “if” function to determine sales amounts for transactions without a delivery address
15.for Canadian customers without a home address for service sales, we can filter the tCustomer file to determine if those customers have any other address in the system. In this case, the customers without a home address do not have any address in the system. For these transactions, we can use the “if” function to determine sales amounts for these transactions knowing that they have no address in the system
16.for these Canadian sales of goods and services with no addresses in the system, we can multiply the sales amounts for these transactions by the rate of GST/HST for ON per the tRates_01 file to determine the GST/HST owing on these transactions
Introduction to Federal Income Taxation in Canada 43rd Edition 2022-2023 Edition
by Nathalie Johnstone , Devan Mescall , Julie Robson Solution manual CHAPTER 22 Sample
SalesDate Year DayofWk month category product SKU q price custType custID Sales$ CustCountry delprov provtaxrate taxduesales 2022-01-15 2022 Sat 1 sales small 44feffa8 2 1359.99 Corp 1627 2719.98 CAN ON 0.13 353.5974 2022-01-13 2022 Thu 1 sales large bc42f84b 3 6739.99 Corp 1566 20219.97 CAN AB 0.05 1010.9985 2022-01-02 2022 Sun 1 sales small 44feffa8 2 1359.99 Corp 1635 2719.98 CAN NS 0.15 407.997 2022-01-25 2022 Tue 1 sales small 44feffa8 2 1359.99 Corp 1032 2719.98 CAN ON 0.13 353.5974 2022-01-02 2022 Sun 1 sales small 44feffa8 2 1359.99 Corp 1322 2719.98 CAN BC 0.05 135.999 2022-01-22 2022 Sat 1 sales large bc42f84b 3 6739.99 Corp 1109 20219.97 CAN NS 0.15 3032.9955 2022-01-30 2022 Sun 1 sales small 44feffa8 2 1359.99 Corp 1458 2719.98 USA 0 0 0 2022-01-16 2022 Sun 1 sales small 44feffa8 4 1359.99 Corp 1400 5439.96 CAN BC 0.05 271.998 SalesDate Year DayofWk month category product SKU q price custType custID Sales$ CustCountry servhomeoffprov serprovtaxrate taxdueserv 2022-01-14 2022 Fri 1 techSupportmedium 10ebbb57 2 150 Corp 1460 300 CAN SK 0.05 15 2022-01-11 2022 Tue 1 techSupportmedium 10ebbb57 2 150 Corp 1032 300 CAN ON 0.13 39 2022-01-08 2022 Sat 1 techSupportmedium 10ebbb57 2 150 Corp 1629 300 USA 0 0 0 2022-01-21 2022 Fri 1 techSupportlarge 31cd4dcd 3 150 Corp 1239 450 CAN ON 0.13 58.5 2022-01-29 2022 Sat 1 techSupportlarge 31cd4dcd 3 150 Corp 1566 450 CAN AB 0.05 22.5 2022-01-22 2022 Sat 1 techSupportmedium 10ebbb57 2 150 Corp 1125 300 CAN SK 0.05 15 2022-01-29 2022 Sat 1 techSupportlarge 31cd4dcd 3 150 Corp 1179 450 USA 0 0 0 2022-01-19 2022 Wed 1 techSupportmedium 10ebbb57 2 150 Corp 1170 300 CAN ON 0.13 39
Mescall , Julie Robson Solution
CHAPTER 22 Sample
The following shows all of the lines in the updated sales analysis file showing the GST/HST that should have been charged for Canadian goods and services transactions without any address in 2022:
Stage 4 – Modeling
We can use Excel’s pivot table function on the updated sales analysis file to determine the revenues and GST/HST amounts for the year.
A)Determine the total Canadian and USA sales for 2022 as shown below knowing the USA sales will not have any GST/HST tax amounts due:
B)Determine product sales by province in 2022 and related GST/HST owing for those sales (note that row “0” represents USA sales and service sales which are excluded from this part of the analysis and row “NA” represents Canadian product sales where there was no address for the customer):
Note that the GST/HST amounts are tested to the right to ensure they are consistent with the rates for those provinces, and they are consistent.
C)Determine service sales by province in 2022 and related GST/HST owing for those sales (note that row “0” represents USA sales and computer product sales which are excluded from this part of the analysis and row “NA” represents Canadian sales where there was no address for the customer):
43rd
Introduction to Federal Income Taxation in Canada
Edition 2022-2023 Edition by Nathalie Johnstone , Devan
manual
SalesDate Year DayofWk month category product SKU q price custType custID Sales$ CustCountry Noprovproductrevs Noprovservicerevs ONtaxesdueNoProvRevs 2022-02-01 2022 Tue 2 sales medium 3e7d929d 5 2099.99 Corp 1348 10499.95 CAN 10499.95 0 1364.9935 2022-02-10 2022 Thu 2 techSupportlarge 31cd4dcd 3 150 Corp 1331 450 CAN 0 450 58.5 2022-02-25 2022 Fri 2 techSupportmedium 10ebbb57 3 150 Corp 1172 450 CAN 0 450 58.5 2022-04-08 2022 Fri 4 sales small 44feffa8 3 1359.99 Corp 1621 4079.97 CAN 4079.97 0 530.3961 2022-04-24 2022 Sun 4 sales small 44feffa8 2 1359.99 Corp 1221 2719.98 CAN 2719.98 0 353.5974 2022-04-05 2022 Tue 4 techSupportmedium 10ebbb57 2 150 Corp 1621 300 CAN 0 300 39 2022-05-31 2022 Tue 5 techSupportsmall 7d959cc9 2 150 Corp 1221 300 CAN 0 300 39 2022-06-05 2022 Sun 6 sales small 44feffa8 2 1359.99 Corp 1163 2719.98 CAN 2719.98 0 353.5974 2022-07-31 2022 Sun 7 sales small 44feffa8 4 1359.99 Corp 1621 5439.96 CAN 5439.96 0 707.1948 2022-08-07 2022 Sun 8 sales large bc42f84b 3 6739.99 Corp 1621 20219.97 CAN 20219.97 0 2628.5961 2022-09-16 2022 Fri 9 sales medium 3e7d929d 2 2099.99 Corp 1221 4199.98 CAN 4199.98 0 545.9974 2022-10-07 2022 Fri 10 techSupportmedium 10ebbb57 2 150 Corp 1262 300 CAN 0 300 39 2022-11-27 2022 Sun 11 sales small 44feffa8 2 1359.99 Corp 1104 2719.98 CAN 2719.98 0 353.5974 2022-11-05 2022 Sat 11 sales small 44feffa8 3 1359.99 Corp 1633 4079.97 CAN 4079.97 0 530.3961 Row Labels Sum of Sales $ 2022 37980304.66 CAN 30458649.83 USA 7521654.83 Grand Total 37980304.66 Row Labels Sum of Sales $ Sum of tax due sales test rates 2022 37980304.66 #N/A 0 9165309.83 0 AB 4239056.51 211952.8255 5% BC 4380375.91 219018.7955 5% NA 56679.74 #N/A NB 381217.74 57182.661 15% NS 600896.64 90134.496 15% ON 13053102.29 1696903.298 13% QC 5613468.42 280673.421 5% SK 490197.58 24509.879 5% Grand Total 37980304.66 #N/A
Note that the GST/HST amounts are tested to the right to ensure they are consistent with the rates for those provinces, and they are consistent.
D)Determine the sales for the year and related HST owing for which there are no addresses in the system for products delivered or services provided. These sales will be allocated to ON as shown below:
Note that the HST amounts in ON are shown properly above at 13% of the sales.a
E)Aggregating the results of the models and allocating the NA row for non-address sales to ON as per above, we arrive at the following summary of the actual results for 2022:
Note 1 agreed to total sales for year
Note 1:Non-Address sales have been allocated to Ontario where services are provided to customers and where computers manufactured
Note that the GST/HST amounts are tested to the right to ensure they are consistent with the rates for all jurisdictions, and they are consistent.
43rd
Introduction to Federal Income Taxation in Canada
Edition 2022-2023 Edition by Nathalie Johnstone , Devan Mescall , Julie Robson Solution manual CHAPTER 22 Sample
Row Labels Sum of Sales $ Sum of tax due serv check rates 2022 37980304.66 #N/A 0 36336649.66 0 AB 237000 11850 5% BC 241830 12091.5 5% NA 1800 #N/A NB 23100 3465 15% NS 25200 3780 15% ON 747375 97158.75 13% QC 340800 17040 5% SK 26550 1327.5 5% Grand Total 37980304.66 #N/A Row Labels Sum of No prov product revs Sum of No prov service revs Sum of ON taxes due No Prov Revs 2022 56679.74 1800 7602.3662 Grand Total 56679.74 1800 7602.3662 NWC Summaryof Taxes Due byJurisdiction bySales Type 2022 Year Sales Taxes ProductSales Service Sales Non-Address Sales Total ProductSales Service Sales Non-Address SalesTotal checks AB 4,239,056.51 $ 237,000.00 $ 4,476,056.51 $ 211,952.83 $ 11,850.00 $ 223,802.83 $ 5.00% BC 4,380,375.91 $ 241,830.00 $ 4,622,205.91 $ 219,018.80 $ 12,091.50 $ 231,110.30 $ 5.00% NA 56,679.74 $ 1,800.00 $ -$58,479.74 - $ - $ - $ - $ 0.00% NB 381,217.74 $ 23,100.00 $ 404,317.74 $ 57,182.66 $ 3,465.00 $ 60,647.66 $ 15.00% NS 600,896.64 $ 25,200.00 $ 626,096.64 $ 90,134.50 $ 3,780.00 $ 93,914.50 $ 15.00% ON 13,053,102.29 $ 747,375.00 $ $58,479.74 13,858,957.03 $ 1,696,903.30 $ 97,158.75 $ 7,602.37 $ 1,801,664.41 $ 13.00% QC 5,613,468.42 $ 340,800.00 $ 5,954,268.42 $ 280,673.42 $ 17,040.00 $ 297,713.42 $ 5.00% SK 490,197.58 $ 26,550.00 $ 516,747.58 $ 24,509.88 $ 1,327.50 $ 25,837.38 $ 5.00% All USA Sales 7,521,654.83 $ - $ 7,521,654.83 $ - $ - $ - $ 0.00% Total 36,336,649.66 $ 1,643,655.00 $ - $ 37,980,304.66 $ 2,580,375.38 $ 146,712.75 $ 7,602.37 $ 2,734,690.49 $
Finally, we provide a summary of the actual results for the year above compared to the amounts reported by the company in its accounts as shown below:
Stage 5 – Evaluation
The results of our analyses indicate that the company has under reported its GST/HST obligation by $8,985.44 for the year. We need to ensure that we follow up on the items noted above in the data preparation process before we finalize our assessment.
Stage 6 – Deployment
As noted above, we need to complete follow up on the tSales file and tCustomer file items noted above and update the analyses before including the results of this analysis in the audit file. Assuming the CRA POS rules do not change in the future and the organization’s sales transaction types do not change, a similar analysis can be used in future years as part of the audit file.
C)Issues for Follow Up
Sales transactions for 2022 were filtered in the updated sales file table. The total sales figure was calculated for 2022 per the tSales file by using a pivot table on sales in the file and this figure was agreed to the total sales for the year reported in the summary information provided by jurisdiction. The following unusual items were identified for follow up in the tSales file in Excel by filtering the columns in the file (note that students may use other analysis tools such as Python, R, MS Access for this part and the other parts of the solution):
43rd Edition
Introduction to Federal Income Taxation in Canada
2022-2023 Edition by Nathalie Johnstone , Devan Mescall , Julie Robson Solution manual CHAPTER 22 Sample
NWC Overall Summary of Sales and GST/HST Taxes Due Actual Submitted to CRA Sales Under/ GST/HST Billed Sales GST/HST Billed Sales GST/HST Billed (Over) Reported Deficiency/(Excess) AB 4,476,056.51 $ 223,802.83 $ 4,505,123.56 $ 225,256.18 $ 29,067.05 -$ 1,453.35 -$ BC 4,622,205.91 $ 231,110.30 $ 4,632,045.22 $ 231,602.26 $ 9,839.31 -$ 491.97 -$ NB 404,317.74 $ 60,647.66 $ 401,234.12 $ 60,185.12 $ 3,083.62 $ 462.54 $ NS 626,096.64 $ 93,914.50 $ 615,065.99 $ 92,259.90 $ 11,030.65 $ 1,654.60 $ ON 13,858,957.03 $ 1,801,664.41 $ 13,764,281.87 $ 1,789,356.64 $ 94,675.16 $ 12,307.77 $ QC 5,954,268.42 $ 297,713.42 $ 5,980,000.34 $ 299,000.02 $ 25,731.92 -$ 1,286.60 -$ SK 516,747.58 $ 25,837.38 $ 560,898.73 $ 28,044.94 $ 44,151.15 -$ 2,207.56 -$ USA 7,521,654.83 $ 0 7,521,654.83 $ 0 - $ - $ Total 37,980,304.66 $ 2,734,690.49 $ 37,980,304.66 $ 2,725,705.05 $ 0.00 $ 8,985.44 $
Introduction to Federal Income Taxation in Canada 43rd Edition 2022-2023 Edition by Nathalie Johnstone , Devan Mescall , Julie Robson Solution manual
CHAPTER 22 Sample
Invoices with 0 or negative sales quantities and dollar amounts generally do not appear in sales summaries, so these should be reviewed.
Fractional sales of a computer would indicate an error as would fractional sales of service hours of less than one hour when the company’s policy is that a minimum of one hour must be charged for each customer.
The high unit/high dollar invoices are significantly higher than all other invoices in the year, and as such, should be reviewed for correctness.
Negative unit sales SalesDate Year DayofWk month category product SKU q price custType custID Sales $ 2022-03-15 2022 Tue 3 sales medium 3e7d929d -1 2099.99 Corp 1174 -2099.99 2022-05-07 2022 Sat 5 techSupportmedium 10ebbb57 -2 150 Corp 1405 -300 2022-06-12 2022 Sun 6 sales small 44feffa8 -3 1359.99 Corp 1136 -4079.97 2022-09-16 2022 Fri 9 sales large bc42f84b -2 6739.99 Corp 1223 -13480 2022-09-10 2022 Sat 9 sales small 44feffa8 -2 1359.99 Corp 1049 -2719.98 2022-10-28 2022 Fri 10 sales small 44feffa8 -3 1359.99 Corp 1479 -4079.97 2022-10-14 2022 Fri 10 sales small 44feffa8 -2 1359.99 Corp 1185 -2719.98 2022-03-27 2022 Sun 3 sales small 44feffa8 -1 1359.99 Indi 147828 -1359.99 2022-03-02 2022 Wed 3 sales small 44feffa8 -2 1359.99 Indi 148093 -2719.98 2022-04-30 2022 Sat 4 sales small 44feffa8 -1 1359.99 Indi 151900 -1359.99 2022-06-25 2022 Sat 6 sales medium 3e7d929d -1 2099.99 Indi 157404 -2099.99 2022-07-02 2022 Sat 7 techSupportmedium 10ebbb57 -2 150 Indi 160134 -300 2022-08-06 2022 Sat 8 sales small 44feffa8 -1 1359.99 Indi 161169 -1359.99 0 unit sales SalesDate Year DayofWk month category product SKU q price custType custID Sales $ 2022-02-05 2022 Sat 2 sales small 44feffa8 0 1359.99 Corp 1618 0 2022-05-12 2022 Thu 5 sales small 44feffa8 0 1359.99 Corp 1606 0 2022-08-25 2022 Thu 8 sales small 44feffa8 0 1359.99 Corp 1599 0 2022-08-05 2022 Fri 8 sales small 44feffa8 0 1359.99 Corp 1262 0 2022-08-13 2022 Sat 8 techSupportmedium 10ebbb57 0 150 Corp 1158 0 2022-09-24 2022 Sat 9 sales medium 3e7d929d 0 2099.99 Corp 1104 0 2022-11-25 2022 Fri 11 sales large bc42f84b 0 6739.99 Corp 1611 0 2022-12-11 2022 Sun 12 sales small 44feffa8 0 1359.99 Corp 1245 0 2022-12-20 2022 Tue 12 techSupportmedium 10ebbb57 0 150 Corp 1125 0 2022-11-27 2022 Sun 11 sales medium 3e7d929d 0 2099.99 Indi 137943 0 2022-11-27 2022 Sun 11 sales small 44feffa8 0 1359.99 Indi 137965 0 2022-11-27 2022 Sun 11 sales medium 3e7d929d 0 2099.99 Indi 138031 0 2022-11-06 2022 Sun 11 sales medium 3e7d929d 0 2099.99 Indi 138119 0 2022-11-29 2022 Tue 11 sales medium 3e7d929d 0 2099.99 Indi 138427 0 2022-11-22 2022 Tue 11 techSupportsmall 7d959cc9 0 150 Indi 140011 0 2022-11-15 2022 Tue 11 techSupportsmall 7d959cc9 0 150 Indi 140077 0 2022-11-04 2022 Fri 11 techSupportlarge 31cd4dcd 0 150 Indi 140231 0 2022-12-17 2022 Sat 12 sales small 44feffa8 0 1359.99 Indi 141199 0 Fractional unit sales SalesDate Year DayofWk month category product SKU q price custType custID Sales $ 2022-06-02 2022 Thu 6 techSupportmedium 10ebbb57 0.5 150 Corp 1554 75 2022-07-20 2022 Wed 7 techSupportmedium 10ebbb57 0.5 150 Corp 1552 75 2022-05-04 2022 Wed 5 techSupportlarge 31cd4dcd 0.5 150 Indi 155223 75 2022-05-06 2022 Fri 5 techSupportmedium 10ebbb57 0.3 150 Indi 155334 45 2022-05-27 2022 Fri 5 techSupportsmall 7d959cc9 0.75 150 Indi 155423 112.5 2022-07-09 2022 Sat 7 sales small 44feffa8 0.6 1359.99 Indi 158835 815.994 2022-08-31 2022 Wed 8 techSupportsmall 7d959cc9 0.45 150 Indi 163370 67.5 2022-09-30 2022 Fri 9 techSupportmedium 10ebbb57 0.5 150 Indi 165593 75 2022-12-14 2022 Wed 12 techSupportsmall 7d959cc9 0.5 150 Indi 143003 75 High unit and dollar sales invoice SalesDate Year DayofWk month category product SKU q price custType custID Sales $ 2022-05-15 2022 Sun 5 sales large bc42f84b 11 6739.99 Corp 1185 74139.89 2022-05-20 2022 Fri 5 sales large bc42f84b 11 6739.99 Corp 1289 74139.89 2022-05-07 2022 Sat 5 sales large bc42f84b 11 6739.99 Corp 1298 74139.89 2022-07-24 2022 Sun 7 sales small 44feffa8 100 1359.99 Corp 1575 135999 2022-09-10 2022 Sat 9 sales large bc42f84b 11 6739.99 Corp 1419 74139.89 2022-09-03 2022 Sat 9 sales large bc42f84b 11 6739.99 Corp 1003 74139.89 2022-09-29 2022 Thu 9 sales large bc42f84b 11 6739.99 Corp 1341 74139.89
The following items were identified for follow up in the tCustomer file: 71 customers had no addresses for the 3 year period-this could be expected possibly from individual customers that paid by eft, but some corporate customers had no addresses. In addition, some product (computer) sales customers had no delivery address.
Problem 3
memo
Zelda Inc.
To:CFO
From:CPA
Date:September 4, 2022
RE:Upcoming CRA Audit
I am writing to provide responses to your questions related to the upcoming CRA Audit. I show your questions (in bold) and my responses below.
If you have any questions or concerns, please do not hesitate to contact me.
CPA
a)What years will CRA be able to audit?
As Zelda Inc. (“Zelda”) is a CCPC, the normal reassessment period is 3 years. The 2017 tax year was assessed May 20, 2018, so that year is “statute barred” and likely will not be subject to audit unless CRA alleges fraud or gross negligence.
All other tax years were assessed after the date that is 3 years prior to the start of the audit date, so they may be subject to audit. The 2018 year was assessed December 5, 2019, so the CRA auditor will likely focus on that year first as they will not have very much time to propose reassessments before the 3 year reassessment window ends.
b)What visualization technique would you use to screen for expense accounts that appear to be risky from an audit point of view? Please show the results of the visualization technique you would use.
There are many visualization techniques that may be used to screen for “risky” expense accounts given the GIFI information we are using. Visualization tools could include Tableau, Power BI, Microsoft Excel or one of many other software packages or programs that present data as visualizations. Below, I provide 2 visualization techniques from Excel:
Introduction to Federal Income Taxation in Canada 43rd Edition 2022-2023 Edition
CHAPTER 22 Sample
by Nathalie Johnstone , Devan Mescall , Julie Robson Solution manual
Introduction to Federal Income Taxation in Canada 43rd Edition 2022-2023 Edition by Nathalie Johnstone , Devan Mescall , Julie Robson Solution manual
CHAPTER 22 Sample
Sparklines of Expenses by Tax Year (see small bar graphs of all expenses below)
GIFICodeandName 2017 2018 2019 2020 2021 Assessment** GIFIcode8000–Amount–Tradesalesofgoodsandservices 3,500,345 6,230,922 8,769,034 12,450,986 18,456,234 GIFIcode8300–Amount–Openinginventory - 700,069 1,246,184 1,753,807 2,490,197 GIFIcode8320–Amount–Purchases/costofmaterials 1,225,121 2,180,823 3,069,162 4,357,845 6,459,682 GIFIcode8340–Amount–Directwages 350,035 623,092 876,903 1,245,099 1,845,623 GIFIcode8350–Amount–Benefitsondirectwages 35,003 62,309 87,690 124,510 184,562 GIFIcode8450–Amount–Otherdirectcosts 175,017 311,546 438,452 622,549 922,812 GIFIcode8500–Amount–Closinginventory 700,069 1,246,184 1,753,807 2,490,197 3,691,247 GIFIcode8520–Amount–Advertisingandpromotion 140,014 249,237 350,761 498,039 738,249 GIFIcode8522–Amount–Donations - 5,000 7,000 8,000 10,000 GIFIcode8523–Amount–Mealsandentertainment 35,003 62,309 87,690 124,510 184,562 GIFIcode8570–Amount–Amortizationofintangibleassets 12,500 25,000 25,000 25,000 25,000 GIFIcode8620–Amount–Employeebenefits 35,003 62,309 87,690 124,510 184,562 GIFIcode8670–Amount–Amortizationoftangibleassets 156,000 310,000 325,000 350,000 606,000 GIFIcode8690–Amount–Insurance 11,345 18,000 20,000 24,000 29,000 GIFIcode8691–Amount–Lifeinsuranceonexecutives - - - 14,000 14,000 GIFIcode8711–Amount–Interestonshort-termdebt - - - 35,780 67,098 GIFIcode8714–Amount–Interestonlong-termdebt - - - 121,321 231,456 GIFIcode8715–Amount–Bankcharges 6,543 13,444 13,234 78,904 14,567 GIFIcode8761–Amount–Memberships - 23,456 24,556 26,789 32,123 GIFIcode8762–Amount–Businesstaxes 11,200 11,424 11,652 11,886 12,123 GIFIcode8811–Amount–Officestationeryandsupplies 4,567 6,909 7,254 7,617 7,998 GIFIcode8813–Amount–Dataprocessing 17,890 97,890 32,123 35,335 38,869 Highrisk GIFIcode8861–Amount–Legalfees 12,098 45,654 18,909 178,654 23,456 Highrisk GIFIcode8862–Amount–Accountingfees 24,557 30,998 32,322 121,321 34,565 GIFIcode8863–Amount–Consultingfees - 120,000 123,433 224,566 128,900 GIFIcode8871–Amount–Managementandadministrationfees - 350,000 350,000 350,000 350,000 CRAfocusarea GIFIcode8911–Amount–Realestaterental 60,234 125,000 125,000 125,000 125,000 GIFIcode8912–Amount–Occupancycosts 23,002 46,789 48,193 49,638 51,128 GIFIcode8914–Amount–Equipmentrental 13,456 28,909 29,776 30,670 31,590 GIFIcode9010–Amount–Otherrepairsandmaintenance 11,232 145,321 34,543 38,908 42,321 Highrisk GIFIcode9014–Amount–Garbageremoval 35,003 62,309 87,690 124,510 184,562 GIFIcode9060–Amount–Salariesandwages 385,038 685,401 964,594 1,369,608 2,030,186 GIFIcode9061–Amount–Commissions 35,003 63,000 88,000 125,000 185,000 GIFIcode9063–Amount–Bonuses 25,000 45,000 90,000 150,000 450,000 CRAfocusarea GIFIcode9065–Amount–Managementsalaries 78,654 201,330 234,322 254,321 489,087 CRAfocusarea GIFIcode9130–Amount–Supplies 17,502 31,155 43,845 62,255 92,281 GIFIcode9131–Amount–Smalltools 2,356 56,766 3,433 2,321 4,532 Highrisk GIFIcode9180–Amount–Propertytaxes 14,543 28,908 30,353 31,871 33,465 GIFIcode9200–Amount–Travelexpenses 52,505 93,464 131,536 186,765 276,844 GIFIcode9220–Amount–Utilities 34,211 68,000 84,678 124,000 185,000 GIFIcode9270–Amount–Otherexpenses 1,232 13,432 98,765 12,456 14,656 Highrisk GIFIcode9273–Amount–Sellingexpenses 122,512 218,082 306,916 435,785 645,968 GIFIcode9274–Amount–Shippingandwarehouseexpense 115,161 204,997 288,501 409,637 607,210 GIFIcode9275–Amount–Delivery,freightandexpress 107,100 190,648 268,306 380,963 564,705 GIFIcode9276–Amount–Warrantyexpenses 35,003 62,309 87,690 124,510 184,562 GIFIcode9281–Amount–Vehicleexpenses 12,455 32,123 38,548 46,257 55,509 GIFIcode9284–Amount–Generalandadministrativeexpenses 17,654 36,786 42,322 47,887 58,900
Introduction to Federal Income Taxation in Canada 43rd Edition 2022-2023 Edition by Nathalie Johnstone , Devan Mescall , Julie Robson Solution manual
CHAPTER 22 Sample
Conditional Formatting of Year over Year Change in Expenses as Percentage of Sales
c)From the visualization results in (b) above, how would you screen for risky expense accounts?
Sparklines Visualization
GIFI Code and Name 2018 2019 2020 2021 High Audit Risk*** GIFI code 8000 – Amount– Trade sales of goods and services 0.0% 0.0% 0.0% 0.0% GIFI code 8300 – Amount– Openinginventory ∞ 26.5% -0.9% -4.2% GIFI code 8320 – Amount– Purchases/costof materials 0.0% 0.0% 0.0% 0.0% GIFI code 8340 – Amount– Directwages 0.0% 0.0% 0.0% 0.0% GIFI code 8350 – Amount– Benefits on directwages 0.0% 0.0% 0.0% 0.0% GIFI code 8450 – Amount– Other directcosts 0.0% 0.0% 0.0% 0.0% GIFI code 8500 – Amount– Closinginventory 0.0% 0.0% 0.0% 0.0% GIFI code 8520 – Amount– Advertisingand promotion 0.0% 0.0% 0.0% 0.0% GIFI code 8522 – Amount– Donations ∞ -0.5% -19.5% -15.7% GIFI code 8523 – Amount– Meals and entertainment 0.0% 0.0% 0.0% 0.0% GIFI code 8570 – Amount– Amortization of intangible assets 12.4% -28.9% -29.6% -32.5% GIFI code 8620 – Amount– Employee benefits 0.0% 0.0% 0.0% 0.0% GIFI code 8670 – Amount– Amortization of tangible assets 11.6% -25.5% -24.2% 16.8% GIFI code 8690 – Amount– Insurance -10.9% -21.0% -15.5% -18.5% GIFI code 8691 – Amount– Life insurance on executives 0.0% 0.0% ∞ -32.5% GIFI code 8711 – Amount– Intereston short-term debt 0.0% 0.0% ∞ 26.5% GIFI code 8714 – Amount– Intereston long-term debt 0.0% 0.0% ∞ 28.7% GIFI code 8715 – Amount– Bank charges 15.4% -30.1% 319.9% -87.5% GIFI code 8761 – Amount– Memberships ∞ -25.6% -23.2% -19.1% GIFI code 8762 – Amount– Business taxes -42.7% -27.5% -28.2% -31.2% GIFI code 8811 – Amount– Office stationery and supplies -15.0% -25.4% -26.1% -29.2% GIFI code 8813 – Amount– Data processing 207.4% -76.7% -22.5% -25.8% Yes GIFI code 8861 – Amount– Legal fees 112.0% -70.6% 565.4% -91.1% Yes GIFI code 8862 – Amount– Accountingfees -29.1% -25.9% 164.4% -80.8% GIFI code 8863 – Amount– Consultingfees ∞ -26.9% 28.1% -61.3% GIFI code 8871 – Amount– Managementand administration fees ∞ -28.9% -29.6% -32.5% GIFI code 8911 – Amount– Real estate rental 16.6% -28.9% -29.6% -32.5% GIFI code 8912 – Amount– Occupancy costs 14.3% -26.8% -27.5% -30.5% GIFI code 8914 – Amount– Equipmentrental 20.7% -26.8% -27.5% -30.5% GIFI code 9010 – Amount– Other repairs and maintenance 626.8% -83.1% -20.7% -26.6% Yes GIFI code 9014 – Amount– Garbage removal 0.0% 0.0% 0.0% 0.0% GIFI code 9060 – Amount– Salaries and wages 0.0% 0.0% 0.0% 0.0% GIFI code 9061 – Amount– Commissions 1.1% -0.7% 0.0% -0.2% GIFI code 9063 – Amount– Bonuses 1.1% 42.1% 17.4% 102.4% GIFI code 9065 – Amount– Managementsalaries 43.8% -17.3% -23.6% 29.7% GIFI code 9130 – Amount– Supplies 0.0% 0.0% 0.0% 0.0% GIFI code 9131 – Amount– Small tools 1253.5% -95.7% -52.4% 31.7% Yes GIFI code 9180 – Amount– Property taxes 11.7% -25.4% -26.1% -29.2% GIFI code 9200 – Amount– Travel expenses 0.0% 0.0% 0.0% 0.0% GIFI code 9220 – Amount– Utilities 11.7% -11.5% 3.1% 0.6% GIFI code 9270 – Amount– Other expenses 512.5% 422.5% -91.1% -20.6% Yes GIFI code 9273 – Amount– Sellingexpenses 0.0% 0.0% 0.0% 0.0% GIFI code 9274 – Amount– Shippingand warehouse expense 0.0% 0.0% 0.0% 0.0% GIFI code 9275 – Amount– Delivery,freightand express 0.0% 0.0% 0.0% 0.0% GIFI code 9276 – Amount– Warranty expenses 0.0% 0.0% 0.0% 0.0% GIFI code 9281 – Amount– Vehicle expenses 44.9% -14.7% -15.5% -19.0% GIFI code 9284 – Amount– General and administrative expenses 17.1% -18.3% -20.3% -17.0%
High risk determined based on visual assessment of "spikes" in any one year or trend not matching trend of increasing expenses with sales increases (except for fixed expenses not tied to sales such as depreciation, rent, management fees).
Conditional Formatting Visualization
High risk assessed based on degree of red for the conditional formatting of the change in expense amounts percentage compared to prior year. Infinity items omitted as they represent new expenses in the year rather than risky expense changes.
d)Based on your screening process discussed in (c ) above, what are 5 specific expense accounts and which taxation year(s) for those specific accounts you believe may be audited by CRA?
“High Risk” expense accounts resulting from the screens for both visualizations include the following 5 expense accounts for the noted taxation years:
Data processing (2018)
Legal fees (2020)
Other R & M (2018)
Small tools (2018)
Other expenses (2019)
For each of those 5 accounts, provide the following:
i)A visualization of that account specifically that you believe supports your view more clearly that CRA will audit that account specifically during the audit period. The following shows simple vertical line graphs for each of these expense accounts for the 5 tax years reinforce visually why these accounts will attract the CRA auditor’s attention for the years noted above:
Introduction to Federal Income Taxation in Canada 43rd Edition 2022-2023 Edition
CHAPTER 22 Sample
by Nathalie Johnstone , Devan Mescall , Julie Robson Solution manual
Another approach would be to present these expense accounts in vertical bar charts as follows for the 5 tax years. To contrast with the line graph visualizations above, I have shown the 5 expense accounts in one combined bar chart. This could have been done as individual bar charts as well like the vertical line graphs above. Either way, the bar charts also reinforce visually why these accounts will attract the CRA auditor’s attention for the years noted above.
Introduction to Federal Income Taxation in Canada 43rd Edition 2022-2023 Edition by Nathalie Johnstone , Devan Mescall , Julie Robson Solution manual CHAPTER 22 Sample
ii)A potential reason for CRA to review that account. That is, what is a potential tax adjustment CRA is looking to make and why?
iii)A potential reason that would explain the account situation such that CRA would be satisfied that the expense amounts were properly deducted in the year. I will address (ii) and (iii) together below by expense account. Data Processing
ii)CRA will likely look to determine if there are any capital expenses in this account like computer hardware or software purchases, upfront software fees or website development costs. CRA would propose to add those expenses back to the company’s schedule 1 for the year as non-deductible capital costs, though it would accept that those non-deductible costs could be added to the company’s schedule 8 (capital cost allowance schedule).
iii)The company may have incurred amounts all of which are reasonable in the circumstances to earn its business income in the year for this expense type such as web site hosting fees, internal wage costs for staff working on its data processing activities, annual cloud computing fees, etc.
Legal Fees
ii)CRA will likely look to determine if there are any capital expenses in this account like fees paid for legal services in areas such as corporate organization/reorganization, buying or selling assets, obtaining financing for the company. CRA would propose to add those expenses back to the company’s schedule 1 for the year as non-deductible capital costs, though it would accept that those non-deductible costs could be added to the company’s schedule 8 (capital cost allowance schedule), cost of its assets, or its S.20(1)( e) amounts, as applicable.
iii)The company may have incurred significant legal amounts in the year all of which are reasonable in the circumstances to earn its business income in the year for this expense type such as negotiating contracts or dealing with employee departures, etc.
Introduction to Federal Income Taxation in Canada 43rd Edition 2022-2023 Edition by Nathalie Johnstone , Devan Mescall , Julie Robson Solution manual CHAPTER 22 Sample
Other R&M
ii)CRA will likely look to determine if there are any capital asset betterment costs in this account like adding a new roof to the company’s building or significantly improving some equipment. CRA would propose to add those expenses back to the company’s schedule 1 for the year as non-deductible capital costs, though it would accept that those non-deductible costs could be added to the company’s schedule 8 (capital cost allowance schedule)
iii)The company may have incurred significant amounts all of which are reasonable in the circumstances to earn its business income in the year for this expense type such as repairing (rather than replacing) the roof of its building or restoring (rather than upgrading) a major piece of equipment.
Small Tools
ii)CRA will likely look to determine if there are any capital asset purchases in this account. CRA would propose to add those expenses back to the company’s schedule 1 for the year as non-deductible capital costs, though it would accept that those non-deductible costs could be added to the company’s schedule 8 (capital cost allowance schedule)
iii)The company may have incurred significant amounts all of which are reasonable in the circumstances to earn its business income in the year for this expense type such as repairing some of its small tool capital assets (rather than replacing these assets).
Other Expenses
ii)CRA will likely look to determine if there are any non-deductible costs in this general expense account like capital asset purchases, shareholder personal expense amounts, or large upfront club membership fees. CRA would propose to add those expenses back to the company’s schedule 1 for the year as nondeductible capital costs, though it would accept that capital costs related to the business could be added to the company’s schedule 8 (capital cost allowance schedule)
iii)The company may have incurred significant amounts all of which are reasonable in the circumstances to earn its business income in the year for this expense type such as contract settlement payments made to suppliers or customers.
e)What would you do as a next step in this risk assessment process for each of the 5 expense account risk areas you have identified?
I recommend that we get the detailed general ledger account activity reports for these accounts to review the number of transactions in these accounts and the amount of the transactions. We could then focus on the largest amounts in the accounts to review the invoice(s) or supporting document for the amount recorded to determine the nature of the amount incurred and included in the expense accounts. This will
Introduction to Federal Income Taxation in Canada 43rd Edition 2022-2023 Edition by Nathalie Johnstone
Solution manual CHAPTER 22 Sample
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allow us to determine if there are specific non-deductible amounts in the accounts in preparation for CRA’s audit.
f)Are there any other significant expense accounts that you believe CRA may audit even though your visualization screening process did not flag these accounts? If yes, what is the issue CRA would be auditing?
As shown in the sparklines screening visualization above, the following accounts will likely be reviewed by CRA in detail as they are usually “CRA focus areas”):
Management and administration fees
Bonuses
Management salaries
As amounts included in these accounts are often determined at the discretion of the owner/manager of the CCPC, CRA will review these accounts to determine the reasonableness of the amounts deducted for the company. Amounts not considered reasonable will be denied by CRA even though they would still be included in the income of the recipient, thereby resulting in double taxation of those income amounts. Amounts paid to family members other than Shannon (who would generally be able to draw fees, bonuses or salaries without restriction as she is the founder of the company and presumably the creator of the sales and profits in the company) would receive special scrutiny to ensure there is not inappropriate income splitting with low income family members.
Management and administration fees will also be reviewed to ensure that any amounts paid to companies of related individuals and potentially subject to the Specified Corporate Income Rules are treated appropriately for the Small Business Deduction of those companies. CRA will also review the bonuses and management salaries to ensure that all amounts were paid in the year or within 180 day of the end of the year.
g)Are there any revenue accounts that you believe may present an opportunity to reduce the company's taxable income as reported in those years? Which account(s) and year(s) for those accounts may present such an opportunity, briefly explain the opportunity and how would you assess this opportunity?
The following revenue accounts would present an opportunity to determine possibilities to reduce the company’s taxable income in the tax years noted:
GIFI code 8090 – Amount – Investment revenue (2021)
GIFI code 8210 – Amount – Realized gains/losses on disposal of assets (2018)
GIFI code 8230 – Amount – Other revenue (2020)
For investment revenue, we would review if there are any ”tax preferred income” items received in the year like dividends from other taxable Canadian corporations which would be deductible in Division C or foreign income that would be eligible for foreign tax credits.
For realized gains/losses on disposal of assets and other revenue, we would review if there are large gains in the relevant year that may be considered to be on account of capital based on the company’s intention when it acquired those assets.
Much like I recommended for the risky expense accounts above, as a follow up, we should get the detailed general ledger account activity reports for these revenue accounts to review the number of transactions in these accounts and the amount of the transactions. We could then review the amounts
Introduction to Federal Income Taxation in Canada 43rd Edition 2022-2023 Edition by Nathalie
CHAPTER 22 Sample
Johnstone , Devan Mescall , Julie Robson Solution manual
recognized in these revenue accounts, related source documents and transaction history to determine if there are opportunities for lower income inclusion amounts or Division C deductions.
Introduction to Federal Income Taxation in Canada 43rd Edition 2022-2023 Edition by Nathalie Johnstone
Mescall
Robson Solution manual CHAPTER 22 Sample
, Devan
, Julie
