Report: Improving Services for Business Owners Facing a CRA Net Worth Audit
Introduction
In late 2022, we were retained by two owners of a restaurant who had been subject to a Net Worth Audit (“NWA”). They had previously had two advisors review the NWA, and those advisors had identified some of the errors. But their review was not systematic and had missed several key CRA mistakes. Worse yet, the advisors had filed objections on behalf of the corporation but failed to file objections on behalf of the shareholders, personally. The year and 90-day deadline had already passed, meaning that – despite all the errors we found in the corporation’s reassessments affecting the reassessments of the shareholders – CRA did not have to reduce the shareholder’s reassessments.
Over the past 10-years, there have been several instances in which I have been retained to assist with an NWA after critical procedural and strategic errors had already been made. We also felt like our own process for dealing with NWAs could be more systematic and intentional. We therefore decided to conduct a project to improve the service available to taxpayers facing NWAs.
Project Goals
After much consideration and analysis, we identified three goals of our project:
To build systems and resources to obtain the best results for clients facing NWAs.
To design an ideal user experience for clients facing NWAs.
To educate business owners, and their advisors, about the risks of NWAs.
Project Stages
Listen
The first stage of our project was to gather as much information as possible from key stakeholders to identify their needs and priorities. We accomplished this through the following means:
We reviewed data from the NWAs that I have worked on over the past 10 years.
We reviewed CRA materials and data on NWAs that we obtained through an Access to Information Request.
We interviewed several former clients who faced an NWA as well as clients who were in the middle of an NWA to understand their experience.
We interviewed several accountants to understand their experience with NWAs.
We presented the issue to the leaders of Video Tax News and sought their feedback and advice.
We had meetings with key officials at CRA to understand CRA’s perspective regarding NWAs and express our concerns on behalf of taxpayers.
I read “Service Design: From Insight to Implementation” by Andy Polaine, Lavrans Lovlie and Ben Reason, the godfathers of service design.
We conducted a survey to better understand CPAs experience with NWAs. We received 191 responses from CPAs across Canada. Here are the results.
Plan
After gaining the perspectives of our stakeholders, we developed a plan for the project, including a theory of change, an analysis of our stakeholders (Canadian business owners and CPAs), a risk analysis, and a project plan.
Here is the theory of change we adopted:
If Blachford Tax Law builds internal systems and resources for responding to NWAs, designs a user experience specific to the needs of taxpayers facing NWAs, and educates business owners and CPAs on the risks of NWAs and how to respond; then Canadian taxpayers and CPAs will have access to better service when facing NWAs.
Execute
Internal Systems and Resources
To maximize our internal capacity to efficiently achieve the best results possible for clients facing NWAs, we identified tools and resources that we could build that would help us quickly identify errors and argue them to CRA. Here are some of the tools and resources we built:
We created a standardized procedure for responding to an NWA, from the initial meeting with the client and CPA, to us identifying all of the errors and filing submissions to the CRA.
We created a series of templates and checklists that help us efficiently gather and store information on the NWA, while still leaving room for the unique aspects of each case.
We created a list of the 35 most common errors in an NWA that we can efficiently review with clients, so that we can quickly key in on the most likely sources of errors.
With the help of two law student interns, we created a case bank of 59 cases decided by the Tax Court of Canada or Federal Court of Appeal that relate to NWAs. These law students summarized each case and cross-referenced key quotes to our list of common errors.
User Experience
The most important objective in responding to an NWA is getting the best result possible. However, because NWAs can take significant time to resolve and are extremely stressful for clients, we did not want to ignore the client’s experience during the time between retaining our firm and us resolving their dispute.
Based on our interviews with clients, we developed three characteristics of a positive user experience:
Simple and efficient: clients want us spending our time on the most high-value tasks and do not want their contributions to the process to feel unnecessarily burdensome. Therefore, we created internal processes and tools for information sharing, document exchange, information management, and effective communication, all specific to NWAs.
Confidence: clients want to know that they have retained the right firm. Like with a mechanic or doctor, it can be hard for the client to know if they are in good hands. Having standardized procedures, pre-existing resources, and a clear plan from the outset; all signal that we are experts in NWAs so that clients can rest assured while we resolve their dispute. The tools and resources we built to improve our internal capacity, therefore also served this objective.
Empowered: an NWA is extremely disempowering. It is challenging for clients to understand how CRA has arrived at the amount reassessed. Yet, for us to succeed, we need the client to understand NWAs enough to provide us the information about their personal financial circumstances that will allow us to identify the errors in the NWA.
We created info graphics that explain the principals of an NWA and a 5-part video series, totaling 42 minutes in length, in which I take the client through the CRA’s NWA documents so that they can follow along with their own NWA and learn what we require of them.
Raising Awareness for Business Owners and CPAs
In addition to building systems and resources and designing a top-notch user experience, we wanted to educate business owners and their CPAs about the risks of NWAs and what they should do if they were facing an NWA. We did this in several ways:
Sharing our work on this project served the double benefit of gathering information that we could use to improve our services as well as alerting people about the risks of NWAs and what to expect in response. Therefore, we consider our survey report and this current report to also serve our objective to raise awareness.
We joined forces with Video Tax News to create a course titled “First 7 Steps for a CRA Net Worth Audit: A Guide for Accountants in Canada”. In the course, Caitlin Butler and I share with accountants how to obtain the key documents necessary from CRA, educate their clients on what an NWA is, and mitigate your own professional and financial risks. I also filmed a video for VTN’s Fall Tax Update courses in which I banged on the drum about the risks of NWAs.
Ella and I held a free, one-hour webinar titled, “How to Avoid a Large CRA Audit”. We shared CRA’s methods for selecting audit targets, their powers and techniques (including NWAs), and how CPAs can protect their clients. We had over 230 people attend. You can watch the recording here.
We have officially named November, “Net Worth Audit Awareness Month”. Beginning Friday, November 1st, we will be posting a nugget of knowledge about NWAs on LinkedIn each business day of the month. We hope you will join us in drawing attention to this devastating audit method so that business owners are aware of the risks, how NWAs work, and what to do if they are subject to one.
Conclusion
Ella and I invested an immense amount of work into this project. Fortunately, it has already drastically increased our intentionality, efficiency, and effectiveness in providing a positive user experience to our clients and getting them the best results possible. We are grateful to the stakeholders who shared their perspectives with us and we look forward to continuing to get the word out during “Net Worth Awareness Month” in November.