Chapter 2 - General audit processes and procedures

On this page

• Section 2A – Overall risk assessment
• Section 2B – Audit plan
• Section 2C – Sampling
• Section 2D – Registration requirements for out-of-province sellers
• Section 2E – Tax account
• Section 2F – Sales and leases
• Section 2G – Operating expenses
• Section 2H – Capital assets
• Section 2I – Finalizing the audit – Assessments
• Section 2J – Audit report
• Section 2K – Post audit adjustments

Section 2A – Overall risk assessment

Issued: 2014/02; Revised: 2019/06/15

Purpose

Any taxpayer can be audited. Taxpayers may be chosen for an audit based on:

• A special audit project (such as, industry specific, goods and services tax (GST) reporting, Workers’ Compensation Board (WCB) reporting) 
• Legislated program
• Risk-based selection
• A referral from another audit

For each audit, the auditor should review why the audit was created and complete a risk assessment. If the audit risk assessment is low, the auditor may cancel the audit prior to a site visit.

General risk factors

The auditor should consider the following general risk factors of an audit:

• Operational change – The risk of errors attributed to changes in accounting software, senior accounting staff or business practices
• Inherent (Industry) risk – The risk of errors resulting from the nature of the business or industry. For example, businesses often fail to self-assess tax on goods they take from their resale inventory for use
• Control (Business) risk – The risk of errors attributed to the taxpayer’s internal control procedures. For example:
  • Segregation of accounting responsibilities
  • Audited financial statements
  • Properly implemented computerized accounting systems are generally controls that help decrease the risk of errors
• Overall risk – This risk includes all factors that have been considered during the initial risk assessment and any other factors which may include: 
  • A previous audit with a significant audit assessment
  • An audit lead indicating errors may exist
  • A change to legislation during the audit period
  • The size of the operation
  • The level of knowledge of the accounting staff regarding the legislation

Addressing the risk

Complete the following two steps after considering the above risk factors:

• Risk assessment – Determine whether the risk is low, medium or high as a result of the above factors
• Risk conclusion – Identify audit methods that can address the perceived risk. This will help determine areas that may be more susceptible to errors and therefore should be focused on during the audit

Section 2B – Audit plan

Issued: 2014/02; Revised: 2021/11/26

Purpose of an audit plan

The purpose of an audit is to verify a taxpayer’s compliance with legislation. Audit plans are created to conduct effective and efficient audits and to focus on the main tax compliance risks for a taxpayer. The audit plan may include various steps in the audit process, such as:

• Setting the audit period 
• Scheduling taxpayer site visits and / or accessing accounting records
• Determining test periods
• Arranging Computer Audit Specialist (CAS) services if the analysis of significant electronic data is involved

During the audit planning discussions with the taxpayer, the auditor should provide the taxpayer with Bulletin CTB 003, Audits (PDF, 208KB), and the B.C. Taxpayer Fairness and Service Code, which explain what to expect during an audit. They should also outline the service standards and codes of conduct to which the ministry is committed. To properly plan an audit, the auditor needs to consider many factors such as knowledge of the business, how the taxpayer fits within its corporate group (if applicable), taxpayer account information in Taxpayer Administration, Compliance and Services (TACS) and whether to do a correspondence or field audit.

Knowledge of the business

Understanding the taxpayer’s business is necessary in order to understand the products or services they provide and the purchases that may be taxable or exempt. Other considerations are:

• Perform background research by:
  • Investigating the business’s website
  • Reviewing previous audits
  • Possibly reviewing audits in similar industries
  • Discuss any issues with your team leader and, if necessary, contact the industry specialist
• Perform a corporate search on BC Online to obtain incorporation documents and to be aware of any corporate changes during the audit period. Note, workload is not responsible for investigating BC Online when raising the case as there may be a significant time gap between raising the case and conducting the audit
• Consider a site tour to obtain additional information for audit issues and potential exemptions
• Determine the exemptions that may be applicable to the taxpayer. For example, if they’re a manufacturer, determine if they are eligible for the production machinery and equipment (PM&E) exemption
• Review the financial statements and general ledger to identify accounts likely impacted by tax issues. For example, sales, expenses, PST tax account, etc. 
• Find out about the taxpayer’s accounting system to see if there are any changes implemented after the previous audit period
• Discuss the potential audit impact of any operational or other changes (for example, changes in accounting staff or management)

Related parties

Companies related through ownership typically engage in inter-company sales and asset transfers, which carry the risk of unpaid PST. Audits of related companies should be carried out at the same time, especially if their accounting is performed at one location (eg, at the parent’s).

• Determine if any related parties to the taxpayer exist through BC Online and discussions with the taxpayer
• If a related party exists, determine whether the related party should be audited (for example, is there risk of tax errors). If not, provide a reason why the related party is not being audited in conjunction with this taxpayer
• Determine if there are any sales between the related parties. There is a risk of tax not paid on intercompany transfers that meet the PST definition of “sale”. The taxpayer may qualify for the exemption that applies to tax-paid assets transferred between “related corporations”. For more information, refer to the Provincial Sales Tax Exemption and Refund Regulation (PSTERR), Part 9 Related Party Asset Transfers

TACS review and initial documentation

1. Taxpayer details in TACS

Review the taxpayer account in TACS, including the audit history, appeal claims, collection activity, taxpayer correspondence, notes, refund claims, etc. Also, review previous audit letters to determine if penalties may be applicable for repeat errors.

2. TACS documentation and steps

If a taxpayer under audit would like to be represented by a third-party, the auditor should obtain a fully completed FIN 146 - Authorization or Cancellation of a Representative (PDF, 254KB). Without such a form, the auditor may exchange information only with the taxpayer.

At the start of the audit, an audit engagement letter must be created in TACS (lead case or audit file) and issued to the taxpayer. The letter is the formal notification to the taxpayer they are being audited under a particular tax act, and it establishes the audit period and the minimum records to be examined during the audit. It can be provided at the same time as the copy of Bulletin CTB 003, Audits (PDF, 208KB), and the B.C. Taxpayer Fairness and Service Code. The letter can describe other aspects of the audit such as computer audit specialist (CAS) involvement, timing of the fieldwork, etc.

3. Contact with taxpayer

A reader must have access to the details of the progress made to date. Contact Notes must be maintained in TACS using CRM Notes and kept current with all relevant information relating to contacts made with the taxpayer, including phone calls, inbound/outbound correspondence, email, documents obtained, attachments, and third-party information. 

If electronic communication is used, all relevant emails must also be referenced in the CRM Notes. Relevant emails do not have to be attached and updated on an on-going basis; however, emails must be attached before the audit is submitted for approval. It is essential to include all relevant electronic correspondence relating to the audit or refund case so that a complete record of communication with the taxpayer is preserved. 

If a final email is sent to the taxpayer to issue the audit conclusion letter, results letter, and/or refund letter, that email should also be attached in TACS and that contact documented in the CRM Notes. This is important documentary evidence that the taxpayer was informed of the final audit/refund results.

Communication with the taxpayer needs to be maintained on a regular basis in order to keep the audit or refund moving forward, and to prevent unnecessary delays. It is suggested that contact be made with the taxpayer by telephone, email or letter at least every 30 days. Lengthy periods without contact, caused by either the taxpayer or auditor, should be addressed in the audit report or refund verification.

Audit waiver

The Audit Period Limitation Waiver Agreement is an agreement signed by the taxpayer and the director that is used when more time is requested by the taxpayer in producing documentation to complete an audit because of the general four-year audit period limitation. The director has delegated authority to the CTAB Executive Director for signing this waiver.

The waiver allows the auditor to delay issuing an assessment until after additional information is gathered by the taxpayer and/ or if the taxpayer would like to have the assessment on sales issued in separate sections. The interest on the assessments continues to accrue until payment is made. The signed waiver should be attached to the audit case in TACS.

The waiver agreement identifies the sections of the acts that allow for the extension of the audit period and provides the new commencement date of the assessment period. When the waiver is signed, the taxpayer waives the application of the Provincial Sales Tax Act (PSTA) 200(1), which otherwise limits the assessment period to a period no longer than four years before the date of the first notice of assessment. 

In addition, an audit waiver can be obtained for the limitation on penalty equivalent assessment under PSTA 203(3). A waiver in place for this section allows the Branch to issue more than one penalty equivalent assessment for the continuous 36-month within the four-year audit period. If an audit waiver is in place, multiple penalty equivalent assessments can be issued for the 36-month penalty equivalent assessment period (such as, one for each year’s sales errors).

Correspondence audits

Correspondence audits are audits conducted without a site visit, in which the auditor requests accounting information from the taxpayer by email, mail or courier. The auditor conducts the audit using the same analytical principles used for a field audit for either a full audit or to address specific audit issues.

In general, an auditor will undertake a correspondence audit when the auditor cannot justify an audit trip. Small local audits can be correspondence audits if they are straightforward and routine. Please discuss this with your team leader before deciding to do a correspondence audit.

Here are some risks and challenges of correspondence audits: 

• Not all audits can be conducted by correspondence, such as those of manufacturers eligible for PM&E exemptions and other businesses with complicated operations
• Taxpayers may not respond in a timely manner or may not know what exactly is required. The auditor should set deadlines for responses to ensure timeliness. In some cases, the auditor should have a telephone conversation with the taxpayer to ensure they understand exactly what is required and the reason for the request
• Without a site visit, it may be difficult to determine which purchases are taxable (for example, for the taxpayer’s own use) and which purchases are exempt (for example, resale)
• Taxpayer reports and other accounting data obtained for correspondence audits are often difficult to understand. For example, a submitted report may not provide the necessary information, and several requests for different reports may be required in order to obtain a report that is adequate

Audits of companies that are under Companies’ Creditors Arrangement Act (CCAA) protection

The audit of a company that entered protection under the Companies’ Creditors Arrangement Act (CCAA) during the audit period can involve two audits: one that focuses on the pre CCAA protection period and another that focuses on the CCAA protection period. These are separate audits, each requiring its own assessment. The auditor in charge of the pre CCAA period must be aware of the date by which all claims, including an assessment, must be filed per the Claims Procedure Order. If that date has already passed, the ministry must go to court in order to have the assessment included in the CCAA claim, incurring legal costs with no guarantee of success. If the audit period begins after the company has entered CCAA protection, there will only be one audit conducted: for the period during the CCAA protection.

Audits of companies that file for bankruptcy

If a taxpayer files for bankruptcy mid-way through an audit, the audit should be concluded as a priority as there is urgency in issuing the Notice of Assessment before the Claims Bar Date and advising Receivables Management Office (RMO) via email so that they are prepared to collect on any outstanding

Receipt for removed books, records and documents form (FIN 494) 

• Audit work should be performed at the taxpayer’s premises whenever possible. This usually results in the most efficient audit process, and encourages clear communication with the taxpayer
• In some very limited circumstances it may be necessary to remove original physical taxpayer records (for example, if there is no space available to work). If original physical records are removed, a signed Receipt for Removed Books, Records and Documents form (FIN 494) must to be completed. One copy is attached to the audit file and the other is given to the taxpayer (A FIN 494 is not required for copies of electronic records, which are authorized by the use of the Audit Authorization form)
• Original physical books, records and documents should be reviewed and returned to the taxpayer as soon as possible. Once records are returned, the Receipt for Removed Books, Records and Documents form should be signed by the taxpayer acknowledging the return. The completed form should be scanned and attached to the audit file in TACS.

References

PSTERR, Part 9 Related Party Asset Transfers
Bulletin PST 210 - Related Party Asset Transfers (PDF, 663KB)
Bulletin CTB 003 - Audits (PDF, 208KB)
B.C. Taxpayer Fairness and Service Code

Section 2C – Sampling

Issued: 2014/02; Revised: 2019/06/15

Purpose of sampling

The goal of an audit is to verify compliance with the legislation. If a taxpayer does not comply with the legislation, the audit determines the amount of taxes owing for the period under review.

It is preferable to conduct audits by reviewing and evaluating each transaction in detail. However, the volume of transactions in most businesses makes this option inefficient for both the taxpayer and the ministry. Therefore, the auditor should consider a sampling method to review the business records.

Sampling is a detailed analysis of a selection of sales and purchase transactions that represent the business’s operations for the entire audit period. This minimizes disruption to the business and the number of records that the business needs to make available. In some cases, such as with a low volume of sales transactions, it may be more practical to examine all the records in the audit period.

During the audit planning discussion, the auditor and the taxpayer will decide the best sampling method to use in conducting the audit. The auditor must be available to answer any questions the taxpayer may have about the audit sampling methodology.

Sampling methods

Statistical sampling

Statistical sampling is typically used to audit businesses that have computerized records available for electronic examination; otherwise, block sampling is used.

Statistical sampling uses randomly selected samples to evaluate sales and purchase transactions for the audit period. With this sampling method, you can measure how closely the sample results match the actual results.

If you use statistical sampling, you need to involve a Computer Audit Specialist (CAS) to consult with the taxpayer and their IT staff to review the available data. For a detailed explanation of the statistical sampling method, see Bulletin CTB 004, Statistical Sampling (PDF, 340KB).

Block sampling

Block sampling uses sample periods or blocks of time to evaluate the sales and purchase transactions for the audit period. The auditor selects these sample blocks in consultation with the taxpayer to help ensure that the samples represent normal business activity.

After selecting a sampling method, the auditor performs a detailed examination of the sample selected for sales made in B.C. and for purchases of items used by the business. Often the sample period is a recent period for which records are readily available. If errors are found in the sample, the auditor may apply them to the entire audit period to calculate the assessment. However, isolated occurrences are not usually applied over the entire audit period.

Proration

Proration is a method of estimating tax errors by using a sample period that is representative of the audit period. The auditor must discuss and have the taxpayer agree to the sample periods and proration at the beginning of the audit for each audit section (tax account, sales, purchases, and fixed assets).

There are many different ways to prorate errors depending on the cause or driver of the errors in the test period. In most cases, the auditor prorates errors based on sales revenue as for most businesses there is a correlation between sales and purchases. However, for some businesses (such as, start-ups, technology companies with limited sales or cost centres), expense accounts may be the driver (for example, Research & Development (R&D) expense).

On occasion, a taxpayer may start a new line of business. The auditor should only prorate test period errors for this new line of business over the period when this line of business was operated by the taxpayer. For example, if an office supply company started selling clothing, errors related to this clothing line of business would only apply to the period when they sold clothes (if less than the full audit period). When a taxpayer merges with another taxpayer, the pre‑merger period transfers to the new taxpayer as if they had always operated as one entity. For example, if within the audit period, the office supply company merged with a clothing company, the auditor would prorate test period errors relating to the clothing business beyond the merger date to when the previous taxpayer had started their clothing line.

References

Bulletin CTB 004 - Statistical Sampling (PDF, 340KB)

Section 2D – Registration requirements for out-of-province sellers

Issued: 2014/02; Revised: 2019/06/15

This section addresses registration requirements for businesses that sell to B.C. but have no locations or employees in B.C.

Note that if a business has voluntarily registered, they must charge, collect, and remit tax on all applicable sales transactions.

The Provincial Sales Tax Act (PSTA) Section 191 authorizes the province to enter into an agreement with the federal government or an agent of the federal government to collect tax to administer and enforce the PSTA in relation to most goods brought or sent into B.C. from outside Canada. Agents of the federal government currently include Canada Post and the Canada Border Services Agency.

Businesses located in Canada but outside of British Columbia

Provincial Sales Tax Act (PSTA) Section 172 requires a person located in Canada but outside B.C., and who sells goods, software or telecommunication services to B.C., to be registered to collect PST if in the ordinary course of business the person does all of the following (the fourth bullet applies only to businesses that sell goods to B.C.):

• The business solicits persons in B.C., through advertising or other means, for orders to purchase goods, software or telecommunication services. Solicitation can occur by personal visit, mail, internet, fax, telephone or newspaper advertisement (not a complete list). Solicitation does not include advertising via a website that is accessible from outside B.C. and does not specifically target persons in B.C.
• The business accepts purchase orders originating in B.C. Purchase orders can be made over the telephone, in writing, via the internet or by email from a location in B.C., regardless of whether the seller has an agent in the province
• The business sells goods, software or telecommunication services to purchasers in B.C. This includes persons operating in the province with headquarters outside the province
• The business causes the goods to be delivered to a location in B.C. Delivery into B.C. includes goods shipped by the seller or an agent of the seller. Any collector who sells or leases a non-exempt good and who causes that good to be delivered in B.C. must collect the applicable PST. In most cases a collector who sells or leases a good to a person who takes delivery of the good outside B.C. does not cause the good to be delivered in B.C. even if the good subsequently enters B.C.

A “collector” who must levy PST but does not must be assessed under PSTA 203 for a penalty that is equivalent to the tax not levied. The assessment is limited to a continuous three-year period commencing not more than four years from the date of the first notice of assessment. Sales beyond the three-year period would be assessed against the purchaser, subject to the four-year limitation imposed under PSTA 200.

If a business does not meet all the applicable criteria listed above, it does not have to register to collect PST. Assuming the business does not meet all the criteria and is therefore not registered and has not levied an amount as PST, any liability for unpaid PST and related penalties and interest are imposed on the purchaser, not the business. To assess a business for failing to meet its obligations, there must be clear evidence that all the applicable criteria have been met and this evidence must be documented in the audit report. It is important to note that a business may meet the applicable criteria for only part of the audit period should its circumstances change.

Note, if a business willfully failed to register, PSTA Section 202 authorizes the imposition of a 25% penalty of the amount that should have been levied. Discuss with your supervisor and obtain director approval before applying this penalty.

Businesses located outside British Columbia

Effective September 1, 2015, PSTA Section 172.1 requires any person located outside British Columbia to be registered if, in the ordinary course of business, the person does ALL of the following:

• Accepts orders to purchase goods, if the orders originate from B.C.
• Sells goods to a person in B.C. for use or consumption by the person or another person described under 172.1(1)(b)
• Holds the goods in inventory in B.C. at the time the goods are sold or provided

Unlike Section 172 of the PSTA, this provision can apply to a business located anywhere outside B.C.

Businesses that are located outside Canada and do not hold inventory in B.C. are not required to be registered to collect PST. However, any business that is registered must charge, collect, and remit tax on all applicable sales transactions.

Avoidance of double taxation policy

In order to avoid double taxation, an auditor should not assess the seller and the purchaser for the same tax due. Auditors must take steps to ensure that the tax has not already been assessed during an audit of the purchaser, by reviewing the purchaser’s audit history. If the purchaser has been assessed, auditors must not assess the seller for the same transaction. For further information, refer to Section 2F, Sales and Leases, Assessments.

References

Bulletin PST 001 - Registering to Collect PST (PDF, 422KB)

Section 2E – Tax account

Issued: 2014/02; Revised: 2021/11/28

Purpose of review

To ensure that tax collected has been correctly accumulated, reported, and remitted.

Risk analysis

During the audit planning phase, your overall risk assessment should provide insight to areas of risk for the tax account. Some considerations regarding potential risk areas are:

• Is the taxpayer registered? Should they be registered? (see Provincial Sales Tax Act (PSTA) Section 1, Definitions - Collector)
• Is the taxpayer a real property contractor? Should they be collecting tax?
• Is the taxpayer making incorrect debit entries for PST paid on purchases?
• Does the taxpayer have special reporting periods? If so, have they applied for special remitter status?
• Are there any accounting software changes? Is there a potential for tax collected to be incorrectly posted to another general ledger account?
• Does the taxpayer have more than one branch or location? If so, are they correctly claiming commissions?
• Does the taxpayer self-assess tax?
• Is the taxpayer a delinquent remitter?

Late PST Registration (and/or Non-Registered Collectors):

• This section addresses taxpayers that are required to be registered but registered late or have yet to register. This includes taxpayers that have collected tax prior to or without registering as a collector. Refer to Tax Interpretation Manual Section part 1 – Division 1 - Definition - Reporting periods
• A taxpayer who carried on business before June 1, 2015 and who registered late may be required to file a PST return for a reporting period ending on May 31, 2015, and that return would be due June 30, 2015. The filing frequency assigned to such a taxpayer is monthly. Therefore, for any month after May 31, 2015 in which the taxpayer should have been registered but was not, a monthly return for the taxpayer is deemed to have become due
• After June 30, 2015, if any taxpayer under audit is found to be a collector and has not yet registered, the auditor can process an assessment for any tax collected and not remitted as this initial return and any subsequent returns are now overdue
• The taxpayer should become registered during the audit process as the auditor is in direct contact with the taxpayer when this information becomes known. Therefore, it is expected that the auditor will play a central role in assisting the taxpayer and working with Registration and Closure Section staff in the registration process
• A 25% penalty may be considered when a taxpayer wilfully failed to register if sufficient information exists (PSTA Section 202). The application of the penalty should be discussed with the auditor’s supervisor and the directors’ approval is also required

Systems & records review

Document and discuss the existing systems and records with the taxpayer. Some suggested questions to ask during the discussion are:

• Are all sources of revenue identified? Is the related tax posted in full to the tax account (for example, multiple locations, sales journals, etc.)?
• Does the taxpayer maintain a separate file for tax remittances?
• Is there a system in place for self‑assessments?
• Does the taxpayer understand the legislation and how it applies to their industry, regarding tax collected, self‑assessed, and paid?
• Does the taxpayer remit to more than one jurisdiction? If so, do they maintain separate accounts?
• Is there adequate segregation of duties?
• How is tax credited to customers applied to the tax account?

Analytical review

During the analytical review the auditor should gain an understanding of the tax account and note any unusual transactions, events, amounts, ratios or trends that might impact the audit. The results should provide guidance as to the level and detail of audit work required. Some suggestions that may be used for this review are:

• Review the taxpayer’s remittance history (such as, PST return and payment history) and identify any significant variances with the tax account
• Calculate tax collected as a percentage of sales and determine if it is reasonable considering the taxpayer’s line of business
• Review financial statements for any significant fluctuations in sales that may not be reflected in tax collected
• Verify if the taxpayer is reporting total sales or taxable sales only
• Verify that any debit entries posted to the tax account are valid (for example, they are not input tax credits (ITCs))

Internal control review

The internal control review may provide the auditor with a level of confidence in the taxpayer’s internal control system. If the taxpayer has a system for self‑assessments and reconciling the tax account, the system should be tested. The results of the internal control review determine the level of substantive testing required.

Examples of internal controls tests:

• Discuss with the taxpayer, and document details of, any specific internal controls that exist to ensure tax collected on sales is properly accumulated in the tax account and remitted correctly and any debit entries made to the tax account are reviewed for validity, etc. 
• Perform a walk‑through test to verify that internal control procedures operate as the taxpayer has described

Substantive testing

The amount of substantive testing required depends on the results of risk analysis, systems and records review, analytical review, and internal control review. If these reviews indicate low risk then minimal or no substantive testing is required. Note that in most cases the audit period for failure to remit tax is four years. A failure to remit can involve a minimum 10% penalty (PSTA Sections 200 and 205).

Some examples of substantive testing are:

• Examine the tax account for any unusual debit entries
• Verify that the ending balance is current
• From the taxpayer’s general ledger details, prepare a tax continuity schedule and compare tax collected to tax reported for the test period and investigate any differences. Consider expanding this analysis to the full audit period

Sample template

Remittance period	– Tax remitted	Tax collected	Variance
	Total remitted	Total tax account	Total variance

• Consider over and under remitted tax. Keep a running difference to know when an amount is truly under‑remitted as it may have been over‑reported earlier
• Generally, any under‑remitted amounts (where the running balance is under-reported) may be assessed with a 10% penalty as the knowledge of the tax liability is evidenced with the uncleared tax account balance that has been carried forward in the general ledger
  • Any overpayments from previous reporting periods may be considered as payments in advance towards the subsequent under-remitted reporting periods. 10% penalty may be assessed when the previous overpayment amount is depleted, and the running balance start to result in a NET under-remitted amount
  • In determining whether the penalty will be imposed, the auditor should apply discretion and professional judgement. If the auditor is reasonably certain the taxpayer had knowledge of the tax liability yet failed to remit the tax collected, a 10% penalty may be considered appropriate
  • It should be noted that not every unremitted balance will automatically attract penalty assessment. When in doubt, the auditor should consult their supervisors and discuss further to ensure consistent and correct audit procedures are followed in assessing the taxpayer the penalty. In determining a penalty application and whether the auditor’s discretion is consistent with publicly-communicated penalty policies, refer to Bulletin CTB 005, Penalties and Interest (PDF, 210KB) 
• The taxpayer is not entitled to commission when the full amount of tax has not been reported and remitted on time. In situation where overpayments from previous reporting periods were sufficient in covering subsequent under-reported periods, commission may be entitled as long as the previous overpayment amount sufficiently covers the subsequent under-reported periods. Assess for commission(s) claimed in error and apply the same penalty treatment as with the assessment for any tax variance (if a 10% penalty was charged for an under-remitted amount, the related commission claw-back should also be subject to a 10% penalty; if no penalty was assessed on tax under-remitted/variance then there should be no penalty applied to the commission claw-back)
• Verify that the correct commission has been taken
• Review tax account adjustments made and verify that the taxpayer has adequate supporting documentation
• Claw back commissions claimed for any period in which tax collected (whether or not accumulated in the tax account) exceeded the tax reported amount

Internal account adjustments

A taxpayer can claim an adjustment on a PST return for PST that is no longer collectable if the taxpayer wrote the related debt off during the reporting period. This adjustment is allowed if certain conditions are met. See PSTA Section 159.

A taxpayer can also claim an adjustment on a PST return for PST credited or refunded to customers in the reporting period. This adjustment is allowed if certain conditions are met. See PSTA Section 160.

Adjustments for PST pertaining to bad debts written-off or PST refunded or credited to customers should be reflected as debits in the tax collected account.

The PSTA does not prohibit a taxpayer from making internal tax account adjustments for other reasons. The PSTA does not regulate or directly contemplate a taxpayer’s tax collected account. The PSTA requires the taxpayer to remit the PST charged. The taxpayer can adjust the PST tax collected account in whatever manner the taxpayer chooses as long as the PST charged within a reporting period is correct and remitted within the required time (subject to the allowable deductions for bad debts and customer refunds).

The following example demonstrates adjustments in the tax collected account where the taxpayer meets the requirements of PSTA Section 179 (2):

• The taxpayer has a monthly reporting period
• At the start of the August reporting period, the taxpayer’s tax account balance is nil
• On August 10, the taxpayer sells $500 of taxable goods and charges and collects $35 PST (tax account balance = $35)
• On August 15, the taxpayer mistakenly debits the tax account $10 (tax account balance = $25)
• On August 20, the taxpayer sells another $500 of taxable goods and charges and collects $35 PST (tax account balance = $60)
• On August 23, the taxpayer discovers the August 15 mistake and credits the tax account $10 (tax account balance = $70)
• On September 30, (the last day of the month following the reporting period) the taxpayer remits $70

However, an adjustment to a tax collected account could impact the taxpayer’s statutory obligations where an adjustment straddles reporting periods, for example:

• A taxpayer has a monthly reporting period
• At the start of the August reporting period, the taxpayer’s tax account balance is nil
• On August 10, the taxpayer sells $500 of taxable goods and charges and collects $35 PST (tax account balance = $35)
• On August 15, the taxpayer mistakenly debits the tax account $10 (tax account balance = $25)
• On August 20, the taxpayer sells another $500 of taxable goods and charges and collects $35 PST (tax account balance = $60)
• On September 30, (the last day of the month following the reporting period) the taxpayer remits $60
• On October 3, the taxpayer discovers the August 15 mistake and credits the tax account $10 (tax account balance = $10)
• On November 30, the taxpayer remits $10

In the above example, the amount remitted on the return for August is not the total amount that the taxpayer charged and collected during August. Accordingly, the taxpayer is subject to a PSTA Section 199 assessment for the $10 charged and collected in August but not remitted by the due date. The $10 remitted with the return for October should be treated as a pre-payment of the PSTA Section 199 assessment.

The PSTA does not provide rules for adjusting self‑assessed tax accounts. However, the PSTA does have requirements when self‑assessed tax must be paid. See Sections 29 to 31 of the PSTA, and Sections 31.1, 32, and 33 of the Provincial Sales Tax Regulation (PSTR).

The following example demonstrates adjustments in the self‑assessed tax account where the taxpayer meets the requirements of the PSTA and PSTR:

• A taxpayer with a monthly filing frequency purchases non-exempt goods in Alberta and brings them into British Columbia on June 2, 2014
• The purchase price of the goods was $100
• At the start of June the self‑assessment account balance is nil
• The taxpayer credits the self‑assessment account with $20
• Later in June, the taxpayer discovers their error and debits the self‑assessment account $13 (account balance = $7)
• The taxpayer remits the $7 tax by July 30 on the return for the June reporting period

The following example demonstrates adjustments in the self‑assessed tax account where the taxpayer does not meet the requirements of the PSTA and PSTR:

• A taxpayer with a monthly filing frequency purchases non-exempt goods in Alberta and brings them into British Columbia on June 2, 2014
• The purchase price of the goods was $100
• At the start of June the self‑assessment account balance is nil
• The taxpayer credits the self‑assessment account with $20
• The taxpayer remits the $20 by July 30 on the return for the June reporting period (at this point the taxpayer is entitled to a refund because too much tax has been self‑assessed)
• The taxpayer then brings additional goods into British Columbia on August 5, 2014
• The purchase price of the goods is $200
• The taxpayer credits the self‑assessed tax account $14
• On August 20th, the taxpayer realizes the mistake regarding the June reporting period and debits the self‑assessed account $13 (account balance is now $1)
• The taxpayer remits the $1 tax by September 30th on the return for the August reporting period

In the above scenario, the taxpayer has not met the self‑assessment obligations with respect to the August reporting period. Accordingly, the taxpayer would be subject to a PSTA Section 199 (1) assessment on the $13 which was not remitted for the August reporting period.

A taxpayer who discovers an error in the taxpayer’s tax collected or self-assessed account can simply adjust for the error during the reporting period, or in the first month following the reporting period but before the taxpayer has filed a PST return for that period. If the taxpayer discovers the error after filing the PST return, the taxpayer should file an amended PST return and remit any further PST owing with the amended return.

If the amended return creates a credit balance in the taxpayer's PST account in TACS, the ministry will refund the balance. The taxpayer must not reduce the following period's remittance by the credit balance. However, during the course of an audit, if auditors find that the taxpayer has over remitted tax liability and would be entitled to a refund, they should advise the taxpayer to file a refund rather than filing amended return where the over-remittance occurred. This is because once the audit commences, the audit period will be locked in the system and the taxpayer should not be advised to file amended return for any reporting period within the audit period.

In respect of a non-monthly remitter’s reporting period, the remitter has until the period’s tax due date to make any required adjustments.

A taxpayer who has overpaid PST to a supplier can request a credit or refund from the supplier or apply to the ministry for a refund. The taxpayer must not recover the PST by debiting a tax account and remitting the adjusted balance to the province.

An amount debited to a tax account for tax overpaid can be subject to an assessment under PSTA Section 199, as it would reduce tax the taxpayer should remit per PSTA Sections 179 or 29.

Generally, a taxpayer who is found to have recouped overpayment of PST to a supplier by under-remitting PST to the ministry is not penalized if it is the first time the taxpayer has done so and the taxpayer had not been advised by the ministry on the proper way of recovering overpaid PST.

Other invalid adjustments (such as, refundable but the adjustment was made outside the allowable period) must be assessed. Generally, no penalty is charged if the taxpayer has not been previously advised that they must file for a refund for invalid adjustments. For example, where there was an overpayment of tax due to an accounting or posting error, and the taxpayer made the adjustment outside the allowable time frame instead of applying for a refund, auditors can, after assessing for the invalid adjustment, advise the taxpayer to file a refund application after verifying and confirming the refund entitlement.

To reduce unnecessary administrative work for the Refund Section, it is recommended that auditors advise the taxpayer to file the refund and provide all relevant supporting documents during the audit for verification. With the refund netting procedures, this amount will be offset by both the assessment entry and the credit entry in TACS and will have minimal impact on the total assessment.

If it is determined that an amount taken as a debit adjustment is not refundable (whether or not it is made within the allowable period), per PSTA Section 205, a 10% penalty may be imposed. The auditor may consider not assessing a penalty for a first-time occurrence when the taxpayer demonstrated that the debit entry was erroneously made in good faith; however, the auditor should obtain his/her manager’s approval before making a decision not to assess 10% penalty.

Delinquent remitter

When there are PST returns that should have been filed but were not, the ministry will issue estimates for the reporting periods with overdue returns, and the taxpayer is considered a delinquent remitter.

Before starting an audit on a delinquent remitter, if Collections is working on the account, it is recommended that the auditor contact the collection officer to discuss the account and advise the collection officer that an audit will be conducted.

After all audit review and testing work is completed, and the tax assessment has been discussed and verified with the taxpayer, estimates on the account should be reversed in TACS. The auditor will need to determine if the taxpayer has any payment credits that may qualify for an interest relief on the audit assessment.

Account balances shown in TACS are not static. On approximately the 23^rd of every month, accounts are re-evaluated and estimates, penalties and cycle interest may be applied to outstanding balances. As a result, the account balances may change after the 23^rd of every month. Auditors will need to verify the account balances again before providing an interest relief on the audit assessment.

References

Bulletin CTB 005 - Penalties and Interest (PDF, 210KB)
Bulletin GEN 001 - Bad Debt (PDF, 193KB)
Guide to Completing the PST Return

Section 2F – Sales and leases

Issued: 2014/02; Revised: 2019/06/15

Purpose of review

The purpose of the review is to ensure sales and leases are recorded and tax is applied at the appropriate tax rate on taxable goods and services. Provincial sales tax (PST) is generally due at the same time that the sale or lease takes place, or when any portion of the sale or lease price is paid or becomes due, whichever is earlier. A sale or lease price, or any portion of the sale or lease price, generally becomes due the earliest of:

• The day the first invoice is issued for the sale or lease
• The date of the invoice
• The day the invoice would have been issued, but for undue delay
• The day the taxpayer’s customer must pay the sale or lease price under a written agreement

Auditors must ensure that the taxpayer:

• Charges and collects tax on sales and/or lease
• Maintains sufficient accounting to support the taxpayer’s tax liability
• Remits all taxes in the tax liability account to the ministry along with the tax return

In most cases, an assessment under Provincial Sales Tax Act (PSTA) Section 203(2) for failure to levy tax can be made in respect of a continuous period of three or fewer years that occurs within four years of the date of the first Notice of Assessment, and in respect of only one continuous period.

In most cases, an assessment under PSTA Section 199(2) can be made in respect of any period that occurs within four years of the date of the first Notice of Assessment.

In order to prevent assessing both the seller/lessor and purchaser on the same transaction, please refer to the Assessment portion of this section.

Risk analysis

During the overall risk review auditors identify sources of risk that are unique to the taxpayer for sales and/or lease. Some potential risk areas are:

1. Sales and/or lease:

• Real property contracts for the supply and installation of goods that become part of real property and goods that do not (see Bulletin PST 501, Real Property Contractors (PDF, 341KB)
• Bundled taxable and non‑taxable goods and services
• Non‑taxable goods and services only
• Taxable goods and services only
• Cash sales
• School supplies
• Exempt and taxable safety items
• Leases (see Tax Interpretation Manual (TIM) definitions for “lease”, “lessee”, “original lease price”, etc.); bundled sales (see TIM definitions for “non-taxable component”)

2. Tax Exempt Customers:

Farmers, fishers, aquaculturists, manufacturers and other qualifying persons, contractors and subcontractors, operators of multijurisdictional vehicles, purchasers of adult-size clothing and footwear for children, purchasers of vehicles or aircraft for use outside B.C. and certain purchasers of software require exemption certificates.

• See PST exemptions and documentation requirements for exemptions and applicable exemption certificates or documentation. The page contains a detailed list of specific exemptions, documentation required, and relevant bulletins for each exemption
• First Nations Treaties Areas and Maps:
  • First Nation Profiles Interactive Map 
  • First Nations A-Z Listing (includes First Nations community map)
• Independent sales contractors who sell only exclusive products do not register to collect PST. Generally, they pay PST on the suggested retail prices for the exclusive products and collect and retain PST when they resell the product (see TIM definitions “independent sales contractors”)

3. Types of Sales Transactions:

• Over‑the‑counter
• Internet
• By phone
• Promotional distribution
• For delivery by the seller - review Bulletin PST 302, Delivery Charges (PDF, 400KB), to determine appropriate rules regarding taxation of delivery charges

Systems & records review

Document and discuss the existing systems and records with the taxpayer. These are some areas to discuss:

• Sales and/or lease types and how the taxpayer generally handles them? Do they retain exemption certificates?
• Is tax automatically charged on all taxable sales/leases?
• Is there an override function for tax and who is authorized to override the tax?
• Inventory coding: Is there a master listing of products with the tax status of each product? Verify those items setup as exempt. Note that product tax tables may change over time and therefore it may be necessary to look at more than one master listing created during the audit period

Analytical review

During the analytical review, the taxpayer’s sales information can be compared to industry standards, prior sales history or other information that can provide insight into the taxpayer’s sales.

Some tools that may be used in this review include the following:

• Sales history analysis – significant fluctuations in sales may indicate unrecorded sales
• Inventory accounts examination – manual adjustments may indicate promotional distribution or other own-use of inventory
• Shareholder account examination – significant increases in shareholder account activity may indicate shareholder or intercompany transfers

Internal control review

The internal control review provides the auditor with a level of confidence that the taxpayer’s systems are in place to ensure PST is properly charged, collected, accumulated, and remitted. The results of the internal review determine the level of substantive testing required. If internal controls are in place and adhered to, only minimal substantive testing may be required.

Some objectives of proper internal controls:

• Validity – transactions recorded are valid and documented
• Completeness – all sales transactions are recorded and none omitted
• Accuracy – transactions with PST charged are properly calculated at the correct rate
• Proper period – all pertinent sales transactions are recorded in the correct period

Some areas to consider when evaluating the effectiveness of internal controls:

• Overall control environment and management’s attitude towards controls (“tone from the top”). If the management has a poor attitude towards controls in general, the company may lack proper controls
• Personnel capability – if the tax department is competent and knowledgeable, the staff will be up to date on current legislation and the application of tax
• Controlled access and segregation of responsibilities – for example, computerized tax coding of products and tax code overriding authorities should be reserved for appropriate management
• Taxpayer’s involvement in controls – a taxpayer’s regular periodic comparison of accounting data, to detect and correct anomalies, indicates stronger internal controls

Examples of internal control tests:

• Discuss with the staff and review how product coding is done and what procedures are in place to ensure taxable goods and services are coded correctly
• If there is an override or authorization process in place for exempt sales, test the overriding procedures, and the system
• Interview management about their general attitude towards tax compliance
• Interview staff to determine their accounting proficiency and tax knowledge

Substantive testing

The amount of substantive testing required depends on:

• The results of the risk analysis
• Systems
• Records
• Analytical and internal control reviews

If the auditor’s review indicates low risk, minimal or no substantive testing is required. Some examples of substantive testing are:

• Verify whether PST numbers are recorded, or exemption certificates or other documentation are maintained, to support exempt sales and/or leases
• How are invoices maintained? If they are numeric, ensure completeness
• Is tax collected posted to the tax account automatically or manually? Trace tax collected
• Ensure tax is correctly applied and accumulated on taxable sales/leases
• Verify that the taxpayer quotes their customer’s PST number directly on their invoices when selling taxable goods or services (or has a valid exemption certificate)
  • If the customer’s PST number is not documented on the invoices, determine whether the customer’s PST number was obtained and maintained in the taxpayer’s system
  • Should the auditor be satisfied that the customer’s PST number was obtained and kept on file with the intention of making an exempt purchase, and the auditor judges that it appears to be a purchase for resale (for example, the sale is a significant dollar amount and the sale is recurring) no further verification is required
  • In the situation where the auditor is unable to conclude that it was a purchase for resale, even though the taxpayer has the PST number on file, the auditor should consider requesting a sales confirmation be sent to the customer
  • If the auditor at any time suspects that the PST number has been misused by the purchaser, the auditor should raise a lead case on the purchaser in TACS with transactional information
• Review product listing, catalogues or other sources for taxable and non‑taxable goods and services
• Refer to Chapter 5, Industry Specific Review Procedures, for possible sales/leases issues unique to the taxpayer’s industry. Raise leads where applicable if it appears that customers have misused their registration number or exemption certificate

Sample selection

Audit testing typically involves sample testing to conduct an audit in an efficient manner. A sample should be representative of the population.

Determine the sampling method to be used: statistical vs. non‑statistical

• Use the statistical sampling method whenever possible (see Computer Audit Specialist (CAS) Procedural Manual).
• Prior to the commencement of large or recurring audits, contact CAS to discuss sampling options.
• When statistical sampling alone is impractical, use non‑statistical sampling methods in lieu of, or in combination with, statistical sampling. The auditor should discuss their reasons for not using statistical sampling with their supervisor and document them in the audit report.
• Statistical samples cover a period within the audit period, rather than reviewing the records for the entire audit period.

Generally, auditors need to determine the sales sample period in the current year based on their risk analysis and internal control review result, as well as their discussions with the taxpayer on representative periods / stores, etc. Depending on the discussion, auditors can add additional test periods to evaluate the sales audit period (choose periods from different seasons in earlier years).

As most taxpayers have some sales/leases that are seasonal, it is important to select sample period(s) that are not significantly impacted. Typically, the Christmas holidays are excluded as that period may not be representative (for example, higher than normal sales and often the taxpayer employs temporary staff). If sampling from a subset of locations, recommend not testing stores located on First Nations lands (unique issues to that store that are not typically representative).

The larger the retailer is, the shorter a representative sample period can be. For very large national retailers, sample sizes can be as short as one week or several chosen days over a limited number of stores.

Assessments 

Sellers/lessors can be assessed when they have not properly applied, levied or accumulated tax in their accounting records. Generally, auditors are not required to check if the purchaser self‑assessed or qualified for an exempt purchase if the seller/lessor does not have supporting documentation to support why they did not collect tax. The auditor assesses the seller/lessor for tax not collected on the taxable sales/leases.

1. Assessments on late or non-registrant collectors

Late or non-registered collectors should be assessed a penalty equivalent to the tax not levied on taxable sales. A taxpayer who carried on business before June 1, 2015 and who registers late may be required to file a PST return for a reporting period ending on May 31, 2015, and that return would be due June 30, 2015. The filing frequency assigned to such a taxpayer is monthly. Therefore, for any month after May 31, 2015 in which the taxpayer should have been registered but was not, a monthly return for the taxpayer is deemed to have become due.

2. To avoid double taxation in situations where the seller/lessor being audited contends that its customer had paid the tax by self-assessing the transaction, it is important that the auditor verify whether the purchaser has already paid the tax on the same transaction or having paid the tax would be entitled to a refund.

If the purchaser did not supply any supporting documentation to claim an exemption and the seller/lessor fails to collect tax, the auditor should assess the seller/lessor. The assessment is limited to a continuous period of three years within a period that begins four years before the date of the first Notice of Assessment. The purchaser can be assessed for the portion of the four-year period that the seller/lessor has not been assessed. PSTA Section 203 (2) has the effect of absolving the purchaser’s original liability, to the extent that a collector pays a penalty assessed under PSTA Section 203 (1). Note that the penalty must actually be levied and paid, not just assessed, for this relief to have an effect. Therefore, in checking whether the seller/lessor has been assessed on the same transaction in the system, auditors need to take one step further and ensure that the assessment issued has been paid by the seller/lessor.

When proration is used to assess a seller/lessor for sales application errors that covers the the entire audit period, the proration is deemed to have all sales/leases errors for the entire audit period included in the assessment. If during a subsequent audit of a purchaser for the same audit period, a purchase transaction from the above seller/lessor was discovered during purchase testing, the auditor will not assess the purchaser for this error again as long as the seller/lessor had already received the notice of audit assessment and paid the assessed amount in full.

From the perspective of the seller/lessor and purchaser of a transaction:

Seller/lessor: Assess the seller/lessor (or raise a lead) if it appears that they had a legal obligation to levy the tax, as long as the auditor is sure that the purchaser was not assessed.

Purchaser: If the auditor finds that the purchaser intentionally provided an invalid PST number or another person’s PST number to claim exemption, the auditor should assess the purchaser. Generally, the auditor would assess the purchaser where the seller/lessor had no obligation to collect the tax (quoted customer’s PST number, was not legislatively required to be registered (located only in US, etc.)).

3. Sales/leases errors

The typical sales errors are sales application errors (failure to charge tax) and sales accumulation errors as outlined below:

a. Sales/leases application errors

Sales/leases application errors are errors noted during the audit where taxpayers did not charge or collect PST on the sales/leases of taxable goods or services. This includes transactions that do not have documentation to support the exemption (for example, the purchaser’s PST number is not indicated on the invoice or the exemption certificate was not obtained at the time of the purchase and maintained). When the auditor communicates to the taxpayer that an assessment will be made due to the lack of exemption documentation, but the taxpayer is certain that PST was correctly not collected on the sale/lease, the auditor may consider sending out a sales confirmation letter to the purchaser. If the sales confirmation response indicates that the purchase does not qualify for any exemption, the seller/lessor should be assessed.

There may be situations where incomplete exemption certificates are obtained by a retailer, for example, on sale of adult-sized clothing to children, sale/lease to a First Nations individual, etc.

In a situation where the sale involves adult-sized clothing for children and the exemption form is missing or incomplete, the auditor can verify exemption by issuing a sales confirmation letter to the purchaser. If no confirmation is received from the purchaser, the seller will be assessed. Upon conclusion of the audit, this error will be included in the audit conclusion letter. If this occurs again in a subsequent audit, sales confirmation letters will be sent to the purchasers. For unsupported sales where no confirmation is received in the subsequent audit, the seller will be assessed for the error and may be assessed a 10% penalty under PSTA Section 205. For incomplete exemption certificates missing only the child’s name, a sales confirmation will only be sent if it is obvious that the purchaser was not the child. For example, if a credit card was used to pay for the purchase (children typically do not hold credit cards). This is because the exemption certificate form only requires the child’s name if the child is not the one who makes the actual purchase.

If, during the first audit of a seller, it is discovered that a taxpayer of adult-size clothes claimed exemption using their own exemption certificate form and the form omits required information, such as the declaration per Provincial Sales Tax Exemption and Refund Regulation (PSTERR) Section 9 (6)(d) or Part (C) of the Certificate of Exemption Children’s Clothing and Footwear form (FIN 425)(PDF, 252KB), do not send a sales confirmation to the purchaser or assess the seller. Instead, warn the seller that the same error uncovered during a subsequent audit would result in an assessment for the error and a 10% penalty under PSTA Section 205. However, if there is evidence that the seller was aware that the form omitted required information — for example, the seller was informed of the required information via a ruling issued to the company or other correspondence in TACS — a 10% penalty under PSTA Section 205 may be imposed. The seller should be warned that a similar error uncovered during a subsequent audit would lead to an assessment for the error and a 10% penalty under PSTA Section 205.

Any assessment resulting from this type of error would be “penalty equivalent assessment” assessed through PSTA Section 203 over the sales audit period (maximum of a three-year continuous period within the audit period).

The PST legislation requires that the taxpayer (seller/lessor) charge tax on taxable sales and leases unless they obtain documentation to support the exemption. If during the audit, the taxpayer contacts its customer and the customer confirms that they self‑assessed the tax, depending on the self‑assessed amount remitted, the taxpayer may be assessed penalties for failure to charge tax through PSTA Section 205 (c) as detailed below.

The taxpayer is required to obtain the purchaser's PST number (and record it on the invoice or other sales document) or other required exemption documentation (such as, an exemption form), to show why the taxpayer did not collect PST. If they have been advised of the requirements and later make the same error, a 10% penalty may be applied through PSTA Section 205 (c).

Sales or lease application errors and penalties

Sales application errors	Penalty
Scenario 1A - First audit1
Seller/lessor has failed to charge tax and the purchaser has fully paid the tax owing to the government (or the purchase would be exempt).	Do not assess the seller/lessor the penalty equivalent or 10% penalty. Instead, issue a warning letter which states that the seller/lessor might be assessed both penalties if the same error is discovered in the future.
Scenario 1B - Second audit
Seller/lessor has failed to charge tax and the purchaser has fully paid the tax owing to the government (or the purchase would be exempt).	Do not assess the penalty equivalent. Assess the seller/lessor a 10% penalty on the tax that should have been charged.
Scenario 2A - First audit1
Seller/lessor has failed to charge tax and the purchaser has only partially paid the tax owing to the government.	Assess the seller/lessor the penalty equivalent for the tax not charged less the amount paid by the purchaser (PSTA Section 203). Do not assess an additional 10% penalty on the tax not charged. Issue a warning letter which states that the seller/lessor might be assessed both penalties if the same error is discovered in the future.
Scenario 2B - Second audit
Seller/lessor has failed to charge tax and the purchaser has only partially paid the tax owing to the government.	Assess the seller/lessor the penalty equivalent for the tax not charged less the amount paid by the purchaser (PSTA Section 203) and assess the seller/lessor a 10% penalty on the tax not charged (on the full amount invoiced).
Scenario 3A - First audit1
Seller/lessor has failed to charge tax and the purchaser has not paid the tax owing to the government.	Assess the seller/lessor the penalty equivalent for the tax not charged (PSTA Section 203). Do not assess an additional 10% penalty on the tax not charged. Issue a warning letter which states that the seller/lessor might be assessed both penalties if the same error is discovered in the future.
Scenario 3B - Second audit
Seller/lessor has failed to charge tax and the purchaser has not paid the tax owing to the government.	Assess the seller/lessor the penalty equivalent for the tax not charged (PSTA Section 203) and an additional 10% penalty on the tax not charged.
Sample of error types: - PST number not legitimate2 (for example, it is short of eight digits, using old R# or GST#) - No exemption documentation - Exemption documentation not complete (penalty equivalent (PSTA Section 203 (1.1)) - Exemption not legitimate3

¹In cases where a collector has obtained a ruling providing the correct application of legislation and did not follow the advice provided in the ruling, the warning for first occurrence should be omitted and instead a 10% penalty should be applied.
²The seller/lessor is not required to actually validate the PST number presented. If the number appears correct and seller/lessor has no other reason to believe an invalid number was provided, no penalty should be assessed.
³The seller/lessor is only required to obtain the necessary documentation from the person claiming the exemption and not to make a determination as to their eligibility for it. As long as they do not have reason to believe that person is not eligible for the exemption claimed, no penalty should be applied.

Notes:

• A seller/lessor who grants an exemption that requires a PST number and fails to record the number on the invoice should not be penalized if the seller/lessor can show that at or before the time PST became payable the seller/lessor did obtain the PST number.
• Use of a discontinued exemption form (such as, an SST form) to claim a current exemption is acceptable if the form contains all information required by the current form.

A seller/lessor assessed under PSTA Section 203 (1) for a sales application error may attempt to recover the tax amount assessed by billing its customers after audit; and subsequently discover that the purchaser (customer) paid the error amount directly to the government or was exempt from having to do so. To avoid double taxation, the assessment should be reduced by the amount, via an audit adjustment. The seller/lessor should receive a warning letter stating that a similar error discovered during a subsequent audit might be subject to a 10% penalty.

Even if an audit adjustment fully or partially eliminates an original penalty equivalent assessment under PSTA Section 203, the 10% penalty under PSTA Section 205 (c) can still apply separately from the PSTA Section 203 penalty.

b. Sales accumulation errors

A sales accumulation error occurs when PST collected is not recorded in the proper tax account. Such an error occurs, for example, when the taxpayer erroneously accumulates the PST collected in their goods and services tax (GST) account or does not record the PST collected in any account. Such an error is assessed as “unremitted tax” error in TACS and typically does not result in a 10% penalty. However, PSTA Section 205 (c) is discretionary, so a penalty could be considered if the taxpayer purposefully misallocated the PST or has a history of making such errors. The assessment period for sales accumulation errors is not limited to 3 years within the audit period. It can include tax accumulated from any sales application error that occurs during the four-year audit period.

Mandatory electronic filers

Businesses with at least $1.5 million in total Canadian sales and leases of property or services per year are required to file returns and remit PST and municipal and regional district tax (MRDT) electronically (Provincial Sales Tax Regulation (PSTR) Sections 73 and 95(2)).

If a taxpayer is a mandatory electronic filer and their situation changes, such that they are no longer required to remit tax in accordance with Section 73 (1)(a) of the PSTR, the taxpayer may contact the registration section to update their information. There is no statutory requirement that they contact the registration section; however, doing so may prevent confusion in a later audit.

1. Penalty provisions relating to non‑compliance (PSTR Section 73 (1)(a))

a. The taxpayer has exceeded the $1.5 million requirement threshold but has not been filing electronically.

In this situation, as soon as a taxpayer exceeds $1.5 million in the previous 12 months the taxpayer is required under section 73 (1)(a) of the PSTR to remit electronically. If the taxpayer fails to remit electronically, they are subject to a 5% penalty on the total amount required to be remitted in accordance with Section 73 (1)(a) of the PSTR. The 5% applies to the entire remittance balance within the audit period only if the taxpayer fails to meet PSTR section 73 (1)(a) in respect of all reporting periods within the audit period. If the taxpayer fails to meet PSTR Section 73 (1)(a) in respect of particular reporting periods and not the entire audit period (for example, only the first two months within the audit period), the 5% applies to the remittances for those periods, not to the remittance for the entire audit period.

b. The taxpayer provided incorrect information at the time of registration which resulted in the registration section advising the taxpayer that they did not have to file electronically.

In this situation, if a taxpayer provides incorrect information at the time of registration, the person is still obligated to file electronically if they meet the conditions of section 73 (1)(a) of the PSTR. The taxpayer may be assessed a 5% penalty, similar to the penalty provisions described in point a) above. Application of the penalty depends on the circumstances. If the taxpayer was required to file electronically during the entire audit period, then the 5% penalty would apply to the total amount assessed. However, if during the audit period the taxpayer’s sales drop and they no longer are required to file electronically, then the 5% penalty only applies to the tax remitted during the period when Section 73 (1)(a) of the PSTR applies.

The penalty in Section 205 (c) of the PSTA is discretionary so staff should discuss with their supervisor before assessing the 5% penalty.

Miscellaneous

1. Incidental supplies and provisions

Occasionally, a good, software or telecommunication service is provided incidentally to a non-taxable or exempt service.

PSTA Section 1 excludes the following from "sale": the provision of tangible personal property (TPP), software or a telecommunication service that, in prescribed circumstances, is merely incidental to a contract for the provision of services that are not subject to tax under this Act. PSTR section 7 prescribes such circumstances, including the following:

• The fundamental objective of the contract is the acquisition of the service and not the acquisition of the TPP, software or telecommunication service

• There is no separate purchase price for the TPP, software or telecommunication service

• total consideration for the service (including the TPP, software or telecommunication service) is the same as, or only marginally different from, what would normally be charged if the TPP, software or telecommunication service were not provided

Please refer to the Tax Interpretation Manual (TIM) for further details regarding incidental supplies or provisions of goods, software or telecommunications services.

PSTA Section 1 excludes the following from “lease”: a right to use tangible personal property that, in prescribed circumstances, is merely incidental to an agreement for the right to use real property, or to an agreement for the provision of services that are not subject to tax under this Act. PSTR 3.1 prescribes those circumstances, including the following in respect of TPP whose supply is merely incidental to the right to use real property and therefore not a “lease” of the TPP:

• The right to use the real property is seven days or less

• There is no separate price for the right to use the TPP

• The total consideration payable for the right to use the real property is the same as, or only marginally different from, what would be the total consideration payable for the right to use the real property if there were no right to use the TPP

2. Warranty sales

The purchase price of a warranty is subject to PST in the following situations:

1. The customer is required to pay or agree to pay for the warranty in order to obtain title to the good and the good is non-exempt. In this case, the purchase price of the warranty is included in the purchase price of the good. PST applies to the purchase price of the warranty the same way it applies to the good

2. The warranty is optional and therefore its purchase price does not have to be included in the purchase price of the warranted good, but the warranty guarantees something to which PST applies, such as scheduled non-exempt maintenance or other related services

Further details on warranties, including the PST implications to service providers in fulfilling warranties, please refer to Section 5U, Vehicles within this manual.

3. Sales/leases to the Federal Government

Generally, the Government of Canada is exempt from paying PST on sales and leases of goods and services as long as the relevant department of the federal government provides its PST number.

All federal government departments may claim the PST exemption. There are some federal boards, agencies and commissions that do not qualify and must pay PST. The federal entities that do not qualify are listed in Schedule I of the Federal-Provincial Fiscal Arrangements Act (Canada), and in Part I or Part II of Schedule III of the Financial Administration Act (Canada). If a federal entity is not listed on either of these schedules, it can claim exemption using its PST number.

The exemption does not extend to purchases by third parties, such as those by employees of the federal government or eligible federal entity.

Please refer to the Tax Interpretation Manual (TIM) and Bulletin CTB 002, Sales and Leases to Governments (PDF, 162KB) for further details of sales or leases to Governments.

If it is noted during the audit that the PST number issued to a federal agency or department was misused, the auditor should raise a lead for risk analysis.

4. Sales confirmations

When the taxpayer does not quote a customer’s PST number on the invoice or other required sales/leases document, auditors can use third-party confirmation to verify whether the customer intended to claim the exemption (such as, for resale). Confirmation can be used also in a situation where the auditor feels a PSTERR section 26 exemption may not apply (for example, because the purchaser may have made use of the TPP other than by storing it with the seller). See Assessments section for further information about situations where sales confirmations would be sent.

If the purchaser indicates the purchase was for their own non-exempt use, the penalty to be applied depends upon whether the purchaser self‑assessed. If they did not self‑assess, then the taxpayer is to be assessed a penalty equivalent to tax not collected. When the purchaser indicates they did self‑assess, or would be entitled to a refund of tax, the collector may be assessed a 10% penalty on the tax that they should have charged (PSTA Section 205 (c) (ii)) (refer to table in the Assessments Section 3 (a) to determine).

PSTA Section 203 (1.01) reduces the penalty imposed in Section 203 (1) in certain situations. The following provides general guidelines in determining whether the “director’s satisfaction” criteria have been met:

Category	Type	Director will be satisfied if...
1	A person became liable for paying PST to the seller/lessor on a non-exempt good but paid the PST directly to the province.	There is direct evidence of self-assessment by the person liable to pay the tax (for example, Company A purchased/leased assets from Company B and self‑assessed the tax which was verified by the auditor by reviewing Company A’s tax reporting in our system).
2	A person who could have claimed an exemption became liable for paying PST to the seller/lessor because the person did not provide the seller/lessor with the required documentation. The person did not pay the PST to the seller/lessor or directly to the province. Had the person paid the PST, the person would be entitled to a refund under PSTA 153.	The person liable to pay the tax provides the required documentation (for example, manufacturer exemption certificate was provided by the purchaser via third-party confirmation during the audit).
3	A person became liable for paying PST on a nonexempt good to the seller/lessor. The person did not pay the PST to the seller/lessor or directly to the province. The person’s use of the good entitles the person to a refund of any PST the person pays on the good (e.g, under PSTA 158, because the person shipped the good out of B.C. for business use and made no use of the good while it was in B.C. other than by storing it in B.C. and shipping it out of B.C.).	The person liable to pay the tax provides the same evidence required if they were to apply for the refund (for example, the purchaser provided shipping documents during the audit via third-party confirmation).

The confirmation letter is generally prepared on the taxpayer’s letter head and then returned directly to the auditor.

Example of sample sales confirmation letter

Date:_____________________ Customer Name:______________________ Fax#: _______________________ Our records are currently being audited for British Columbia provincial sales tax (PST) compliance. We note that we have not charged the tax on our sales to you as follows. Date                     Invoice #             Description                        Invoice amount Please help us update our accounting records by indicating the correct sales tax treatment in connection with the above listed invoices. Mark the appropriate option (A, B, C or D) next to the items or to the attached invoices. Option – A) Goods purchased for resale. Our exemption number is PST____________ - or - we have attached a Certificate of Exemption form (FIN 490)(PDF, 229KB). Option – B)   The goods were purchased for our own use. Option – C)   The goods were purchased for our own use and we have self‑assessed. Please attach supporting documentation for verification of self-assessment. Option – D)   Other – please specify and provide applicable support. I hereby confirm that we have purchased the products listed on the above invoices for the purpose as indicated next to each item. Please Note - This is not a request for payment. Date ________________________   Signature _______________________________ Name ___________________________________ Title _________________________                                     (Please Print) Please email this completed confirmation and attached invoices by ___________ (date) to ____________ (auditor name), Auditor, at _________@gov.bc.ca (auditor’s email).

 Section 2G – Operating expenses

Issued: 2014/02; Revised: 2021/11/26

Purpose of review

The purpose of the review is to ensure the correct payment of tax on purchases of taxable goods and services. Auditing purchases should be tested for completeness, application and accumulation of the tax.

Risk analysis

The following potential risk areas are to be reviewed (this is not an exhaustive list):

• Misuse of a registration number or exemption certificate
• Exclusion of the foreign exchange portion of the purchase and associated costs from self‑assessment
• No self‑assessment on the change of use (for example, purchases for resale changed to own use)
• No self‑assessment on out‑of‑province purchases for own use (such as, promotional use)
• No self‑assessment on the B.C.-use portion of non-exempt software
• Exclusion of landing costs from calculation of purchase price for self‑assessment
• Claiming exemptions that do not apply
• Incomplete recording of expenses
• Expense allocation (or exclusion), when multiple branches / locations are present
• Payment for purchases directly deducted from the taxpayer’s bank account
• Purchase and lease payments debited to a shareholder loan or intercompany account
• Purchases for own use that were recorded in the resale inventory account

System & records review

Discuss with the taxpayer and document purchase practices and internal control procedures.

Identify sources of purchase information to be reviewed, the most common include:

• Expense account general ledger listings
• Purchase invoices
• Purchase orders
• Cash disbursement register
• Shipping records
• Custom brokerage records
• Shareholder loan account
• Inter‑company account
• Prepayment account
• Self‑assessment summary
• Bank statements
• Cheque books
• Lease documents of non‑capital leases
• Financial statements

Analytical review

• Understand the taxpayer’s business and exemptions that relate specifically to their industry
• Review the taxpayer’s prior purchases / self‑assessments from financial statements or TACS and compare to those of the current audit period; note any anomalies and trends
• Examine inventory accounts for increases in manual adjustments, which may indicate inventory transferred for own use or promotional material
• Examine shareholder account(s) or inter‑company account(s) for significant increases, which may indicate taxable goods or services transferred to the taxpayer from shareholders or a related company
• Analyze the taxpayer’s history of self‑assessments for unusually large transactions or significant changes in the pattern

Internal control review

The internal control review helps the auditor evaluate whether the taxpayer’s policies and procedures minimize the risk that that the taxpayer fails to pay, report or remit provincial sales tax (PST) as required. The auditor uses the internal control review in determining the level of substantive testing required. While proper controls mean substantive testing may be reduced, they do not necessarily eliminate the need for substantive testing.

The following are procedures to test internal controls (this is not an exhaustive list):

• Verify if the taxpayer has documented internal control procedures with regard to purchases; specifically, how purchase transactions are initiated, processed, and paid for and how they flow through the taxpayer’s system
• Verify if there is sufficient segregation of duties between the initiation of purchases and the approval of and payment for the purchases
• Verify controls over the use of the PST registration number or exemption certificates
• Verify if self‑assessment controls are in place and reliable
• Discuss with staff and review the procedures in place, if any, to ensure expenses are coded correctly
• Interview staff to determine their knowledge and accounting proficiency in complying with the tax regulations specific to their business

Substantive testing

The amount of substantive testing required will depend on the results of the risk analysis, systems and records review, analytical review, and internal control reviews. If these reviews indicate low risk then minimal or no substantive testing is required.

1. Sample selection

The purpose of the sample selection is to determine a sample of transactions that is representative of the taxpayer’s business:

• Review general ledger listing of expenses in high‑risk non‑compliance areas
• Determine the sampling method to be used: statistical vs. non‑statistical
  • Use the statistical sampling method whenever possible (see Computer Audit Specialist (CAS) Procedural Manual).
  • Request electronic records before going out to perform the audit field work
  • Prior to the commencement of large or recurring audits, contact CAS to discuss sampling options
  • When statistical sampling is deemed to be impractical, use non‑statistical sampling method or a combination of both
  •  A statistical sample may be selected from a period within the audit period, instead of the entire audit period
• Determine sample period:
  • When statistical sampling is used, a sample can be drawn from the audit period
  • If non‑statistical sampling is used, the auditor is to exercise discretion in determining the length of the test period. In general, the most recent complete fiscal year is used for expense testing. When the transaction volume is significant, shorter sample periods may be used
  • Rather than testing one continuous period, two or more smaller periods may be selected instead
  • The length of the test period(s) should sufficiently remove the effect of seasonality
• Determine the sample size:
  • The appropriate sample size is a balance between efficiency and accuracy
  • The sample size may be increased if either the auditor believes or the taxpayer can show that the sample is not representative of the population
  • A taxpayer should be advised in advance that testing results from the increased sample size supersedes the results from the previous samples
• Factors contributing to the use of non-statistical sampling include:
  • Record format (for example, no electronic purchase data is maintained)
  • Availability of supporting documents (for example, only the current fiscal year information is on the premises)
  • Ease of retrieval (for example, storage of the physical copies of source documents is scattered).

2. Substantive testing procedures

The purpose of the substantive test is to identify errors where tax is not paid or self‑assessed on taxable purchases, including taxable goods and services:

• Verify completeness and accuracy of recorded purchase transactions by selecting sample purchase invoices and tracing them to general ledger accounts to see if coding indicated on the invoice matches actual general ledger posting and there are no missed entries
• Trace the sample of general ledger transactions to source documents of purchases
• Examine supplier invoices to ensure no misuse of exemption certificates or the taxpayer’s registration number and that tax was correctly paid or self‑assessed
• Ensure that tax has been self‑assessed on landed cost (freight, foreign exchange, duty, and customs charges) for out‑of‑province purchases by examining freight invoices, transport waybills, and customs documents
• Use the detail on transport waybills and customs documents to determine if all purchases have been accounted for by sample tracing to supplier invoices
• Confirm tax self‑assessed on goods taken from inventory for own use, including use in promotional distribution
• Trace tax self-assessed to the tax account to verify correct recording and reporting. Ensure tax is paid on consumables, parts for non-qualifying production machinery and equipment and materials used to make such parts, and services to non-qualifying machinery and equipment
• Review leases or recurring payments for which there are no invoices, but automatic withdrawals on bank statements
• Review prepaid account for taxable goods and services prepaid and amortized
• Review charges to shareholders’ accounts for goods taken from the resale inventory
• Check for inter‑organizational transfers of goods purchased
• Review for proper tax application on software and software maintenance contract purchases allocated to B.C. usage
• Obtain explanations of any missing documents, disagreeing amounts or any unusual entries. If no satisfactory explanation is provided, these items may be assessed

Assessment

Before making an assessment on a purchase transaction, the auditor is to check if the matching sales transaction has already been assessed on the part of the seller. If the seller makes an exempt sale to the purchaser without exemption support, an audit lead is to be raised on the seller. The seller, if assessed, has recourse over the purchaser to recover the amount of the assessment (PSTA Section 203(2.1)). For further information refer to Section 2F, Sales and leases.

If a lead is raised on the seller, the seller may be subsequently audited and assessed for a maximum of a 3‑year period. The auditor would still assess the purchaser, by prorating the purchase error over the remainder (if there is any) of the purchaser’s audit period. For further information, see the following:

• Section 2F, Sales and leases
• Section 2I, Finalizing the audit, Assessments

Prorate sample tax errors over an audit period in an equitable manner (typically in proportion to sales), refer to Section 2C, Sampling, Proration.

Where it is determined that tax is payable by a registered purchaser, determine the payment due date in accordance with Section 29 of the PSTA. The due date for the purpose of the assessment is the last day of the filing period. For example, an annual remitter whose last day of the filing period is December 31 failed to self‑assess goods purchased on January 1 of the same year. The date of the transaction for the assessment would be December 31 when entering it into TACS working papers.

Apply penalty when warranted, see Section 2I, Finalizing the Audit - Assessments.

Miscellaneous

1. Small sellers

During the review of a taxpayer’s purchase invoices, the auditor may encounter a purchase invoice that does not charge PST because the supplier is a small seller. A purchase of “eligible tangible personal property” from a small seller is exempt from tax (PSTA Section 91).

A small seller is a business located in B.C. that is not required to register to collect PST and is not registered. See PSTA Section 1 for the definition of small seller and PSTA Sections 91, 114, 136, and 183.

The nature of the goods and services, the business location, actual and expected 12-month revenues, and how the business operates are some of the criteria that are relevant to determining whether a supplier qualifies as a small seller (refer to PSTA Section 1 definition of small seller). The auditor can obtain this information by reviewing the purchase invoice, discussing the supplier with the taxpayer, reviewing TACS, and performing a web search. Corporate income tax information may also be requested from workload. The auditor should have a discussion with the team leader prior to taking this last step.

When a small seller is being audited, it is important to be aware that a small seller is ineligible for exemptions from PST available to collectors. See PSTA Sections 89, 90, 112, and 135; PSTERR Subsections 38 (6), 40 (4), 59 (6), 68 (6), 73 (1) (a), and Section 117.

2. Tax Payment Agreements (TPA)

Before starting an audit, check if the taxpayer has entered into a TPA with the ministry. Taxpayers who have a TPA number can acquire some goods exempt from PST, but must self‑assess the PST on those goods. Most persons who enter into a TPA must be registered to collect PST and therefore must have reporting periods. Most registrants in a TPA must self-assess the applicable PST by the earlier of the following:

a) the last day of the first month after the reporting period in which the registrant uses the tangible personal property (TPP) or software other than by storing it
b) the last day of the first month after the reporting period that includes the 12^th month after the month in which the TPP or software enters B.C. See PSTA Section 32.

3. Delivery Charges

Delivery charges incurred in relation to nonexempt purchases and leases are almost always included in the purchase or lease price of the goods and therefore subject to PST. Refer to Bulletin PST 302, Delivery Charges (PDF, 162KB).

Section 2H – Capital assets

Issued: 2014/02; Revised: 2021/11/26

Purpose of review

To ensure that tax has been correctly paid on purchases of capital assets. Auditing capital assets should test for completeness, application, and accumulation of the tax.

Risk analysis

The following list includes factors to be considered in determining the level of risk with capital assets (this is not an exhaustive list):

• The taxpayer is part of a capital intensive industry
• Larger companies are more likely to have a higher volume of capital asset additions
• A new business is more likely to have a higher volume of capital asset additions. If the business purchased the assets of an existing business, it is possible that the provincial sales tax (PST) was not paid or remitted
• Capital assets purchased by a head office, where the head office is located outside of B.C.
• The number of locations that the business has in B.C.
• A lead regarding capital assets attached to the audit
• Capital asset errors in a prior audit
• The business qualifies for exemptions such as production machinery and equipment, farming equipment; etc.
• The business is part of the SUCH (schools, universities, colleges, and hospitals) sector. There is some misunderstanding that these sectors are exempt from PST
• Asset transfers between related parties which may not be eligible for exemption
• The business accounts for capital assets on a project basis. When this occurs, capital assets are not usually recorded in the capital asset accounts until the project has been completed
• The business’s showroom holds assets that are not readily available for sale
• The business brings goods into B.C. for temporary use. There is no self‑assessment of tax on out‑of‑province purchases
• Tax is not self‑assessed on landed costs

Systems & records review

The following include some of the records used to review capital assets:

• Supplier invoices
• General ledger capital asset accounts
• Trial balances
• Capital asset register
• Capital asset files / continuity schedules
• Financial statements
• Internal financial statements
• Capital cost allocation (CCA) schedules from income tax returns
• External accountant’s capital assets working papers
• Shipping, customs, and import supplier files
• Insurance policy listing of insured capital assets
• Asset purchase agreements

Large multinational companies may provide capital asset information by geographical location. This information may not be complete. For example, software used by the whole company, including in B.C., may not be found in the list of assets for B.C. This demonstrates the importance of obtaining capital asset information for the whole company.

Analytical review

Review information in TACS to determine whether the business self‑assesses tax or makes casual remittances, and what the frequency of the self‑assessment is if the business does self‑assess. Be alert for self‑assessed tax recorded in the same account as tax collected.

Internal control review

Substantive testing for capital assets is generally preferred because of the lower volume of transactions for capital assets. Internal control review and testing is not usually completed for smaller businesses due to the lack of segregation of duties and other important controls.

It is recommended that a review of internal controls be conducted for each large business. The degree of effective internal controls exercised by the taxpayer in accounting for the tax has a bearing on the degree of reliance which can be placed on the system and affects the extent of substantive testing required.

If it is decided to review the internal controls, discuss with the taxpayer the details of internal control procedures that ensures tax on purchases of capital assets are correctly recorded and paid. If it is determined that the internal controls can be relied upon, select a sample to test the internal controls.

Substantive testing

Capital asset transactions are generally examined for the entire audit period because capital assets are not usually purchased on a regular basis and individual transactions can involve relatively large expenditures. Where the business being audited is very large and has had a significant volume of asset transactions over the audit period, the auditor may consider using statistical sampling to verify the capital asset additions (see Chapter 6, Computer Assisted Auditing Techniques).

Use the following audit procedures to determine whether the tax on capital asset purchases have been properly paid (note that this is not an exhaustive list):

• Tour the premises of the business to determine the type of assets and the age of the assets
• If the business is eligible for the production machinery and equipment exemption, obtain the list of all machinery and equipment and then determine qualifying and non‑qualifying machinery and equipment
• Review the capital asset continuity schedules or general ledger listing of capital assets for any additions made during the audit period
• Vouch the general ledger transactions to the supplier invoices and other source documents
• Examine supplier invoices to ensure tax was correctly charged at the source
• Verify that tax was paid on the landed cost of out‑of‑province purchases
• If amounts were self‑assessed on capital assets, verify they are correct and were recorded in the tax account properly
• If taxes were not paid because of an exempt transfer between related parties, confirm that the transfers meet the conditions set out in the Provincial Sales Tax Exemption and Refund Regulation (PSTERR), Part 9 Related Party Asset Transfers
• Compare the CCA schedules and ledgers to ensure completeness of recording

Assessments

When an error is found (such as, PST was not paid on a non-exempt asset), the auditor should determine its cause. For example, a purchaser may misuse its PST number, or fail to self-assess PST on an asset acquired outside B.C., or the seller may improperly provide an exemption. This is done in order to determine whether to assess the purchaser and / or raise a lead on the seller. A lead should be raised on the seller when it is determined that the seller had a legal obligation to collect the tax and obtained no evidence to exempt the sale (such as, PST number was not documented on the invoice). Otherwise, the purchaser should be assessed. For further information, see the following:

• Section 2F, Sales and leases, Assessments
• Section 2G, Operating expenses, Miscellaneous
• Section 2I, Finalizing the audit, Assessments

Section 2I – Finalizing the audit – Assessments

Issued: 2014/02; Revised: 2019/06/15

Communication of discrepancies / errors

The auditor uses professional judgement in determining the timing of communicating discrepancies / errors to the taxpayer. There may be some situations where it is appropriate to communicate errors throughout the audit, and other situations where it may be more appropriate to do so at the end of the audit. The taxpayer’s preference should also be taken into consideration regarding the timing of communicating this information.

An audit conclusion letter is issued to a taxpayer upon completion of the audit. This letter outlines the audit work performed, records reviewed and audit findings, and it references the legislation relied on to issue the assessment. It also provides the information for the appeal process. If there is no assessment, a nil letter should be issued.

The contact log should be updated to show that the letter was sent, either by email or standard post.

Assessments

The assessment period for tax collected but not remitted by a collector, or tax not paid or remitted by a taxpayer, is four years before the date of the first notice of assessment (Provincial Sales Tax Act (PSTA) Sections 199(1), 199(2) and 200(1)). The assessment period for failure to levy tax by a collector (sales application error) is limited to a single continuous period of three years within a period that begins four years before the date of the first notice of assessment (PSTA Section 203).

Companies that have been dissolved can be issued a notice of assessment. The BC Corporations Act (section 364) allows the issuance of the notice of assessment within two years of dissolution.

Assessing the purchaser and / or the collector

The period for a PSTA 203 sales application assessment is limited to a single continuous period of three years within a period beginning four years before the date of the first notice of assessment. If necessary, the auditor can raise a lead for the purchaser. The purchaser can then be assessed for the balance of the four-year period. A sales application error can be assessed even if the seller is not registered to collect PST, as long as the seller had been required to register (PSTA Sections 169 to 172). If the seller is a small seller, this does not apply (see Section 2G, Operating expenses, Miscellaneous). For more information on assessing sales application errors, see Section 2F, Sales and leases, Assessments.

The most common purchase error assessment is for tax not paid or self‑assessed for purchases from a supplier that is located outside of B.C. and not required to be registered to collect PST (see Section 2D, Registration requirements for out‑of‑province sellers).

Where a business that is registered (or required to be registered) sells business assets, the business, as a collector, is required to collect the tax on that sale. PSTA Section 203 provides for a penalty where a collector has not levied tax in accordance with the act. If the seller is not a collector and does not collect PST on the sale, the purchaser is required to self‑assess the PST (unless an exemption applies). If the tax has not been remitted by the purchaser, the purchaser will be assessed for the tax that should have been remitted.

A collector who grants an exemption is not required to verify that the claimant qualifies for the exemption. The collector only needs to obtain the required exemption documentation. If the exemption does not apply, the purchaser is liable for the unpaid tax and any related penalties and interest. Only if it is reasonable to conclude that the collector had reason to believe that the exemption did not apply would the collector face an assessment.

Avoidance of double taxation

Caution is required so that the branch does not assess both the seller and the purchaser for the tax due. Before assessing the purchaser, make sure the tax has not already been assessed during an audit on the seller. If the seller made exempt sales without support, a lead is raised on the seller and the purchaser is not assessed. For more information see Section 2F, Sales and leases, Assessments.

Penalties for tax collected not remitted

An unremitted running balance in a PST payable account is typically subject to a 10% penalty, because it is reasonable to conclude that the collector knew of the balance but did not remit it. In determining whether the penalty will be imposed, the auditor should apply discretion and professional judgement.

If the auditor is fairly certain the taxpayer had knowledge of the tax liability yet failed to remit the tax collected, a 10% penalty may be considered appropriate. A running balance is not necessarily evidence of unremitted PST (for example, a balance may be due to an error unrelated to PST, such as a non-PST amount credited to the PST payable account in error). Therefore, a running balance should not be assessed automatically. When in doubt, staff should consult their supervisors and discuss further to ensure consistent and correct audit procedures are followed in assessing the taxpayer the penalty.

Before imposing a 25% or 100% penalty, the auditor should contact their team leader and manager. Imposition of a 100% penalty requires audit director approval. Evidence of discussions and approvals of penalties by the team leader, manager, or audit director should be included in the audit working paper in the “Substantiation of penalties applied” box. For more information on penalties, see PSTA Section 205.

The 10% penalty discussed above does not apply for a tax accumulation error if it is the first time that the registrant has failed to properly accumulate the tax collected in the tax account. An example of this is if PST is accumulated in the GST account instead of the PST account. Where the registrant has previously been notified of a tax accumulation error in an audit letter, a subsequent occurrence of the same type of non‑compliance may attract a 10% penalty.

For information on how penalties apply to non-registered taxpayers, see Section 2E, Tax Account, Risk Analysis.

For information on internal tax account adjustments, see Section 2E, Tax Account, Internal Account Adjustments.

Penalties for tax not paid or remitted by the purchaser

When there is failure by the purchaser to pay or remit tax, and it is the first time that it has been discovered in an audit of the purchaser, it is branch policy not to assess penalties on the purchaser. Generally where the purchaser has previously been notified of non‑compliance in an audit letter, a subsequent occurrence of the same type of non‑compliance may attract a 10% penalty (PSTA Section 205). In determining whether the penalty should be imposed, the auditor should apply discretion and professional judgement. A higher level of penalty, such as 25%, should be discussed with the team leader and manager.

Generally, these penalty provisions do not apply to unique errors, even when there is documented audit history that similar errors by the purchaser were previously assessed. For example, a purchaser who was assessed in a previous audit for failure to pay PST and who during the current audit period claimed exemption in error on non-qualifying machinery might not be assessed a penalty in relation to the machinery if the two failure-to-pay errors are not identical.

For information on internal tax account adjustments, see Section 2E, Tax Account, Internal Account Adjustments.

Other penalties

Other specialized penalties in the various tax statutes must be discussed with team leaders, managers and possibly audit directors. Examples are the PSTA 25% penalty for willfully failing to register, or the Carbon Tax Act penalties available under section 47. Professional judgement must be exercised by team leaders and managers in deciding when to escalate these approvals.

Contentious issues

There should be an attempt to resolve contentious issues during the audit or refund. Auditors should discuss these issues with their supervisor. If a taxpayer does not agree with the audit findings or refund adjustments they should be advised of the appeal process.

It is important that contentious issues are clearly summarized, and additional information and discussions with the taxpayer are documented in the audit report on the Additional Information tab.

If an issue was resolved in favour of the taxpayer, it is still important to document this for a future audit or refund, for the sake of research and planning. If the issue was assessed or adjusted, it may be appealed, in which case the appeal officer would review the audit report or refund verification in detail. It is imperative to know what the taxpayer said and what information was provided during the audit or refund so it can be compared to any information provided during the appeal. The discussion in the audit report or refund verification should be detailed enough to assist the reviewer and other users (such as, appeal officer) to fully understand the issue. The discussion in the audit report or refund verification should refer users to supporting information (such as, attachments, copies of letters from the taxpayer, TACS letters, emails from supervisors, rulings).

Interest accrual

The auditor is to advise the taxpayer that interest on the audit assessment continues accruing until the earlier date of when the notice of assessment is issued or when the assessed amount is paid in full. To minimize potential dispute over the interest amount, it is recommended that the auditor finalize the amount of tax owing with the taxpayer before calculating and advising the taxpayer of the amount of the interest.

Supporting documentation

During the course of an audit or refund, an auditor will have assembled various types of documentation, from a variety of internal and external sources, in order to support the final assessment or adjustments. This would include taxpayer records, internal emails, and rulings that support a decision to assess or not to assess a transaction. Entries in the working papers transaction tables should be referenced, and easily traced to supporting documents.

If the volume of taxpayer records is excessive, representative samples of the records may be attached with a note in the audit or refund report explaining how these are representative of the records examined.

If a file is appealed or goes to court, these documents allow the appeals or legal branches to prepare a thorough case without relying on an auditor’s ability to recall information about the file at a later date.

Documentation should be attached at the audit level in TACS, except for the Authorization form, which is attached at the Taxpayer level. All documents must be “checked in” to ensure that the final version is attached.

When original records are received from the taxpayer, they should be scanned and attached in TACS. These original records will also be stored in the office.

Attached to the original records will be an indexing sheet that includes the following information: the taxpayer’s legal name, the audit or refund approval date, and the unique TACS case number.

For the Vancouver staff, the original documents and indexing sheet should be placed in the basket outside the Office Manager’s office. The Surrey and regional staff should send the original documents and indexing sheet to the Vancouver Administrative Assistant. Examples of original records are: original signed waiver from the taxpayer, original signed refund claim forms, and original signed authorization forms. Records received by email or fax, and photocopies are not original records.

Section 2J – Audit report

Issued: 2014/02; Revised: 2022/02/18

Purpose of review

The purpose of the audit report is to provide details of the taxpayer being audited, the audit procedures applied, and the audit findings. The audit report is used for in‑branch supervisory review and approval of all audits, including those that do not result in an assessment. When a taxpayer appeals an audit assessment to the minister, the Appeals Branch reviews the report to evaluate the basis of the assessment. The report may be further reviewed by legal counsel and judges if the taxpayer further appeals to the courts. The audit report should be initiated at the start of the audit and updated regularly as the audit progresses.

Taxpayer Administration, Compliance and Services (TACS) report:

• Format:

The current audit report format consists of multiple tabs, each tab containing a number of fields / check boxes for information pertinent to the taxpayer and the audit. Once all tabs are updated, the report can be exported into a Word document and reviewed. The exported report is unformatted, and any update to the exported report cannot be saved back to or effect any changes in TACS.

• Length restriction:

A maximum number of 5,000 characters is set for the fields in the report.

• Partial audit:

The audit report does not contain a partial audit indicator. When the audit of certain risk areas is delayed for any reason, the most common being records outstanding from the taxpayer, the auditor must observe the time frame established by the branch (for example, 60 days from the start of the audit) to complete the rest of the audit. In TACS, each partial audit is a new audit with the same audit end date as the original audit.

• Reference to the legislation:

At the core of any audit is the correct application of legislation and policy to specific transactions. Once the nature of the taxpayer’s business and transactions are understood the auditor must determine the correct application of legislation and policy. Legislation and policy that is relied on to make audit assessments and refund adjustments must be referenced in the audit report.

The reviewer must be informed what sections of the legislation have been applied to a particular situation. Taxpayers can be referred to information bulletins; any correspondence must inform them also of the specific legislation applied. The audit report must detail the legislation that forms the basis of the assessment, in the “Description of test results” box if it is to go to the taxpayer, as referenced in the “Audit report guidelines”. Other legislation or policies that is relied on to deny an exemption or is further used in the auditor’s analysis should go in the “Assumptions” box in the working papers.

• Refund interest netting:

The audit report includes an “Interest netting” tab that provides details of interest relief granted to the taxpayer. When a refund meets the criteria to be processed in conjunction with the audit, the refund interest is applied against the assessment interest at a rate more favorable to the taxpayer than if the refund was processed separately. When the auditor inputs information in the applicable assessment tabs and “Tax credit” tab, the audit report automatically calculates the net interest, which is displayed in the “Interest netting” tab.

• Payment interest netting:

The auditor completes the “Payment” tab to effect interest relief from pre‑payments received from taxpayers. Information entered on this tab is included in the “Interest netting” tab when interest is calculated on the assessment.

• Content of the report populated to audit conclusion letter:

In addition to being used for the internal review of audit work, some content of the audit report is populated to the Audit Conclusion letter advising taxpayers of the audit results for each audit section (such as, Unremitted tax, Sales, Purchases, and Capital assets) where there is a corresponding assessment. These fields include:

• Description of test periods chosen
• Description of records obtained for testing
• Description of test results
• Basis of proration and sources of data used
• Substantiation of penalty applied

• Completion and approval:

The auditor completes the audit report and the team leader then reviews and approves the audit report prior to finalizing the audit results with the taxpayer. To enable timely team leader approval, it is recommended that the auditor update the audit report regularly during the course of the audit.

General guidelines

The following guidelines should be used to organize and prepare the audit report:

• As the audit report provides details of the planning, procedures and findings in respect of each audit, auditors should cross‑reference Chapter 2 of this manual to complete the report
• All notes taken from discussions with the taxpayer prior to commencing the audit must be organized and reviewed, together with all relevant audit findings and significant information obtained throughout the course of the audit
• The report is based on reliable information that has been drawn from facts and verifiable evidence
• Comments in the report must present an objective and unbiased view
• The report must identify and provide sufficient detail to describe each working paper schedule
• The report should be clear and concise so there is no confusion or question in the reader's mind as to what is being communicated

Audit Report

The report is laid out in the following sections:

1. Header

This section provides:

• The taxpayer’s name
• Account information
• The act under which the audit is conducted
• The status of the audit

2. Assessment summary tab

This section requires:

• Input of current audit period dates
• The amount of the assessment in each audited area
• The refund amount determined in conjunction with the assessment
• Interest and penalties
• Areas not audited

3. Audit of specific risk area tabs

Each section addresses a specific audited area: unremitted tax, sales, purchases, and capital assets. When completing these tabs, sections 2E, Tax account, 2F, Sales and leases, and 2G, Operating expenses of this manual to ensure that procedures are followed and documented. Each tab requires the following information:

• Audit period:

In most cases, an assessment under PSTA 203(2) for failure to levy tax can be made in respect of any continuous period of three or fewer years that occurs within four years of the date of the assessment, and in respect of only one continuous period. In most cases, an assessment under PSTA 199(2) for failure to remit amounts collected can be made in respect of any period that occurs within four years of the date of the assessment.

• Assessment of the risks and resolution of the lead:

The assessment is based on results of risk analysis, analytical review, and internal control review. There is no designated field to input findings of “Analytical review” in the audit report. The review is nonetheless an important step of the audit procedures and is addressed in this section of the report. If the audit was initiated because a lead flagged a particular risk area, the auditor must confirm in the report if the risk was substantiated and tax recovered due to the lead.

• Description of systems and practice:

Describe records maintained and the accounting procedures applied to each specific audited area, as well as the filing methods of the records used during the audit.

• Description of test periods chosen:

In most audits, all transactions recorded in the capital asset and tax payable accounts during the audit period are reviewed. Sales and purchases are often audited by sampling-and-proration due to the large volume of transactions. The auditor should note the sampling method (statistical vs. non‑statistical) and the justification if statistical sampling method is not used.

• Description of records obtained for testing:

Describe the records for the sample period requested from the taxpayer for internal control and substantive testing.

• Internal control and substantive tests performed:

This section consists of standard test procedures of a specific audited area. The audit report does not contain separate fields to input internal control and substantive test procedures.

• Description of remaining tests:

Describe any tests not already listed as the standard procedures.

• Description of test results:

Besides providing details of errors found, the description should also include legislation section references for all amounts assessed.

• Basis of proration and sources of data used:

Proration is often applicable to the assessment on sales and purchases. The most common basis of proration is gross sales stated on the taxpayer’s financial statements or tax returns. Another basis (such as, cost of sales, operating expenses) may be considered when the assessed area (for example, a specific type of purchase) does not correlate to gross sales.

• Assumptions applied to audit tests and results:

The underlying assumption in support of sampling and proration is that the sample is representative of the population. Assumptions made in lieu of any missing information for estimated assessments should also be noted. Refer to further information in the Document Your Analysis section below.

• Substantiation of penalties applied:

When a penalty is applied, the auditor is to clearly document the reason for the penalty and its legislative basis. The level of penalty is specific to the area being audited (for example, no penalty applied in addition to tax assessed on sales application errors) and circumstances of the assessment (for example, taxpayer’s knowledge of liability, repeat non‑compliance, false or deceptive statements, willful default). Refer to Section 2I, Finalizing the Audit - Assessment, for details on penalty policies.

• Additional information:

Describe all relevant audit steps that are not described in another field.

4. Additional information tab

This section provides details of audit resources and taxpayer information. These include:

• Audit resources:

List the name of each audit team member including auditor, team leader, manager, and director who conducted, reviewed, and approved or potentially approves the audits.

• Knowledge of business:

Provide taxpayer information pertinent to the audit, such as:

• Audit contact (including taxpayer’s external accountant or bookkeeper)
• Location and timing of field work (for example, describe when and where the field work took place). Any specific knowledge of the business that causes the field work to occur at a particular location or time should also be noted
• Description of taxpayer business (for example, specific industry, formation date, most recent annual sales)
• Fiscal year-end date
• Taxpayer’s accounting and software systems and controls (for example, manual vs. computerized, segregation of duties, accounting cycle, record quality, and completeness)
• Corporate and / or organizational changes during the audit period and how they impact the audit (such as, mergers and acquisitions, dissolution and wind-up, leadership changes, and accounting staff turnover during the audit period)
• Additional audit information:
• Related companies audited, related companies not audited, and reasons for not being audited
• Other consumption tax audits of the taxpayer that occur in respect of the same audit period. If a company has accounts or operations that could be subject to audit under other acts, and such audits are not conducted, the reasons for not conducting these audits should be provided
• If Electronic Data Processing (EDP) technique is applied to assist statistical sampling, which is the preferred sampling method, the report should note the EDP auditor involved, if any, and describe the EDP procedures. If EDP technique is not used, the reasons should be provided
• Audit conclusion
• This section focuses on contentious issues discussed with the taxpayer. If applicable, the auditor is to describe in detail what aspect of the assessment the taxpayer disagrees with and the reasons for their disagreement. The auditor is to apply relevant legislation to determine if the taxpayer’s position is supported and document any additional work conducted to address the taxpayer’s concern(s) and the results of the discussion between the taxpayer and the audit branch
• If undue delays occur, they must be addressed and documented in the “Significant matters in relation to the audit” section. Judgement needs to be exercised when considering what an undue delay is, considering factors such as file size or complexity of issues. Delays can be caused by a number of factors, including:
  • Time demands on the taxpayer contact (such as, controller working on year‑end)
  • Inadequate records 
  • Staff turnover and lack of tax knowledge
  • Unexpected auditor absence
  • Waiting for a ruling
  • Difficulty with electronic records
• Referrals are to be made to external tax agencies for potentially outstanding tax under their tax statutes
• Risks that assessed amounts will not be collected should be addressed (for example, due to cash flow difficulties, taxpayer disagreeing to the assessment, etc.)

5. Tax credit tab

This tab is completed only when the taxpayer requests refund items that should be processed during the audit. With this option, the refund items are added to the Tax credits working paper; it is not necessary to create a separate refund audit. When verifying tax credits in conjunction with the audit, the auditor is to provide details of the verification procedures, analysis, and recommendations as to allow, disallow or vary the amount applied. See Chapter 3, Refund procedures, Verifying a refund application. If the taxpayer is entitled to a refund but is not filing an application to make it a refund in conjunction with the audit assessment, outline what the taxpayer overpaid tax on and why it is not being done in conjunction with the audit.

6. Interest netting tab

When interest from a tax credit or audit prepayment is netted against the interest on the assessment, this tab provides details of the netting calculation. The auditor is not required to input information on this tab as the calculation is affected from the assessment working paper, “Tax credit” tab, and “Payment” tab.

7. Payment Tab

The audit file must account for all payments by the taxpayer received during the course of the audit. Once a payment is received and a payment voucher is created in TACS, the “Payment” tab is generated and included in the audit report. The auditor then records the payment information in the “Payment table” on this tab. As TACS applies the payment in a prescribed order (Interest netting -> No interest entries -> Penalty entries -> Sales penalty equivalent), it is imperative that the auditor correctly determines the amount applicable to the above categories before entering the information into the “Payment table”. 

Document Your Analysis

The audit / refund report should provide a clear, easy-to-follow account of taxpayer information, risk analysis, audit testing, and test results. The audit report or refund verification should also provide an analysis of important issues to allow the reader to easily understand how conclusions are reached.

The analysis should identify all issues, facts, and assumptions that support a particular application of tax. Assumptions should be detailed in the “Assumptions” box of the audit report. Auditors should carefully examine transactions and facts so that all important specifics are fully understood. All pertinent supporting information must be examined. Consider the following:

• Referring in the audit file to relevant attachments which contain the details of the analysis
• Ensuring figures in supporting attachments are easy to trace to assessment figures entered in the TACS working paper
• Clearly stating and summarizing the facts relied on and how the decision was reached in the working papers and / or audit report

Assumptions are often an important element in drawing a conclusion and should be made clear in the audit report or refund verification and in communications to the taxpayer where appropriate. Specific assumptions may be critical to how an assessment was formulated or a refund adjustment was made. For example, assuming whether reported amounts are net or inclusive of tax may be necessary if the taxpayer cannot explain their methods. Consider the following when working with assumptions:

• Indicate why you are or are not relying on the taxpayer’s statements
• Clearly state and summarize assumptions relied on and how the decision was reached in your working papers and / or audit report
• Consider prior audit or refund results, especially if they are fairly recent and the same business conditions exist, and explain any reliance on factors found in prior audits or refunds applied to current audits or refunds
• Does the audit assessment rely on industry standard information (such as, liquor mark-ups); estimates or third-party information (for example, reported GST sales)?
• Were the assumptions tested to examine their validity?
• Were alternative assumptions considered (such as, discussed with sector specialist)?
• Were assumptions underlying sample periods and proration calculations documented?
• Explain whether you requested any important documents but did not receive them. If the taxpayer does later provide them (such as, during the appeals process), it will be helpful if the following are clearly documented:
  • What was requested
  • What was received
  • What reason, if any, the taxpayer gave for not providing the documents

Section 2K – Post audit adjustments

Issued: 2014/02; Revised: 2022/02/16

On occasion, after an audit assessment has been processed, a taxpayer provides additional information that may impact the initial audit assessment. The additional information may include records requested but not made available at the audit stage or an explanation of calculation errors.

When a taxpayer provides information warranting an adjustment, the auditor creates an adjustment audit, which pulls in the working paper tables from the original audit. This allows the auditor to go into those working papers and delete lines that should not have been assessed, change assessable amounts, change proration factor calculations, or do anything which might reduce the assessment. The adjustment audit should have the same audit period and interest calculation dates as the original audit.

Once an adjustment is completed, no further audit adjustment can be created. If a further adjustment is warranted it will have to be calculated outside of V9 and entered into a new V9 audit case with the same audit dates as the original audit.

Different procedures apply when the taxpayer has filed a formal appeal. While under appeal, any adjustments will be processed with the appeal by the Appeals Branch. Notify the respective Appeals Officer if you notice that a taxpayer has requested an adjustment to an assessment that they are also appealing. A taxpayer requesting a post‑audit review challenging the legislative basis of the audit assessment must go through the appeal process if it was not resolved during the audit approval process.