New standard on compilation engagements: What does it mean for tax work?

Recent trends in tax compliance work

How we do tax compliance work has changed significantly over the years, especially for corporate returns. In the past, clients commonly engaged practitioners to perform an audit, review or compilation, and also to prepare corporate tax returns (T2) as part of the engagement. As time passes, more members are being engaged to provide services in different ways and many are moving away from these engagements.

One increasingly common trend involves “tax-only” engagements in which the accountant prepares the T2s using either:

• financial statements provided by the client, or
• financial data from their client’s systems and no formal financial statements are prepared

In both cases, the accountant is not reporting on the financial statements, and their engagement focuses solely on tax return preparation.

In another recent trend, accountants are becoming more involved in their client’s day-to-day bookkeeping before they prepare the T2, logging in to their client’s accounting system to help them in real time and sometimes doing all of the bookkeeping on their behalf. The accounting data is then often imported directly into the client’s T2 General Index of Financial Information (GIFI) statements and T2 returns are prepared by the accountant.

A new standard for compilation engagements has arrived

In addition to changes in the nature of client engagements, the standard for compilation engagements has changed. The Auditing and Assurance Standards Board (AASB) has replaced the old Section 9200 with CSRS 4200, effective for compiled financial information for fiscal periods ending on or after December 14, 2021 (with early application allowed).

With all of these changes, members have asked about the impact on typical client engagements that involve T2 preparation. In particular, members have asked under what circumstances a compilation engagement will be needed and the impact of the new standard on the use of disclaimers on tax returns and forms.

In this blog, we discuss how the new standard applies in relation to tax compliance work and other issues.

Topics include:

• the new standard’s application and scope
• the use of disclaimers, including third-party requests for GIFI, T2s and other tax forms
• uncertainties about how to prepare Schedule 141 Notes Checklist (S141)

We also highlight the key considerations related to tax work but do not review the new standard itself in detail. You can find a link to helpful resources at the end of this blog.

The new standard’s application and scope

When performing work for small and medium-sized enterprises, there are three common services that are provided assuming an audit or review is not performed:

• bookkeeping services or assistance
• compilation engagements (i.e., compiled financial information with a practitioner’s communication attached)
• tax return preparation

When looking at the new standard, the key is to determine both the services that your client needs and the potential requirements that could apply. For example, if you provide bookkeeping services and prepare the client’s T2, can you use data from the client’s accounting records to prepare the return without performing a compilation engagement?

The answer to this question is based on the scope exclusions that are contained in the new standard, and in particular, exclusions that are related to bookkeeping and tax work:

• Bookkeeping services: Under the new standard, a compilation engagement is not needed when you prepare the financial information as part of a bookkeeping engagement, whether you help with some of the work or do all of it.
• Tax services: The second exclusion applies where the financial information is presented solely in government-prescribed forms such as corporate, trust or personal income tax returns.

When you combine the two exclusions, if you do bookkeeping for your client (whether all of it or simply a few year-end adjusting journal entries) and use that data to prepare the client’s T2 and other tax forms, a compilation engagement is generally not required. The same is true when preparing T2s based on financial information that your client has provided to you. Of course, you can still undertake a compilation engagement if it would provide value for your client.

With these changes, it will be important to check in with your client regularly to discuss their needs and determine the nature of the bookkeeping, tax and other services they need. An engagement letter setting out the scope of services is also a good practice.

Third-party requests for GIFI and other tax forms and disclaimers

GIFI forms are intended to recap a corporation’s financial statements for the Canada Revenue Agency (CRA) in a uniform way. In some cases, other third parties, such as a corporation’s bank, may ask for a copy of the GIFI forms or the entire tax return for their own reasons. Knowing this might happen, some practitioners have put disclaimers on tax forms in the past to indicate that no review or audit has been done. We have had questions on what should be done going forward and there are a few things you should keep in mind:

• When you do tax return preparation services, you are helping your client prepare their tax return. This remains true if you EFILE the return after the client has approved it. If a lender or other third party asks for the tax return, your client may provide a copy to them.
• Under the new standard, the only appropriate form of communication that should be included or attached to financial information is a compilation engagement report. Any other forms of communications, such as footnotes or disclaimers on tax returns, may be confusing or misleading to readers, and therefore, should not be included on tax forms you prepare.
• Where your client provides a copy of their tax return to a lender or other third party, this does not affect the scope exclusions we described earlier.

Where a lender or other third party asks for a client’s tax forms, as a suggested best practice, the client should send the forms so your role in the engagement is clear.

Schedule 141 notes checklist uncertainties

As a result of the changes we have just discussed, S141 needs to be updated. In particular, with increasingly sophisticated accounting systems, formal financial statements are not prepared as often or in the same way as they were in the past. As we recently raised with the CRA, S141 refers to the accountant who prepared or reported on the financial statements. This is confusing, given the way tax work is now often done, and S141 should be updated.

Adding to the confusion is the rising popularity of tax-only engagements where the client provides accounting records that the practitioners uses directly to prepare a T2. Some practitioners are unclear about exactly who “the accountant” is in these cases. In our view, simply preparing the tax return does not make you the accountant that the form refers to. We believe the answers in Part 1 should identify the individual responsible for the financial information, even if they are not an accountant by training.

Also, Parts 1 and 2 of the form do not contemplate an engagement where you provide bookkeeping and tax services only. In this case, no one is actually preparing formal financial statements. As we have discussed with the CRA, it is not clear how S141 should be answered in these cases.

Due to all these issues, we suggested that the CRA revise the S141 form. We also asked them to consider what information they really need so they can streamline the S141’s questions as much as possible.

Helpful resources

We have issued a variety of comprehensive guidance materials to raise awareness about the new compilation standard. Access them now from one convenient location.

Keep the conversation going

If you have any questions or uncertainties about the new standard and tax work, we want to hear from you via email at [email protected]. Your feedback will help us develop additional guidance to clarify how the standard relates to tax work.

NOTE: The commentary function of this page has been temporarily closed. Unfortunately, because of the volume of feedback regarding recently announced COVID-19 tax measures, we do not have the capacity to respond to individual inquiries. We strongly encourage you to visit our Canadian Tax News and COVID-19 Updates page for information.