CRA Audits Do Happen
The words Canada Revenue Agency (CRA) and Audit separately can already make people break out in a sweat, but put them together? I don’t think anyone is ever thrilled to hear that they are going to have to go through a tax audit!
However, as an experienced accountant, I can assure you that they do happen and sometimes it really is just the random luck of the draw. While there are many situations that can result in an automatic closer look by the CRA, there are those situations where there isn’t anything “odd” on a return that would trigger an audit.
An Example Of Why The CRA May Audit You
There are times when the CRA may see a trend in a particular industry where there are consistent treatments of expenses or revenues that are not complying with the Income Tax Act. In those cases, they will focus on the taxpayers that operate within that industry. If you happen to work in that particular industry, you can expect to receive a call for more information and possibly an audit. One example of this was the construction industry. And a result of the many audits that occurred was the introduction of the T5018 forms that are now required for construction companies to complete for all of their sub-trades.
The best way to deal with these requests is to understand the process and to provide the information on a timely basis to the auditor.
A Peek Into The CRA Auditing Process
Tip #1: Get It In Writing
The audit will start off with a letter or a telephone call. My recommendation to everyone is that even if the request has been made over the phone, to have the auditor follow-up with a written letter. This will confirm what their expectations are and offer you (and your bookkeeper/accountant) some more guidance.
If the timeframe that you have to work with is too difficult to meet, be open with the auditor. If you need an extra week, ask for it. They will generally understand.
Next, you will need to supply the requested information to the auditor. If it is a Corporate Tax Audit that has been initiated, the information will likely be asked to be supplied in a digital format. They will ask for a certain number of years of information. Once you provide that to them, there is a team on their end that will run the information through their computer system. This will provide them with some samples of areas that they would like to focus on.
For all of the requests that the auditor makes, I would get it to be put in writing. For the most part, the auditors are easy to work with. However, I have found that when they verbally ask for support, sometimes they ask for more than they need. So if you get it put in writing, you may find that the actual request is for less information. This just helps to streamline your time spent on pulling the requested information.
Once the CRA auditor has completed their review of the information provided, they will provide you with a report and a list of adjustments that they feel need to be made. They will discuss these with you so that you understand why these adjustments are being proposed. A great end result would be that they couldn’t find anything that required adjustments. And these situations do happen. However, if they do find something, use it as a learning tool. Understand why the adjustment is being made. Sometimes, the auditors will also find areas where additional deductions could be taken. So it can work in your favour too. Once the report has been worked through, you will receive another letter from the CRA, confirming the adjustments and if any taxes are owing. You will need to sign off on the letter and then pay for the outstanding amounts.
And that completes the audit.
Some Things I’ve Learned As An Experienced Accountant
Tip #2: Start Getting Organized So You Don’t Have to Stress in the Future
The biggest stressor that I found with most audits, especially for small business owners, is the amount of time required to collect and provide the requested information to the auditor. It does take time. And depending on how well your records are kept, it could take a lot of time if you don’t know where things can be found.
So if you have been keeping things in a shoebox vs having an organized filing system, the audit process will be painful. My recommendation to you is to spend the time now, to get things in order in case you’re audited by the CRA in the future. I would start with the most current year and then start working backward. You need to keep your records for 7 years. However, CRA audits generally have a 4 year window. If you don’t have the time, hire a student or a part-time worker to help you out. That extra cost that you pay now, could save you a lot of time in the future.
I have also seen situations, where a Payroll Deductions Audit is performed on a company or a GST audit, is performed, and due to the state of the records (very messy and disorganized), the company will find that they receive another letter for an Income Tax Audit. I do believe that organization is the key.
TIP #3 – Use the resources that you have.
I would also look to your external accountant to assist as well. If you don’t understand what the auditor is asking, ask your trusted accountant to explain it to you. You can also ask them to be the “go-between” between yourself and the auditor.
Forms of CRA Audits:
Prior to COVID-19, a CRA Audit can be in the form of a Desk Audit or an in-person Audit. A desk audit generally required you to provide everything so that the auditor could work through your supporting tax return information from their desk and you didn’t interact with them in person. An in-person audit meant that the person was on-site for a period of time.
As a result of COVID, all of the audits are being performed remotely, which has its challenges for both sides. Patience is the key. Everyone has a job to do and the less adversarial that both sides, the easier the process will be.
There are also requests that are done on an ‘ad-hoc’ like basis from the CRA. An example of this is, the annual letter that a taxpayer receives to provide supporting information for deductions being claimed on the tax return. Charitable Donations, Medical Expenses, Child Care Expenses, and Foreign Tax Credits are common requests. These are not considered audits.
Another example of this is if you are filing a GST return for the first time and are entitled to a refund, you can expect a letter from the CRA to ask for support for the refund claim.
Tip #4: Things to keep in mind each year when you file a tax return.
When I prepare tax returns for my clients, there are a number of questions that run through my mind in all of the preparation work. Do I have enough information to support the information being placed in the return? Can the client support the information in the return? If the CRA wants to look at the return more closely, what will they be looking for? What would the CRA likely challenge? Make sure that you ask yourself those same questions. You may use your accountant to help you prepare your return. But remember. These are ultimately your numbers and you are responsible for the information that is being submitted to the Government.
Dayna Holland, CPA, CA (she/her)
CEO of Dayna Holland Ltd.
Are you a small business owner or self-employed and wanting to improve your bookkeeping habits so that you can get ahead in 2021? Be sure to check out this blog post for my top three recommendations based on conversations I’ve had this year with entrepreneurs.
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