The Canada Revenue Agency has the right to audit you, whether you are an individual, partnership, trust or corporation. This also includes charitable and not-for-profit organizations. The purpose of an audit is to ensure that you have been complying with the laws set out in the Canadian Income Tax Act. An audit can be performed “in-person” or it can be done as a desk audit.
A Desk Audit is a request that a CRA agent will send to you in the mail and asks for you to send them back information via mail, fax or through their online portal. Sometimes these requests are asking for support on certain line items from your tax return. And sometimes they are all encompassing requests for an entire year’s worth of information.
A common desk audit will be for GST purposes. If you have filed your first GST return for the year, and if you are in a refund position, you will likely be asked to provide information to support your refund claim. Common information requested, would be for copies of your invoices and copies of supplier invoices. You generally have 30 days to provide this information.
Other times, a CRA audit may be performed if you have entered into a complex tax transaction or if the government is looking at a particular industry because in previous years, they have found that other companies in this industry have taken a “too liberal” approach to their tax filings. This type of audit will likely be done in person at the beginning and will take a long time to complete. Payroll tax audits are also very common and can potentially lead to other audits if the auditor is not satisfied that your business is keeping proper accounting records.
And there are times where it is just random and your name pops up as being selected to be audited.
In my past experience, I’ve seen a range of auditors auditing my clients or the companies that I worked at prior to forming my accounting practice. Most of the auditors were reasonable and having them performing their audits, allowed me to learn things that I may not have known before. Yes, the process creates anxiety, but I think that is just because the results are unknown. Yes, it takes a lot of time to pull together the information and to field questions that the auditor may have. But generally, if you are prepared and have proper accounting records, the whole process can move relatively smoothly for both yourself and the auditor.
Technically, the CRA can go back up to 7 years, but the general rule of thumb is that 4 years is the timeframe period that accountants work with. If the auditor finds something within the 4 years that they are looking at, and it looks like you have done something very wrong and this has been done on purpose, they can go back up to 7 years.
This 4 year period starts from the point in time that you actually file your tax return and you receive your Notice of Assessment. Therefore, it is really important to file your tax returns on time. Not only does this prevent interest and penalties from being charged if you file late, but if you never file, that 4 year time clock never starts.
My tips for dealing with audits:
- Make sure you get everything in writing from the CRA Agent and only provide that information.
- I have found that there are some auditors that are a bit more aggressive and will verbally ask a person or business to provide vast amounts of information, but when the written request is provided, the request has a much more narrowed focus.
- Try to be patient and understanding.
- The Auditor is one person, trying to do the job that they have been assigned.
- They have rules and regulations that they have to follow
- Don’t be afraid to ask for clarification.
- Sometimes, the auditor may assume that you understand what they are asking for.
- Don’t feel bad if you need to ask them questions. This will help ensure that you provide them the information that they need to make their assessment.
- Audits are an unfortunate necessity.
- They provide you comfort that you have interpreted the rules correctly.
- They provide the government comfort that people are following the Income Tax Act
- They provide the government with feedback on how the Laws and Regulations are being followed and if things need to be altered in their interpretation.
Dayna Holland, CPA, CA
CEO of Dayna Holland Ltd.
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