Tax audits are stressful. However, audits occur quite frequently and are part of the day-to-day workings of the Canada Revenue Agency (CRA). Here is a guide to help take the fear out of an audit and to help ensure your business is ready for one.
What can the CRA audit?
The CRA can selectively audit GST/HST and income tax returns, payroll records, and excise taxes and duties.
How does the CRA select files for a business audit?
The conditions for audit selection are quite broad. According to the CRA, it looks for “the potential for errors in tax returns or indications of non-compliance with tax obligations,” in information they have on file. The CRA has a number of data scientists on staff who can compare your tax returns to other taxpayers in a similar business. In addition, material changes in how you file your return from prior years could also trigger questions from the CRA.
What can you expect when your business is audited?
In most cases, the audit will take place on site at your business. It’s important to take any CRA inquiries seriously to prevent the scope of an investigation from increasing.
It’s important to ask for clarification from the auditor where needed. You should provide only the documents they need and nothing more. Understand your rights as a taxpayer and don’t be afraid to assert yourself where appropriate. For example, if an auditor’s request would require an extensive amount of time to compile the requested documents, you can address this concern with the auditor. The CRA has committed to take into account the cost of compliance when administering tax legislation.
Before beginning the audit, the auditor will likely take the opportunity to first explain the audit process, learn about your business, tour your business premises, and ask to see your books and records.
The earlier you notify your accountant of the CRA’s request for an audit, the better equipped everyone will be to help. Larger firms will have a tax controversy and dispute resolution team that can assist, particularly if the audit becomes difficult.
What is the CRA auditor allowed to examine?
- Previously filed tax returns,
- Ledgers, journals, invoices, receipts, contracts, and bank statements,
- Your personal records such as bank statements, mortgage documents, and credit card statements),
- The personal or business records of other individuals or entities not being audited (for example, a spouse, family members, corporations, partnerships, or a trust [settlor, beneficiary, and trustee]), and
- Adjustments made by your bookkeeper or accountant to arrive at income for tax purposes.
The only documents the CRA cannot access are those that are protected by solicitor-client privilege.
What can you do to prepare your business for an audit?
- Maintain good records,
- Be knowledgeable and ask questions,
- Avoid giving the auditor free reign over your files,
- Be courteous and professional,
- Put your responses in writing, and
- If you do have sensitive records subject to solicitor-client privilege, assert privilege.
Tax audits are a fact of life for any business, regardless of size or structure. An unfortunate fact, but a fact just the same. So don’t be afraid, be prepared.
Scott Conner is a Tax Partner at BDO Canada LLP. With over 15 years of experience as CPA, CA specializing in Canadian income tax, Scott helps a variety of individuals and private companies pay the least amount of tax possible with great tax planning strategies. He also specializes in planning for estates, trusts, and non-resident dispositions of real estate.