The Canada Revenue Agency’s main duty is to maintain public confidence in the fairness and integrity of Canada’s tax system. Generally, they do this through income tax, GST/HST, and payroll audits. The Canada Revenue Agency records tax returns in a computer system, enabling them to easily select returns that stand out.
How CRA Selects Files to be Audited
There are four main ways of selecting files to be audited:
- Computer Generated Lists: Computer systems compare the financial information of clients engaged in similar occupations, and generate a list of returns that stick out.
- Audit Projects: A particular group is tested, and if the results indicate that there is a significant non compliance, there may be further investigation.
- Leads: Include information from other audits or investigations, as well as information from outside sources.
- Secondary Files: If your company is associated with other previously selected files, the CRA may investigate some of your records as well.
Main Audit Triggers
The best way to avoid an audit is to enlist the help of a qualified accountant. Make sure all required information is present, submit your file on time, and do not claim any deductions that may be subject for review. Some of the main audit triggers include:
- Incorrect expense categories, or unusual deductions.
- Unusual financial statements compared to your industry.
- Large year-to-year differences in income.
- Questionable investments.
Life is not over if the Canada Revenue Agency does decide to look at your books. Again, the best way to deal with this situation is to have up-to-date and organized books. You are required to prove that you have correctly filed your tax returns, and have done your due diligence. If you have not already, hire an accountant to help you, as they will have the knowledge and expertise to handle the situation. It is important to cooperate with the auditor, but do voluntarily give information.
An audit generally follows a five step process, including:
- Your return being selected for an audit.
- You will be notified of the audit, and will either request that you send specific records to a CRA office, or arrange a convenient time to start the audit at your location.
- The auditor will interview you, then examine your books and records.
- The auditor will issue a proposal letter, and give you an opportunity to respond.
- An assessment or reassessment will be issued.
It is important to understand that a tax audit is a civil matter, meaning you are required by the income tax act to cooperate with the auditor and provide them with the correct information. A tax investigation on the other hand, is a criminal matter, meaning that the individual being audited is entitled to their Charter Rights (ie. the right to remain silent). If you are in this situation, you are advised to consult a lawyer.
When the audit is finalized, the auditor will prepare a summary of the proposed adjustments for your return, and allow you a reasonable period of time for your response. If you provide additional information within this period, the auditor will take it into consideration, and issue a new proposal letter. You will then be issued either a notice of assessment, or notice of reassessment.