Just the thought of being audited by the Canada Revenue Agency (CRA) can be stressful for a taxpayer especially right after receiving notification that an audit is being scheduled. As a result, the best advice that we can give to anyone being audited is to remain calm, and understand this about taxes in Canada:
Canada’s Tax System
Canada’s tax system is based on the self-assessment principle, which means that you have to complete a tax return each year to report your income and calculate whether you owe tax or receive a refund. This self-assessment tax system is considered the most economical and efficient way to collect income tax. For more information, see the CRA website on taxation and audit.
What the Canada Revenue Agency does
The Canada Revenue Agency administers the tax laws for the Government of Canada and for most provinces and territories. It is responsible for collecting taxes and other amounts, such as:
- Federal, provincial, and territorial income tax
- Goods and Service Tax/Harmonized Sales Tax (GST/HST)
- Canada Pension Plan contributions (CPP)
- Employment insurance premiums (EI)
The Canada Revenue Agency also delivers various benefit and credit programs to Canadians through the tax system, and in order to do this, need to have people filed up to date, and ensure that those claiming benefits are eligible to do so.
When the CRA reaches out for an audit, it is in most cases their “verification” process where they verify that the claims being made on tax returns are legitimate and can be supported through proof or receipts / records.
So when the notice comes in, there are a few key things to understand.
- Taking a systematic approach to answering requests and having an appropriate attitude about the process can reduce the challenges of the audit
- Respond promptly
- Supplying all the information necessary to clear up any problems
- Be respectful – this is a person doing their job – but ask questions if you are unsure. There might be something you claimed that you shouldn’t have, and there also might be things you didn’t claim that you should have
- If you do not agree with the results – and that is your right – you have 90-days to appeal.
Audit Process Review
The audit process begins when the CRA advises you by letter that you have been selected for an audit and specifies the scope of the audit. You may be asked to submit some or all of your receipts or records for whatever area they are auditing, or maybe they’ll ask for a whole list of items for you to send to them. This is a desk audit.
There could also be a letter asking you to arrange a date and time for an auditor to come to your home or business and included in that request would be a list of documents that the CRA would like to see. This is the type of audit that we believe all requests are, yet that is not the case.
Keep in mind, the CRA has to audit the records of many honest taxpayers to find those who are cheating the system. Contact the auditor, confirm the request, submit what is being asked for, and make sure to leave it by saying something like, “If you need anything else, just let me know.”
Once information has been sent to the CRA – how long is too long?
Based on receipts and records you submit, the length of the audit is going to depend on a few different factors;
- The scope of the audit – was it one area, or is it a general review of a few areas. Or is it a complete review of everything you have filed, or does the CRA know or think something and are trying to confirm it through review of certain things.
- The auditors workload – maybe they scheduled 5 audits and the first 3 responded and send documents / set up appointments quickly. That would delay the review of your information.
- Other factors – weather, ability to get information to the CRA, or ability to track down missing information could lengthen the audit process.
If you’re not sure… Ask.
How Important Record-Keeping is.
We cannot stress enough how important it is to invest in a really good program to keep business records – and for self-employed Canadians, there is none better than QuickBooks Self-Employed.
Records are what you have to show to the CRA that what you claimed is legitimate and accurate. Without records – even if the claim was 100% accurate – you are very likely to have that claim denied.
Some records might be as easy to recover as looking at a bank statement or credit card statement, or checking your email, however, the CRA might require some expenses be documented with receipts that have a reference to how they were paid, such as a cheque number, a bank reference or a note that they were paid by cash. The auditor does spot checks to see if the records are consistent with the claim and with the type of business you are operating / lifestyle that you are living, and may investigate in depth if something does not seem right. In that case, you may have to obtain additional documentation from the bank and from other people you dealt with.
If everything is in order, no adjustment to your taxes will be required. If, however, you made a mistake in your documentation or calculations, there may be a balance due or a credit.
CRA Review Process
The auditor will review your original documentation – receipts, invoices, canceled cheques, bank statements, etc – and then your records such as tax calculations, accounting programs and bookkeeping. If you have an online program, the CRA might ask you to pull off reports for them to use. It’s highly unlikely that they will ask you to give them full access to the program, but if they ask for additional information beyond the scope of the original audit, they will give you time to gather that information / pull those reports.
While the auditor checks your records and documentation, they will not do your bookkeeping for you, so if your records are incomplete, you will be asked to make corrections, obtain the required proof and carry out the required calculations. Incomplete records mean the audit will take longer and may be more extensive.
How To Address Problems
An audit often identifies issues that the auditor wants addressed. You may have revenue that the auditor believes is income and you did not have supporting documentation to prove otherwise, or you may have claimed expenses that the auditor believes are not justified. The key is to work with the auditor to demonstrate that you have valid reasons for your claims and document the reasons with detailed records. Communicate. Communicate. Communicate.
The Results Of The Audit
At the end of the audit, all issues should be resolved. If you have to pay an outstanding balance, it will typically be because you made an honest mistake or interpreted a tax regulation incorrectly. If your documentation is in order and the auditor found no mistakes, no tax should be due. The auditor will advise you of their findings and confirm them in a letter. If you have a balance owing, that letter will be pink, and you will be explained the reason for the balance and then be asked to sign the letter.
You have at least 30 days to respond and question (appeal) the assessment – A Notice of Assessment would be sent to you in the mail.
You still have to keep your records and receipts for a minimum of six years after submitting your tax return, and you should keep the records of the audit as well.