CRA AUDIT IN CANADA

Yes, the CRA does audit individuals. While businesses are commonly audited, individuals, especially self-employed individuals and partners, are also often subject to CRA audits. These audits are conducted to ensure compliance with Canadian tax laws and can cover various aspects of personal tax returns. The CRA may review income, deductions, credits, charitable donations, and any other relevant financial information reported on a personal tax return.

Personal audits can be random, but often, they are initiated due to specific triggers. These can include significant changes in income, large or unusual deductions, discrepancies between reported income and lifestyle, or tips received by the CRA. For instance, if an individual claims significantly higher expenses than average for their income level on a personal tax return, it might raise a flag that leads to an audit by the CRA.

Businesses, in particular, may face audits if your financial statements or tax returns raise questions. Personal tax returns by self-employed individuals and partners and corporate tax returns are audited by the CRA, especially when large or unusual deductions or credits are claimed.

Some other CRA audit triggers include:

1. Income Discrepancies. Significant differences between the income you reported and the information received by the CRA from third-party sources (like employers or banks) can sometimes act as an audit trigger.
2. Frequent Losses in Business or Rental Activities. Consistently reporting losses, especially in businesses or rental property operations, may indicate to the CRA that personal expenses are being claimed as business expenses.
3. Changes in Income or Lifestyle. Sudden, significant changes in income or lifestyle that don’t align with reported income are a CRA tax audit red flag.
4. Home Office Deductions. While legitimate, extensive claims for home office expenses can sometimes prompt a CRA audit, particularly if the amounts seem excessive relative to the nature of the work.
5. Being in a High-Income or High-Net-Worth Bracket. Individuals and businesses in these categories often face more CRA audit scrutiny due to the complexity and size of their financial dealings.
6. Prior CRA Audit History. If you’ve been audited by the CRA before and issues were found, they will often audit again to ensure previous problems have been corrected.
7. Random Selection. Sometimes, taxpayers are chosen for a tax audit at random as part of the CRA’s strategy to enforce tax compliance.

In any of these situations, having the assistance of a knowledgeable CRA audit specialist and certified tax accountant is necessary.

Faris CPA can provide expert CRA personal and business audit help in organizing your records, understanding the CRA audit process, and ensuring that your tax returns and records are accurate and compliant, thereby reducing the likelihood of future audits by the CRA. We also offer personalized CRA audit advice tailored to your individual or business circumstances, helping you navigate the complexities of tax laws, regulations, deductions, and obligations.

Self-employed people are considered high risk by the CRA because they might not be honest with their income. If a taxpayer receives T4 income, the odds that sufficient tax has already been deposited are substantial. The taxpayers earning T4 income are mostly low-risk and receive tax refunds every spring. This means that it takes more time to actually get done with it. You should consider getting a bookkeeper especially when your business involves a lot of expenses and is tracking them bear. A bookkeeper will help you get the best of your accounting software by ensuring everything is done accurately.

The CRA website states that you will be contacted by a CRA auditor via phone, mail, or both, but often by electronic or regular mail, to initiate their audit process and to provide you with the audit’s date, time, and location.

If they do call you, you can end the call and give the CRA auditor or the team leader a call back if you feel more at ease speaking with them after you have verified that they are from the CRA. It’s crucial to remember that the CRA will never request personal information via text or email. Such a request is probably fraudulent.

The following occurs when you are audited by the CRA:

1. First Step: To initiate the audit process and notify you of the audit’s date, time, and location, a CRA auditor will contact you via phone, mail, or both. When you arrive, the auditor will show you a valid CRA ID card before beginning the audit.
2. Records Examination: During an audit, the CRA carefully reviews personal and business taxpayers’ books and records to ensure they pay their taxes, comply with tax regulations, and check the benefits and refunds the taxpayer reported to ensure they are legally entitled to them.
3. CRA Audit Closure. One of three things will occur following an audit by the CRA:
   • There won’t be any changes made to your initial tax assessment that was based on your tax return – likely the best-case scenario but not typical.
   • A modification by the CRA to your taxes that lowers the amount of tax due and entitles you to a refund, also unlikely without a professional tax accountant and CRA audit
   • An adjustment that raises the amount of tax due, for which you will be responsible for payment and often the CRA’s aim in a tax audit.

While you are ultimately responsible for information submitted to the CRA, when you work with a tax accountant, you are choosing the best-case scenario regardless of the outcome of your CRA audit. As seasoned Canadian tax accountants, we also know the most effective resources to assist you in disputing a CRA audit reassessment, which can include objecting to their determinations and presenting further evidence or clarification.

A CRA audit in Canada can take anywhere from two weeks to several years. The time taken for an audit to be complete relies on several factors such as the scope of the audit, the state of the records, delays due to missing records, and meetings with other CRA tax specialists, among others. Additionally, the time limits for the CRA auditors to give feedback upon finishing the audit are far more liberal, and could cause more delays. In most cases, the CRA can reassess the tax returns for the previous three years and audit them for the previous four years; however, you are required to keep records for at least six years, and the CRA has broad powers, including looking back even further in extreme cases.

Following an audit, the CRA has the authority to impose penalties if they discover inconsistencies or proof of non-compliance. The following are a few possible penalties:

• Penalty for Gross Negligence: After an audit by the CRA, the agency will often impose penalties for gross negligence – i.e., false statements or omissions. A financial penalty of up to 50% of the overstated credits or the understated tax may be imposed. A gross negligence penalty will probably be added if a CRA auditor finds that the taxpayer purposefully neglected to report income.
• Fraudulent Reporting or Consistently Neglecting to Report Income: The penalty for repeatedly failing to report income or for making false reports over $500 in a recent tax return to the CRA is lesser of the following:
  • 10% of the amount you failed to report (federal and provincial or territorial.)
  • 50% of the difference between:
    • the understated tax or overstated credits of the amount that you failed to report.
    • the tax withheld from the amount you failed to report.

The CRA may grant you penalty relief if you voluntarily disclose amounts that you failed to report and/or credits that you overstated before they contact you or anyone who is related to you. The best results of the CRA’s Voluntary Disclosure program are always guided by a routinely successful tax accounting team.

The CRA selects personal and business tax returns for audit based on risk assessments. Numerous factors are considered in the assessment, including the chances or frequency of errors in tax returns and the presence or signs of non-compliance with tax obligations.

The frequency and schedule of CRA audits are not specified. Audits may take place at any time within six years of the date of the initial Notice of Assessment for the tax year or years under audit.

The CRA typically conducts audits up to four years following the filing of a tax return. However, there is no time limit or audit season, and the CRA can audit any time of year and go further back in some circumstances, such as those involving extreme fraud or misrepresentation.

The CRA reserves the right to audit your previous years’ tax filings going back six years. It is therefore important to keep documentation and receipts supporting your claims for at least that long. Most CRA audits are not criminal investigations but are done to determine whether the taxpayer has paid enough tax or not. In extreme cases, the CRA will investigate whether a taxpayer has been intentionally evading taxes, which might result in prosecution in prosecution, and possibly further-reaching audits and investigations. As a taxpayer, you are encouraged to use and keep all forms of documentation and receipts that you might need in case an audit is done.

You are expected to comply with all CRA tax laws. This means accurately reporting income, claiming legitimate deductions and credits, and correctly calculating personal or business tax liabilities.

During the CRA audit process, the following requirements, among others, are essential to ensure a smooth and efficient audit process:

1. Record Retention: You are required to keep all financial records and documents that support the information on your business or personal tax returns. This includes invoices, receipts, bank statements, and any other relevant documentation. For individuals, it typically means personal financial records, while businesses must keep more extensive records, including ledgers, journals, contracts, and electronic records.
2. Access to Records: You must provide the CRA auditor with access to all relevant records. This is critical for verifying the accuracy of the information reported on your tax returns.
3. Information Accuracy: The information you provide during a CRA audit must be accurate and complete. Any attempt to provide misleading or false information can lead to severe penalties.
4. Cooperation: You are expected to cooperate with the CRA during the audit process. This includes responding to requests in a timely manner and being available to meet with the CRA auditor as needed.
5. Personal Audit Help and Business Audit Assistance from a Professional Accountant: While not a requirement, having a tax accountant and CRA tax audit professional assist you is highly recommended. We can help ensure you meet all requirements, provide necessary documentation, and understand the CRA audit process. We can also represent you in dealings with the CRA and likely better outcomes of a CRA audit.