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CRA Audit Procedures

CRA T1135 Form

Audit – a dreaded word for any taxpayer. This year, the CRA will send out about 30,000 audit notices. CRA audits are risk-based, meaning that the CRA will go after categories of taxpayers they believe to be at higher risk of tax evasion. You are a high audit risk if you are self-employed, work in construction, work in the restaurant industry, have repeated losses reported from property or business sources, show dramatic swings in income, or live in a postal code that doesn’t match your declared income.

CRA Audit can suck up a great deal of time and money, and may result in a reassessment that includes penalties and interest. This can be financially devastating, pushing taxpayers into bankruptcy. What is an audit and what can you expect from an audit? This article will briefly explore some CRA Audit procedures in a general manner.

An audit will start with a letter from the CRA, never a phone call, informing you that you are being audited. This letter will put you on notice and specifies the years that the CRA wants to audit as well as the documents and records it wants to see. You then have the opportunity to make submissions that the auditor is required to review and respond to.

The auditor, after reviewing your submissions and documents, may either determine that you are correct or that there is a problem. If the Auditor determines that there is a problem, you’ll get a “proposal letter” that sets out the proposed reassessment as well as the reason for it. You will have another chance to make submissions and provide documents to try and dissuade the auditor or to change the proposed reassessment.

Once the auditor has reviewed your submissions to the proposal letter, you will be issued a notice or reassessment unless you manage to convince the CRA that their position in the proposal letter is entirely wrong. Once re-assessed, your only option is to either pay up or file a notice of objection to fight the reassessment. Always hire a professional to help you with an audit right from the start. This way you stand the best chance of avoiding a reassessment or limiting its impact.

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Case Study

A new client of ours had been audited by the CRA. It was discovered that their previous accountant had made many errors and had made many adjustments to their tax records. This company needed someone who could fix their books, records and amend 3 years worth of personal and corporate tax returns.

Our firm took over the file and started working on their books from the beginning.
Corrections were made throughout the company’s books and records. Corrections were also applied to 3 years worth of personal and corporate tax returns. These adjustments were submitted to the CRA and the results were very favourable for our client.

This client has continued to use our firm for handling their business and personal financial affairs.

“Sam is a solid character with high standards and ethics which make his firm excellent.”

FAQS

Why are self-employed people considered a high risk audit by the CRA?

Self-employed people are considered a high risk by the CRA because they might not be honest with their income. If a taxpayers 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.

How long will a CRA audit take?

An audit 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, 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.

How far back can the CRA audit me or my business?

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

Testimonial

“Need someone who can talk CRA and walk tax law stuff? I did. After an expensive year of trying to resolve a CRA issue on my own – I was very happy to have Sam Faris in the ring with me. I am confident that no lawyer or CA could have prepared a stronger case report to support my appeal. Sam approached my case professionally and skillfully from all angles possible and personally made sure I understood exactly what was going on; every step of the way.”

M Quan