Canadians often think that the Canada Revenue Agency either has to accept the values they are provided with or have to prove their case if they want a different result. This belief is very far from the truth. The Canada Revenue Agency can make assumptions about your income and expenses that you, as the taxpayer, have to prove wrong. One situation where this power to make assumptions often comes up is when the CRA conducts a net worth assessment audit.
Net-worth assessments or a net worth assessment audit is an extremely powerful tool that the Canada Revenue Agency can use when they don’t think that the taxpayer is truthful about their income or expenses. The effect of a net worth assessment audit is that the CRA can assess a taxpayer on an amount of unreported income, and therefore results in taxes owing, interest, and penalties. Combine this with the rule that an assessment is presumed to be correct, irrespective of errors in it, and you have a recipe for financial disaster. Once you are the victim of a net worth assessment audit, it is up to you to prove the CRA wrong. This can be a very challenging and time-consuming task.
Obviously, the best way to avoid getting stuck in this tax-quagmire is to ensure that the CRA has no reason to think that you aren’t truthful when filing your taxes, that you keep accurate and complete books and records, and that you are actually filing your taxes and are doing so on time. Not filing taxes on time or at all is the most common reason that the CRA resorts to a net worth assessment audit. Appearing to live beyond your means, for example on social-media (that the CRA monitors), can also lead to a net-worth assessment. But what can you do if the CRA has determined that you are going to be subject to a net-worth audit?
The best defense is a good offense! By getting a professional involved before the auditor shows up, and having one present to assist and guide the auditor, increases the chances that the outcome will be as favorable to you as possible. Even if you end up being assessed for unreported income, the professional likely has made sure that the potential issues you have to challenge are greatly reduced, saving you a ton of money when objecting and appealing the assessment.
The CRA, during a net worth assessment audit, will look at changes in your assets and liabilities over the tax year and also take into account your expenses. The total any increase in assets, plus any decrease in liabilities, plus non-deductible expenses for the year is assumed to be due to your income for the year.
If this number differs from what you reported, you will be reassessed unreported income. Your representative will assist in this process by organizing the information, making sure that the tax effect of the changes is properly considered and interpreted, and that the final result represents a fair and accurate representation of taxable income. This takes experience and knowledge.
If you are reassessed for unreported income as a result of the net-worth audit, you have a fight ahead of you. You have to prove the taxman wrong or challenge the use of the net-worth assessment itself. Both of these methods are time-consuming and require detailed analysis. The taxpayer, in addition to proving the CRA’s assumptions and interpretations wrong, has to provide an explanation for the increase in net worth. There are valid non-taxable explanations, but there are also traps into which unwary taxpayer can fall.
If you are faced with a net-worth audit, or have been given a net-worth assessment, get the experts in your corner. Early involvement is best, but it’s never too late to get someone on your side.
Case Study
A new client of ours had a net worth assessment performed on them and had received a net worth audit. The financial impact of the net worth audit was significant and would have a major impact on his life.
Our firm was selected to help him address these issues with the CRA.
Our firm performed an intensive review of the net worth audit from the CRA. It was discovered that the auditor had made many mistakes. Sam Faris met with the auditor, team leader and director from the CRA.
Based on the findings of our firm, the auditor adjusted the net worth audit to reflect our analysis and calculations.
“My life was collapsing. Involving Sam was the best decision I made. He is a life Saver. 10 stars.”