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Involved in a CRA Net Worth Audit?

When facing a net worth audit, you don’t need a tax lawyer. At Faris CPA, we’ve been providing net worth audit assistance and saving taxpayers unnecessary legal fees for over a decade.

Without a Chartered Professional Accountant (CPA) on side who is a tax expert, it can be very difficult to counter the assumptions and interpretation that the CRA takes.

Contact the professionals at Faris CPA for an assessment today. Call 1 (844) 340-5771 or use the contact form to get started.

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CRA Networth Audit

What is a Net Worth Audit?

Almost all Canadian resident taxpayers and, in some circumstances, non-resident taxpayers, have to file various returns with the Canada Revenue Agency.  If a taxpayer fails to file a tax return when and as required, the Canada Revenue Agency (CRA) can either make a demand of that taxpayer to file missing returns or, in most cases, will use an arbitrary assessment method to determine that taxpayer’s tax liability.  Arbitrary assessments often result in an unusually large amount of tax owing, leaving the taxpayer with the heavy burden of proving the CRA wrong.  One particularly problematic arbitrary assessment method that the CRA uses is called the Net Worth Assessment that results from a Net Worth Audit.

The Net Worth Audit is empowered by the Income Tax Act and permits the CRA to review the various components of a taxpayer’s lifestyle and assets and compare this against the reported income of that same taxpayer.  This review can include where the taxpayer lives, how nice the home is, what cars the taxpayer drives, what clothing and jewellery the taxpayer wears, and the entertainment and trips that the taxpayer engages in.  Where there is a discrepancy between the apparent wealth circumstance of a taxpayer and their reported income, the CRA will issue a reassessment.

A Net Worth Audit is premised on the apparently simple principle that the increase or decrease of a taxpayer’s net worth, year over year, tied to the taxpayer’s income or loss for that year.  The CRA starts by comparing the year over year changes of a taxpayer’s assets and liabilities.  Then, the CRA calculates that taxpayer’s income or loss, taking into consideration personal expenditures and non-taxable sources of income. Personal expenditures can sometimes be assumed and include categories that the taxpayer, personally, does not spend their money on (for example, tobacco, alcohol, gambling – all determined through the use of statistics).  The sum total of these arithmetic process is the change in a taxpayer’s net worth.  The value obtained from the net worth method is then compared to the reported income of the taxpayer to see the taxpayer has been truthful in their reporting.

Despite the apparent simplicity of this method, there are practical complications that often work against the taxpayer.  One particular problem is that the CRA is entitled to assume facts that are often to the taxpayer’s disadvantage.  Once these facts are assumed, the taxpayer has to prove the CRA wrong in order to get a correct assessment.  Another problem is that the CRA lacks the information to know what amounts are from non-taxable sources, such as inheritances or lottery winnings.  What the CRA generally assumes is that any deposit in an account is income and any withdrawal is a personal expenditure.  This is often not accurate as a deposit can represent an inter-account transfer, a loan, a gift, an inheritance, or some other amount that is not taxable.  The method itself is at best inaccurate and contains inherent, systemic errors.

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When are you at Risk of an Audit?

Any taxpayer is at risk of a Net Worth Assessment. However, those most susceptible are taxpayers who have not properly reported their income or those who fail to keep proper books and records of their financial affairs.  Also, at risk are taxpayers whose apparent lifestyle doesn’t match their reported income.  The most obvious way to not get trapped into a net worth assessment is to make sure that the CRA has no reason or basis to use this method.  This means filing all your returns on time, using complete and accurate information, and keeping complete books and records.

Challenging a Net Worth Audit

Challenging a net worth assessment is no easy task and often takes up a large amount of time.  The person being audited will need to go through every deposit and withdrawal in their bank accounts, credit cards, and investment accounts, as well as the assets they own or have owned, and then reconcile these amounts with their tax filings.  Where the audit spans a number of years or goes back a few years, this can be extremely difficult for a taxpayer.  How does one remember what each deposit and withdrawal in an account was and what it was for? Even if one can remember, there is the difficulty of proving what one remembers. This is why the assistance of a diligent and experienced tax accountant is a must.  The best time to get a tax accountant involved is when the auditor contacts you and before any documents are handed over.  The earlier one gets a tax accountant on board, the greater the chances of a favourable outcome are.

Without a Chartered Professional Accountant (CPA) on side who is a tax expert, it can be very difficult to counter the assumptions and interpretation that the CRA takes. Once an audit is complete and the auditor has made a decision in designating amounts as income or personal expenditures, as part of a tax audit, they have internally supported their conclusions and used the documents and arguments advanced by the person being audited.   This decision makes it practically unlikely that an objection at the CRA level will result in any changes. If one is not able to get the CRA auditor to see things the taxpayer’s way, the matter will likely end up in tax court.  This is a lengthy and expensive road to travel and one that is best avoided through detailed submissions prepared by an experienced tax accountant.

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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.”

Other Services

Faris CPA is proud to offer a wide variety of tax-related services, not limited to:

FAQS

Can I challenge a net worth audit?
The CRA can perform a net worth audit to determine what they believe your under reported income is. Challenging a net worth audit should be done by a professional who has in depth understanding in this type of audit, strong analytical skills and who has disputed this type of audit with CRA for many years in order to minimize any taxes that CRA is asking you to pay.
How do I deal with CRA audit?

Dealing with CRA audit can be quite challenging Nonetheless, there are several undertakings you can do to successfully handle the CRA audit. In such a situation, you should cooperate and be respectful, check in with your tax representative, determine whether you want to win the case or settle the issue and also retain a professional tax accountant.

What triggers a CRA audit?
There are several issues that can trigger a CRA audit including claims of capital losses and gains, unreported income, underreported income, unusual changes in deductions or credits, excessive business expense claims and recurring losses from a rental property. CRA also conducts random audits in industries that tend to have a high level of tax non-compliance, such as construction, real estate or hospitality industries.
What are the major pitfalls of net worth assessment audit?

Some of the major pitfalls of the net worth assessment audit include the inaccuracy and the punitive nature of the methodology, the existence of routine errors in its application, the one-size-fits-all application of statistical data is flawed, and the method is used even when contraindicated.

How do you challenge a net worth audit tax assessment?

You can challenge a net worth audit tax assessment by listing down possible explanations and responses to the auditor’s assumptions. As a taxpayer, your main objective should be to demolish all the auditor’s beliefs about your case.

What is the net worth audit calculation?

The net worth audit is the difference of expenditures and the total of opening net worth + reported income. The CRA generally calculates net worth at the beginning of the audit period, and caculate net worth at the end of the period after taking expenses into account.

pro-tip

Pro Tip

ACCESSING THE SMALL BUSINESS DEDUCTION IN YOUR BUSINESS

The Small Business Deduction gives businesses a tax deduction on the first $500,000 of income. This saves an eligible corporation around up to $50,000 in income taxes. There are a number of conditions that have to be met to be eligible for this deduction.

Faris CPA absolutely fantastic tax consultant firm. Sam and his team help me with an extremely difficult tax audit by CRA. They have done an amazing job. You guys are amazing and well deserve five star.
Response from the owner:Dear Eliyas Thank you for the positive Google review and the kind words. We heave dealt with many CRA audit cases. We have delivered the best services to our clients as we are confident with our work and its quality. Please feel free to reach out us if you require our services in the future. Sam Faris
Sam Faris is number one tax advisor and consultant. I contacted a few professionals but he was the only one who was able to help me with my dispute with the CRA. Many thanks to him.
Response from the owner:Said Thank you for the kind words and the 5 stars Google review. CRA issues may get very complicated. I am glad that everything worked out perfectly with you. Feel free to reach out to us any time you require our services. Sam Faris
If you are looking for a tax consultant to help you with the CRA tax audit, Sam is the man. I appreciate Sam for helping me during the tax audit. He is the best professional and number one tax consultant out there. I will recommend him to anyone who has issues with the CRA.
Response from the owner:Thank you Omar for your positive feedback and the five stars Google review. We have more than a decade of experience in dealing with the CRA audits and helping our clients and providing all the required support. As you noticed, we provide a high quality of work to support our calculations and to save our clients from an unfair assessments by the CRA. Thank you again and will remain at your disposal if you require our services in the future.
I had Sam to help me filling my outstanding personal and corporate tax returns under the voluntary disclosure program. He did a very good job and filled them within 4 days and had me protected under the program. As a result of his work efficiency, I saved interest and penalties and now I am up to date with filling all tax returns.
Response from the owner:Anjan Your positive feedback is much appreciated. Providing a high quality services and submit the packages on timely basis is essential especially once it comes to cases which involves voluntary disclosures program. We prioritize these cases and we do our best to file the packages asap and before CRA contacts our clients. Thanks again and let us know if you have any question in the future. Sam Faris
Sam and his team are expert and awesome tax consultants. They were incredibly professional, respectful and informative in dealing with us. What stood out the most was the team’s attention to details to finding all possible deductions to minimize my tax liability.

They helped me to file my many years of unfilled and outstanding personal and corporate tax returns and the tax amount that I ended up owing is very minimal in comparison to what other CPA suggested.

I am now at much better situation from a tax standpoint and involving Faris CPA to deal with my matter made me more comfortable as I was confident that my case was being handled by a true professionals.

I highly recommend the firm for anyone who has tax problems with the CRA and needs to get the best results.
Response from the owner:Sangeet Thank you for the five stars review. Filling multiple years of personal and corporate tax returns is one of our specialties. We have been helping clients catching up with their taxes for more than 15 years now. While we are doing the work, we perform tax planning to minimize taxes owing and at the same time we prepare a high quality package to protect our clients and protect our work in case CRA decides to perform tax audit. Thank you again and feel free to contact us in the future if you have any question regarding our work. Sam Faris
We spoke to a few CPAs before hiring Sam of Faris CPA. Immediately Sam was able to pin point the problem and provided a solution to my problems with the CRA tax audit. We had a very pressing deadline to make a submission to the CRA and missing the deadline will involve significant amount of penalties that we will have to pay. Not only that Sam worked none stop to meet the deadline, he was able to save us thousands of dollars. We are also now in full compliant with the taxes and in a good standing. If you are looking for a tax consultant or you are having a CRA tax audit, don’t waste your time and money. Hire Sam Faris and you will not be disappointed.

Many thanks to Sam and well deserved 10 stars.
Response from the owner:Anish Thank you for your positive feedback. When it comes to CRA issues, meeting deadlines is extremely important and at the same time providing a top quality package is as important. This will avoid escalation with the CRA and as you realized, will save money to our clients. As in all cases, we took your case seriously and we aggressively worked on it to meet the deadline at the same time we did not compromise our work quality. I am glad that you are satisfied with the results. Posting the Google review is rewarding to our hard work too. Please feel free to contact us in the future if you have any questions. Sam Faris
Faris CPA filed my multiples years of unfilled tax returns for both my corporate and my personal. He saved me taxes and was able to waive the penalties for me. Great job team and I will recommend Faris CPA to everyone who has CRA problems.
Response from the owner:Ahmad Your five stars Google review and your positive feedback is much appreciated. All the cases that we take are time sensitive and we take them extremely seriously to avoid complications with the CRA. Meeting deadlines is essential in any case we work on. This is why we were able to save you penalties and interest as we filed all returns before CRA makes a contact with you. We will remain at your disposal anytime you need our services in the future. Sam Faris
CRA performed net worth audit to my company and my personal taxes for three years. I hired another professional at the beginning and paid him 25k. This professional did not deliver what he promised and was unable to reduce taxes as per the CRA proposal letter. I was referred to Sam by a tax lawyer who highly recommended him for any CRA audit. I consulted Sam and I googled him as well. I was impressed with his knowledge, confidence and excellent reputation and decided to hire him. Sam results at the end were way less from CRA proposal. He backed up all his numbers in a way that CRA had to accept his approach and his final numbers. I was very happy with the final tax bill after the audit was completed. I have so much respect to Sam and his work ethics. I was also happy with his fee and I think his fee is reasonable too. Thank you Sam for all your help. You saved mine and my family lives.
Response from the owner:Thank you for the positive five stars review and your kind words. Net worth audit is the most complicated audit that CRA performs where CRA has doubts that taxpayers under reported the income. This kind of audit is one of our specialties. Over the years, we have developed a unique and sophisticated strategy to defend our clients from the CRA excessive numbers. In many cases, CRA auditors acknowledged and complemented our work and our approach. We will remain at your disposal if you need our services in the future. Sam Faris
Dealing with CRA is stressful. Sam took care of me from day one and accommodated my unique needs without hesitation. 5 stars for being professional and a good human.
Response from the owner:Thank you Don for the five stars Google review. We are glad that we met your expectations and your case is closed now. Happy to answer any questions in the future and we will address all queries CRA may have regarding our work. Sam Faris