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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.

CRA Net Worth Audit Ahead?
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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 accountnt.
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.

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Before hiring Faris CPA, I shopped around and I hired a CPA firm who offered significantly cheaper fee than Faris CPA. I must admit that this was a mistake. That firm promised the moon and they did not deliver. I learned by accident that the firm outsourced my file to a firm in India. I was very upset as I did not consent to have my returns done in India. I lost trust in the firm as the firm mislead me by making me believe that my file is being handled properly and efficiently by CPAs who are knowledgeable in Canadian taxes. I had to fire them immediately and hired Faris CPA. Sam Faris and his team dealt with my case efficiently and on timely basis. As a result, my many years of outstanding personal and corporate tax returns have been filed as promised. The taxes that I ended up owing are way less than what I expected. Sam Faris and his team performed a good tax planning strategy which saved me taxes. Faris CPA fee is very reasonable considering the quality of work that has been delivered and the tax saving that was achieved.Don’t hire a firm who provides cheaper fee as you will end up paying twice. In my situation, I ended up paying to a firm who outsourced my file to India and I came back and hired Faris to complete the job properly. Save your money, time and emotions and hire Faris CPA and they will get the job done to your satisfaction.
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Thanks Sam for your help with our CRA issues. You were very easy to contact and deal with and did what was needed very quickly. Thanks so much.
It was my pleasure to work with Sam Faris closely to resolve my tax issue with the CRA. Sam was efficient and resolved it to my satisfaction. Unlike other professionals that I dealt with regarding the same tax matter, whatever he promised, he delivered with the least time and with a reasonable fee. Thanks Sam for all your help.
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CRA audited me based on net worth audit. This audit lasted almost 2 years. I suffered emotionally and financially as a result. Bringing Sam and his team into the picture was the best decision that I have ever made. Sam followed a very unique strategy which led to dropping the taxes to my satisfaction. Thanks Sam for all your hard work.
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I had the absolute pleasure of working with Sam Faris and I can't express enough how thrilled I am with the service I received. From start to finish, the experience was seamless and efficient.Sam is a true expert in Canadian tax regulations. he demonstrated an impressive knowledge of the Canadian tax code, which immediately put my mind at ease. He was able to answer all my questions and provide valuable insights that helped immensely with Canadian tax laws.What truly sets Sam apart is their incredible speed and attention to detail. I submitted my tax documents, and he worked diligently to complete my return in record time, all while ensuring it complied with the Canadian tax requirements. I was amazed at how swiftly they turned around my taxes without sacrificing accuracy. It's evident that he has a deep understanding of the Canadian tax system and can navigate it with ease.Throughout the entire process, Sam was not only professional but also incredibly personable. They made what is typically a stressful time of year into a stress-free experience. Their friendly demeanor and willingness to explain complex Canadian tax concepts in simple terms made me feel valued as a client.
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Best Service
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