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Understanding Net Worth and How it Can Be Audited

Whether you’re an individual or a business, conducting regular net worth audits is necessary much in the same way that your yearly trips to the doctor’s office are for a physical: they help you stay on top of your financial health and proactively address concerns before they unravel into serious issues.

It’s also much better to audit your net worth yourself and uncover bookkeeping or tax reporting errors than it is to have your net worth audited by the CRA. If you’ve received a notice of reassessment or an audit notice, getting help from tax specialists is crucial to help you fight an unfair assessment that results in having to unfairly pay higher taxes or fines and penalties.

What is Net Worth?

Net worth is a basic financial metric that gives you a snapshot of your financial standing. It represents the difference between you or your business’s total assets and liabilities.

Assets can include everything of value you own, like cash, investments, real estate properties, and personal possessions that have significant financial value, like jewelry or artwork.

For businesses, assets also include equipment, vehicles, inventory, etc. Assets can be further classified as liquid (e.g., cash, stocks) and non-liquid assets (e.g., real estate.)

Liabilities, on the other hand, are all of your financial obligations and debts, like mortgages, loans, lines of credit, and credit card balances.

Understanding your net worth is essential for evaluating your financial capacity to make major purchases, weather unforeseen financial storms, set realistic financial goals, and plan for the future.

How to Calculate Net Worth

Net worth is a relatively straightforward calculation; however, it’s a process that requires gathering all of your financial information and verifying the accuracy of your business records and paperwork.

When ready, you calculate your net worth using this simple formula:

Net Worth = Total Assets – Total Liabilities

It is absolutely crucial that the data used in the calculation is accurate, complies with CRA guidelines, and is up-to-date for a reliable assessment, especially to help you avoid CRA net worth assessments. (More on this below.) This means avoiding common mistakes that can skew results, like:

  • Over- or undervaluing assets
  • Hiding assets and/or liabilities
  • Not keeping organized and updated books

Auditing Net Worth for Credit & Funding Opportunities

Auditing net worth also plays a crucial role in ensuring your business’s financial transparency and accuracy by uncovering potential errors or discrepancies in your financial records.

Financial institutions, creditors, and investors often require audited Net Worth Reports to assess your creditworthiness and to help them make decisions on loans and investments, respectively.

A Professional Net Worth Audit Process

A Net Worth Audit conducted by a licensed professional begins when they have all the necessary documentation, including financial statements, transaction records, investment statements, loan agreements, and tax returns.

The auditor ensures that assets are properly appraised and accounted for. Special attention is paid to unique assets, like real estate or rare collectibles.

Liabilities and outstanding debts are also meticulously scrutinized during a Net Worth Audit. The auditor must verify the amounts owed and cross-reference them with supporting documentation to confirm their accuracy.

Best practices dictate that an outside auditor should be the one to conduct a Net Worth Audit. This gives you a valuable outside perspective that can help identify missing information and avoid any conflicts of interest. And when you retain one of the leading professional accountants in Toronto, you’re assured that all figures, paperwork, and methods used comply with Canadian tax laws.

A tax professional verifying business records during a net worth audit.

CRA Net Worth Audits

A Canada Revenue Agency (CRA) Net Worth Audit, on the other hand, is an investigation the CRA conducts that may lead them to reassess a taxpayer’s return and increase their taxable income if their return is inconsistent with data the CRA has on file.

If you’re subject to a CRA Net Worth Audit and reassessed, the onus is on you to either fight it in court or to respond to the Net Worth Audit by examining, questioning, and providing detailed explanations and proof that assumptions made by the auditor during the process are incorrect. During a CRA Net Worth Audit, they are allowed to make negative assumptions that raise your taxable income – that you earn unreported income, for example.

If the CRA does not accept your submissions, your only remaining options are filing a Notice of Objection or appealing to the Tax Court of Canada.

CRA net worth audits are generally conducted when a taxpayer files inadequate records or there are significant year-over-year changes to their assets and liabilities.

Other triggers include mixing personal and business income in one account, insufficient reported income to support the taxpayer’s lifestyle, tax evasion being common in the taxpayer’s industry, or comparatively lower income reported (or higher expenses) than those of similar businesses or individuals.

To determine your net worth, the CRA can do things like assume the value of your home based on where you live and will even analyze a taxpayer’s social media profiles to assert that your reported net worth can’t sustain the lifestyle you share online.

Successfully challenging a CRA Net Worth Audit is a long, drawn-out uphill battle and absolutely requires a licensed tax professional.

Strategies for Enhancing Your Net Worth

There are several effective strategies that can help you increase your net worth and improve your financial standing:

  1. Effective debt management by consolidating high-interest debts, creating a debt repayment plan, and prioritizing repayment of outstanding loans is essential to reduce liabilities and improve your net worth.
  2. Asset diversification and investment strategies can help grow your net worth over time. Diversifying investments across various asset classes and markets reduces risk and can enhance potential returns.
  3. Increasing savings and contributions to retirement accounts are fundamental net worth building strategies that also help you secure a comfortable retirement. Regularly contributing to retirement funds, like RRSPs, takes advantage of compound interest and long-term growth.
  4. Evaluating your insurance coverage(s) is crucial for protecting your assets and minimizing potential financial setbacks.
  5. Seeking professional financial advice and help from financial planners or advisors can provide you with valuable insights and personalized strategies to optimize your net worth growth.

Understanding net worth and conducting regular audits are essential for achieving financial stability and success and avoiding time-consuming, stressful, and expensive CRA Net Worth Audits.

About the Author

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
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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.

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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
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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
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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