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Audits

Just the word "audit" can be enough to panic people, no matter how careful they have been about filing and paying their taxes. However, having some basic information on the process and your rights and obligations can help you deal with an audit if you are faced with one.

This resource only provides general legal information about the process. Depending on the situation a taxpayer may need to hire a lawyer to assist them in dealing with an audit. A lawyer can provide advice on such things as what information needs to be disclosed and on how to settle any tax issues that arise from the audit.

It is important to remember that the Canada Revenue Agency (CRA) can also do criminal investigations of tax-related frauds. Very different rules apply to these investigations. For example, people have the right not to incriminate themselves, so they are not required to provide information to the CRA during a criminal investigation. A lawyer can help a taxpayer determine if they are being investigated for criminal activity and can advise them on their rights in this situation.

Q

What is a tax audit?

A

A tax audit is when the CRA looks at your books and records to make sure you have paid all the taxes you owe. Taxpayers are required to accurately and honestly report tax owing to the CRA and audits are the government's way of checking up on people and businesses.

Q

How does the CRA decide who to audit?

A

The CRA chooses a file for an audit based on a risk assessment. The assessment looks at a number of factors, such as the likelihood or frequency of errors in tax returns or whether there are indications of non-compliance with tax obligations. The CRA also looks at the information it has on file for the taxpayer and may compare that information to similar files or consider information from other audits or investigations.

People whose only income comes from employment are less likely to be audited because the CRA can match the information slips from their employers with the employee's tax return and check to make sure they have declared all their income.

Q

How long after I file my taxes can the CRA decide to audit me?

A

Normally they can audit a return for up to 3 years after it was filed. However, if it has been established that you made a misrepresentation because you were neglectful, careless or dishonest there is no time limit.

Q

How is a tax audit performed?

A

Usually the CRA will contact you by letter to tell you that they are going to perform an audit and to book a date and time for the audit. They will also tell you what tax years they are auditing. Most of the time they will come to your residence or business. Sometimes they will ask you to send the needed documents to them. Other times they may ask you to come to a CRA office.

The auditor will want to look at your records but before doing this they may try to speak to you informally to find out more about you and/or your business. The auditor may want to take a tour of your business or speak to employees. If your business is being audited it is a good idea to identify one person who has the authority to talk to the auditor. If the auditor tries to discuss matters with anyone else they should refer the auditor back to that person.

It is important to remember that the auditor is only entitled to information that is relevant to determining if any taxes are owing for years being audited. Attempts by the auditor to gather other information through casual conversations should be avoided.

An audit can take anywhere from several hours to several weeks to complete depending on the case.

Q

What do I need to show the CRA?

A

Taxpayers have a legal obligation to provide the CRA with any information that is relevant to determining if there are any taxes owing for the years in question. Often times the auditor will have a checklist that identifies areas of particular concern. This may give you some direction about what the auditor will need to look at to satisfy these concerns.

The auditor may ask to examine documents such as bank account statements, invoices, journals, expense accounts, product inventory, sales contracts, appointment books, meeting minutes, shipping and receiving records, investments, corporate documentation, insurance policies etc. The CRA may also request to inspect other people's records, such as clients, to help determine whether your records are accurate.

Q

What if my records are incomplete?

A

Taxpayers are required to keep the necessary records to show that they have paid all the taxes they owe. Even if you hire someone else to keep your books you still have the obligation to make sure they are complete and available to the CRA.

During an audit it is up to you to prove that you have accurately reported your income and paid your taxes. Good record keeping is what will allow you to do this. If you do not have complete records, the CRA can decide you owe taxes based on incomplete information. There are also penalties for not keeping adequate records.

Q

What happens after an audit?

A

The auditor may have questions about some of your records. Most often they will save these questions for the end. You can then respond to these questions and possibly provide more information. You don't need to respond immediately to questions. If you need time to answer tell the auditor that you will get back to them with the information. It is better to take the time to make sure of your answer than to give a quick answer that may cause you problems later.

If there are outstanding issues once the audit is complete the CRA will usually send out a "proposal letter." This letter outlines areas where the CRA believes taxes are owing. If you do not agree with the proposal you can respond with more information to support your position. This may also be a point where you want to get legal advice, if you have not already done so. A lawyer may be able to provide the CRA with legal arguments to support your position.

If no agreement is reached about taxes owing the CRA will issue a Notice of Reassessment for each tax year in question. This will indicate the CRA's determination concerning taxes you owe and the CRA can then proceed to collect these taxes from you.

Q

What if I disagree with the Notice of Reassessment?

A

You can object to the reassessment within 90 days of the notice being mailed to you.

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