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The Canada Revenue Agency (CRA) is allowed to audit your tax information. This means that they examine your situation to make sure you have paid all the taxes you owe. There are important things to know about audits.
Just the word "audit" can be enough to panic people. No matter how careful you have been about filing and paying your taxes, the CRA may audit you. However, having some basic information on the process can help you deal with an audit. It is important to know your rights and obligations.
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 you need to disclose and on how to settle any tax issues that arise from the audit.
It is important to remember that the 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 do not have to provide information to the CRA during a criminal investigation. A lawyer can help a taxpayer determine if they are under criminal investigation and can advise them on their rights in this situation.
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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 must accurately and honestly report tax owing to the CRA. Audits are the government's way of checking up on people and businesses.
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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. They may also consider information from other audits or investigations.
If your only income comes from employment, you are less likely to be audited. This is because the CRA can check if the information slips they get from your employer match your tax return.
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Normally they can audit a return for up to 3 years after it was filed. However, if they find out that you made a misrepresentation because you were neglectful, careless or dishonest there is no time limit.
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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.
The auditor is only entitled to information that is relevant to determining if any taxes are owing for the years being audited. They should not try to gather other information through casual conversations.
An audit can take anywhere from several hours to several weeks to complete depending on the case.
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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. The auditor will often 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:
The CRA may also request to inspect other people's records, such as clients, to help determine whether your records are accurate.
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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.
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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 do not 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 you cannot reach an agreement 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.
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You can object to the reassessment within 90 days of the notice being mailed to you.
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