The CRA Audit Process
We can represent you during a Canada Revenue Agency (“CRA”) audit. Throughout the CRA audit, we act as an intermediary between you and the auditor to relieve the stress of dealing directly with CRA and to ensure proper procedures are followed and that you are treated fairly.
CRA Audit Time Limitations
When you file a tax return CRA reviews it and issues a Notice of Assessment. However, CRA has the legal authority to review the tax return again. They can do this in a less intrusive manner with a relatively quick review of one item on your return. Or they can conduct a detailed, lengthy and intrusive review of your tax filings through the audit process.
Normally, the CRA is permitted to audit or review an individual’s tax return within three years of the date of the respective Notice of Assessment. However, pursuant to subparagraphs 152(4)(a)(i)&(ii) of the Income Tax Act, RSC 1985, c 1 (5th Supp), CRA can audit or review beyond the three-year period if they suspect the taxpayer has misrepresented or provided fraudulent information in a return. The behavior of the taxpayer does not have to be intentional and can be questioned if assumed to be the result of neglect or carelessness. In addition, a taxpayer can sign a waiver allowing CRA to assess beyond the 3 year period.
There is a reverse onus in tax law. The taxpayer must prove the legitimacy of the facts underlying the tax return filed. In contrast, CRA is able to assume facts until they are rebutted by the taxpayer. In practice this means CRA can assume there was “neglect, carelessness or wilful default or…fraud” and reassess a return beyond the three-year time limitation and they routinely do so. The onus is then on the taxpayer to prove the facts of the tax return under review or audit. Only upon appeal does CRA have a burden to support their position.
CRA Audit Targets
There are various factors CRA may rely upon when choosing who to audit. For instance, CRA is known to audit industries that commonly complete many transactions in cash, such as restaurants and construction. They will even target certain communities with the expectation that a lot of transactions may be conducted in cash or “under the table.” Normally, the cash recipient, a business or individual, will not report the income on their or the company’s tax return and the respective contractors will not report their cash income.
CRA, a sophisticated organization, may for example watch a business such as a restaurant and note that it is very busy and compare that fact with the amount of income the business is reporting. Or, if comparably busy restaurants are reporting higher amounts of income, then CRA has a reason to audit the lower income reporting business.
In one example, the executives of a successful company received very high salaries and additional payments through dividends. One of the executives did not report all of the income he received from the company on his tax return. The distinction in amounts was very obvious and CRA noticed. The executive was audited and penalized financially, but ultimately not criminally.
CRA also has the ability to compare incomes of certain geographical districts. If you, for example, own a large house in a traditionally high-income neighborhood but are reporting a low income, CRA will likely be curious as to why. Or, if you are a business and report a large amount of expenses, beyond the average of a comparable business, you may be targeted for audit.
Ultimately, CRA has the data and ability to collect and access data to determine financial anomalies among groups.
Start of the Audit
A CRA auditor will contact you by mail or phone, or both, to start the audit process and tell you the date, time, and location of the audit. An on-site audit may take place at a taxpayer’s home, workplace or representative’s office, such as your Tax Lawyer or accountant. If questions and answers are exchanged orally the auditor may not take accurate notes of the conversation. Normally, we request an exchange of written questions and answers with the auditor.
You are obligated to provide the requested and existing relevant documents for CRA to review/audit. If you fail to do so CRA may compel your cooperation with a compliance order which can be enforced by the court.
What does the Auditor Examine?
The auditor will review your books and records, documents, and information. These may include:
Information that CRA has on file (such as filed tax returns, credit history, and property details);
Your business and accounting data (for example, ledgers, journals, invoices, receipts, contracts, rental records, and bank statements);
Personal accounting data and records (such as bank statements, mortgage documents, and credit card statements);
CRA may request data and record of individuals, corporations or trusts, for example, that are not the subject of the audit; and
Adjustments of the filings under audit may be submitted to CRA for review and consideration.
During an audit, the auditor may find issues and discuss them with you or your representative. It is important that organized books and records are provided to the auditor. The auditor will not do your accounting work in the proper sense and they will review your records with the intention of increasing taxable income. If proper books and records are not available, then a taxpayer should request time to have them prepared and engage an accountant to do so. Those professionally prepared books and records should then be submitted to the auditor.
What happens after a CRA Audit?
Note, CRA auditors are incentivized to increase taxable income. Your tax bill may increase. However, this can be challenged by filing a Notice of Objection with legal arguments and supporting documentation countering the auditor’s inflated reassessment. As well, you can appeal the auditor’s tax assessment to the Tax Court of Canada. Under certain circumstances, a Taxpayer Relief Application may be the right option.
How can we help?
SpenceDrake Tax Law specializes in representing clients through CRA audits and disputing audit outcomes. The assistance of a skilled Tax Lawyer may be necessary to compel the CRA auditor to abide by their obligations to conduct the audit in a reasonable manner and to carefully consider the taxpayer’s position.
Contact us for a free consultation. We will review your facts and outline the steps necessary to challenge CRA’s position.
SpenceDrake Tax Law