The Canada Revenue Agency (CRA) is empowered to audit taxpayers to ensure their compliance with the Canadian tax laws to maintain public confidence in the fairness and integrity of Canadian taxation. You should read this article if the CRA has notified you that you are being audited. As a taxpayer under audit, you will learn about your rights and obligations and the strategies you can employ to deal with the audit process to achieve the best possible tax outcome for your circumstances.

What are the selection criteria used by the CRA?

It is necessary to know how to get under the CRA’s radar to avoid being audited by them. The CRA selects audited files based on risk assessment. Those who are considered high-risk taxpayers are more likely to be audited. Common reasons for triggering a tax audit include:

  • Potentially erroneous tax returns;
  • recurring losses in a business;
  • Tax planning or non-compliance with tax obligations; or any indications of aggressive tax planning or non-compliance
  • Individuals who stand apart from their peers, industries, or communities.

In the event of an audit, what are your rights and responsibilities?

You must cooperate with the CRA auditor if you are chosen for a tax audit. It is illegal to refuse to cooperate with an auditor from the CRA. As part of the CRA audit investigation, you must also maintain adequate financial records and make them available to the auditor.In your capacity as a taxpayer under audit, the CRA auditors have a duty of care toward you. In certain circumstances, you may qualify for relief from penalties and interest.

CRA audits: how does it work?

Tax auditors either conduct a field audit or an office audit. For individuals and small businesses, most audits are office audits, where CRA auditors review taxpayer records in the office. The auditors conduct field audits at taxpayers’ places of business, meet with taxpayers or their accountants at a prearranged meeting time, and review all relevant supporting documents.A CRA auditor examines supporting documents, including ledgers, journals, bank statements, sales invoices, expense receipts, car logs, etc., as part of a tax audit to verify they support a taxpayer’s tax return. Auditor findings are usually communicated via face-to-face meetings or telephone calls after completing their work.The auditors will send a completion letter to the taxpayers if the previous assessment is found to be correct. Auditors will send taxpayers a proposal letter explaining why reassessment is necessary if they owe more taxes or are entitled to a refund. Within 30 days of the proposed reassessment, taxpayers will have the opportunity to agree or disagree. Reassessment notices will be issued after the CRA considers the taxpayers’ responses.CRA allows taxpayers to object to a reassessment within 90 days of receiving a notice of reassessment.

How can tax outcomes be improved?

To get the best possible tax result from an audit process, you should employ certain strategies.

  • You should read CRA notification letters carefully, and responses should be submitted within 30 days. If necessary, ask for an extension. To communicate with the CRA auditor, you can have an accounting firm represent you.
  • Understanding your rights as a taxpayer will enable you to deal with an auditor more effectively. Check out the CRA’s “Taxpayer Bill of Rights Guide” for more information. According to the Guide, all taxpayers are entitled to 16 rights when dealing with the CRA. In addition, the Guide outlines the five commitments the CRA has made to small businesses.
  • Organized financial records help you make better decisions. By promptly providing CRA auditors with all requested information, you will demonstrate your responsibility as a taxpayer.
  • Being nice to the CRA auditor while still being on guard is important.
  • Be present at any interviews the auditor requests. Take the auditor’s input seriously.
  • Don’t provide information that the CRA can later use against you that is irrelevant or extraneous.
  • Participate actively in the CRA audit. When CRA auditors do not understand your facts and transactions, they tend to request more information. Explain the facts, transactions, and how you interpret the law to the CRA to narrow their focus of inquiry.
  • If you have any doubts about the potential tax implications of a particular question or document, consult a tax accountant or lawyer. Engaging a tax professional as your representative is crucial if you want the audit to be conducted fairly and ensure that you achieve the best possible tax outcome.
  • Record the events during the audit in a chronology. Delayed audits may result in increased interest charges. You can use the “taxpayer relief” rules if CRA auditors cause delays, in which case you will be able to get interest waived for late payments subsequently.

Conclusion

Most people in Canada do not understand the tax laws enough to represent themselves in case of an audit. Talk to experts to find out how you can handle a tax audit and how they can help you with it.