We live within a self-assessment tax system; that is, we tell the CRA what we earned, the deductions we are taking and the tax credits we are utilizing. The CRA then tells us the amount of tax we owe based upon the information that we sent them.
It is this self-assessment type of tax system that gives CRA the right to Audit selected taxpayers to ensure that each taxpayer is paying the amount of tax that they are supposed to.
Although the level of compliance with the Income Tax Act in Canada is high compared with other nations, CRA still conducts millions of audits each year and recovers huge amounts of unpaid taxes, interest and penalties.
Last month we discussed what triggers and audit (see our blog at www.ledgers.com for the article), this month we will try and show you how to survive the Audit, if you should be selected.
1. The Audit Notification Letter:
Once you have been selected for audit (whatever the reason), CRA will send you a letter detailing the information they will require (the list is generally very exaustive) and may highlight the areas of concern such as home office expenses, vehicle expenses, dispositions of capital property or medical expenses; you will also be asked to arrange a suitable time and date for the initial meeting.
IF you have any issues, it is at this point you should IMMEDIATELY contact a Tax Professional and/or Tax Lawyer!
2. Information Gathering
The Audit will typically take place in your office or your home if it is related to Personal Tax; During the intial meeting, the Auditor will expect to receive all of the documents and other relevant information that they asked for in their Letter. Failure to provide the requested information can have very serious repercussions!
There are a great deal of issues that can arise at this point – missing information, Auditors on ‘Fishing expeditions’, accusations, allegations and more… you should NEVER meet with an Auditor without representation from a Tax Professional or Lawyer!
The Auditor may or may not find questionable items at this point, but if they do, expect them to dig deeper.
This investigative process can take one day, several days or even months if 3rd parties need to be involved or if the CRA auditor believes that there may be criminal issues (fraud, tax evasion etc.) involved.
3. The Proposal Letter
Once the Auditor has taken the time to review all of your relevant records and then come to a conclusion relating to the Facts, they will send you a letter in a form of what they are suggesting;
It will read something to the effect of: “Dear Taxpayer: we have completed our Audit of your returns and propose to make the following changes:”
They will then detail a list of the changes they are proposing such as the reduction of credits, disallowance of expenses, additional income or other adjustments.
You have 30 days from the date of this letter to produce documents or other factual information for disputing anything the Auditor has disallowed. (bear in mind that auditors hate to be proven wrong!)
Should you dispute the Auditor’s position, they will consider any additional information you provide them, however, you better be very diligent in your challenge.
Should you choose not to respond within the 30 day period, they will just re-assess your return as they had proposed in their Letter.
4. The Reassessment
Once the Auditor has reached their final decision, they will issue a notice of Re-assessment, this assessment takes the place of any previously issued assessment or re-assessment and is relatively binding if left unchallenged.
You, as the taxpayer, must now comply with this reassessment and make payment accordingly. (It is an extremely rare instance when CRA will owe you money as a result of an Audit)
You can appeal a re-assessment, however, it is not easy and we will discuss this in a future article.
Remember, if you are selected for Audit, contact your Local Ledgers Professional BEFORE you discuss anything with CRA.
Next month: What can CRA do during an Audit? (and you’ll be surprised how much power they have!)