(Originally posted on October 3, 2015)

 

Handling a CRA Audit, Part 2 – What can they ask for?

 

Last month we looked at what can trigger an Audit by the CRA, this month we will take a look at the wide ranging power of a CRA Auditor.

Understanding what the CRA can ask for from you and others (your accountant, your employer, your bank etc.) can assist you in preparing for your Audit and getting out of it as cleanly as possible.

Under the Income Tax Act, the Auditor has the following rights:

  • To examine all books, records and documents of the taxpayer that could relate to the Audit, and any books records and documents held by third parties, which pertain to the Audit of the taxpayer.
  • To enter and inspect home offices and any other place where the taxpayer carries out his or her business, holds property, or maintains records.
  • To require cooperation of the taxpayer and third parties.
  • To make a copy of any document required for the purpose of the Audit or to demand a printout of the digital documents.
  • To not be interfered with. (this is a very serious one that is further explained as “no person shall, physically or otherwise, interfere with, hinder or molest an Auditor while he / she is performing his / her duties” Interfering with or threatening an Auditor is a Criminal Offense!


Requirement for Information

When an Auditor issues the request for information letter, the recipients of the letter are required to comply with the terms and failure to do so could result in prosecution.

The Supreme Court of Canada has protected this right of the CRA upon numerous challenges by taxpayers, and this right has always been upheld.

General items they will request include:

  • Bank Statements
  • Mortgage Statements
  • Investment Statements
  • Credit Card Statements
  • Insurance Policies

Sources of other income including:

  • Lottery Winnings
  • Inheritances
  • Lawsuits and Settlements

They will also likely verify your living expenses including:

  • Loans / Leases
  • Household Expenses
  • Child Care
  • Medical Expenses
  • Lifestyle Expenses** (more on this next month)

 

The Income Tax Act

The ITA is a regulatory statute that controls the way income tax is calculated and collected. It is based upon the Canadian System of Self-Reporting (discussed last month).

To ensure compliance with the Act, the Minster of Finance has to be given broad, wide-ranging powers to Audit the returns of taxpayers and to inspect all relevant documents whether or not their is evidence of wrong-doing. Many individuals have accused Auditors of going on ‘fishing expeditions’, unfortunately, under this section of the Act, they are entitled to just that.

The integrity of the Income Tax System can only be maintained where the CRA has a method of randomly monitoring taxpayers and the compliance with the Act.
The Privacy Act:

  • Your expectation of privacy, which is covered by the Privacy Act, is essentially non-existent when it comes to the Income Tax Act and the CRA; that is to say, they can ask for just about anything and you are required to provide it.
  • Your expectation to privacy extends only as far as the documents and information you provide to the CRA will not be disclosed to other parties.

 

The CRA Auditor

The CRA Auditors are highly-skilled, professional accountants with a tremendous amount of training and experience. Do not for a moment believe that you can ‘pull the wool over their eyes’ and beat them in an Audit.

They are extremely observant and listen closely to everything they hear. If you are hiding something, they will find it!