(Originally posted on August 8, 2016)

 

CRA and Lifestyle Audits, Could You Survive One?

 

Back in the November 2015 Article, we briefly mentioned the CRA ‘Lifestyle’ Audit.

Recently, the Globe and Mail wrote that the CRA is introducing these Lifestyle Audits as part of the probe into the Vancouver Real Estate Market, suggesting that people are living far beyond their means so they must have undisclosed (or illegal) income.

So this month, we decided to further detail this type of Audit and we pose the question to you:

“Could You Survive a Lifestyle Audit if CRA Came Calling?


To reiterate, “ A lifestyle audit is the term commonly used by forensic auditors and management in companies to describe the tests that are performed to determine if the lifestyle of an employee is commensurate with that person’s known income stream”. This is the logic that CRA follows.

There are several items that can trigger a Lifestyle Audit, below are just a few:

  • Working in the Construction Industry, or home renovations
  • Divorce – A former spouse files a complaint with CRA
  • Your income vs. your postal code
  • Your income vs. your family obligations
  • Anonymous tips from neighbours and others

Recently, CRA targeted several suspect industries and recovered Millions of dollars in taxes, these industries included home renovation contractors, restaurant servers, and individuals providing ‘contract’ services to the oil & gas industry.

All audits are invasive, CRA is looking over your financial information with a fine tooth comb, however, a Lifestyle audit can go way beyond invasive and become outright frightening.

When CRA comes calling, they will look at every piece of your life, family, possessions, activities, work, the activities of your children and more.

They will then use the information they collected to determine how much money you are actually earning to support that lifestyle and they will assess you accordingly.

 

Take for example the following:

A couple lives in a neighbourhood where homes sell for $850,000, they have 2 cars, 3 children and a pet dog. The children participate in several sports, and the family takes regular vacations each summer.

The wife is employed and earns about $55,000 per year and the husband owns a landscaping business and declares income of $40,000 per year.

Does their income justify their lifestyle? Not likely.

 

Here is what CRA would see:

  • Property taxes on the home are $4,500 per year
  • The Mortgage is $2,200 per month.
  • Insurance, Utilities, Maintenance add another $1,000 per month.
  • 2 car payments and operating costs add another $1,200 per month
  • Groceries for 5 people are about $1,000 per month
  • Sports for the kids add another $5,000 for the year
  • Vacations add another $10,000 per year
  • They contribute $5,000 per year to RRSP’s
  • Entertainment & Recreation…

 

Based only on the above, the family has living expenses of close to $6,500 per month. ($78,000 per year)

 

Their after-tax income is less than that!

 

So what would CRA do? They would look very closely at the landscaping business and determine that the business is collecting a significant amount of ‘cash’ (undeclared income) and file an arbitrary assessment. It would then be up to the business owner to prove CRA wrong – not an easy task.

 

So, could you survive a lifestyle audit?

 

Talk to your local Ledgers Professional if you need some sound tax advice!