More and more businesses are facing a CRA audit these days. Canada Revenue Agency (CRA) has especially ramped up audits of small- to medium-sized enterprises.
Knowing how CRA selects taxpayers for audit, as well as what to expect during an audit, could make you better prepared if you're singled out.
Audits are nothing to fear if you comply with tax rules and regulations…and, if you follow these 7 handy tips.
1. Avoid a CRA Audit in the First Place
Many taxpayers are simply chosen at random for a CRA audit. Others are targeted due to things they provide—or, don’t provide—on their tax return.
Want to steer clear of an audit? Avoid these 6 top CRA audit triggers!
2. Keep Accurate, Detailed Records
Accurate, detailed records are your best tool for surviving the audit.
In addition to helping you avoid an audit in the first place, your good bookkeeping habits can help the auditors do their job, which gets them out of your hair sooner.
Be sure to keep copies of all personal bank, investment, RRSP, and credit card statements for you and your family members together with your business records.
This will expedite matters, and be a lot less costly if CRA does request them during an audit. Trying to reconstruct these records after the fact can be a nightmare.
It's also wise to document all transfers and deposits for all bank, investment and credit card accounts.
Should you take cash out of one account and deposit it in another account without a paper trail like a cheque or electronic funds transfer record, an auditor will assume the cash deposit is an income receipt rather than just a transfer or perhaps a loan advance.
3. Get Help from a Tax Professional
As soon as CRA notifies you about an upcoming audit, contact your tax professional or accountant to arrange qualified representation during the audit. Then contact CRA for a written request listing all specific documents it wants to review.
4. Be Sure You or Your Tax Professional Request Enough Time
You’ll want to make sure you have enough time to get all of the information together before the audit.
If you haven't kept copies of various bank and credit card statements as noted above, it could take time to get them from your financial institutions.
Postponing the audit appointment because you don't have the data together will annoy the auditor. That's not a good way to begin an audit.
5. Only Provide the Information the CRA Auditor Asks For
Compile everything CRA asks for—no more and no less.
During the audit, answer all questions honestly, but don't try to be helpful by providing extra information. You don't want to complicate things or highlight things that the auditor isn't focused on.
6. Make it as Easy as Possible for the Auditor
Make it as easy as possible for the auditor to move quickly through your records by providing a quiet, comfortable workspace and having your documents well organized.
An audit will generally finish a lot sooner if the records remain in your possession. Try to avoid letting auditors take them off your premises.
An auditor may ask you to authorize a check of your bank and loan records and safety deposit boxes.
You should sign the authorization form, but scratch out the line indicating you will pay for any service charges. If CRA has to pick up these costs, the auditor will likely restrict his search somewhat.
7. Don't Be Afraid to Appeal the CRA Assessment
Once an audit is completed and CRA decides tax adjustments are required, the agency will send you a proposed statement of adjustments for rebuttal. This is usually sent within 30 days and prior to issuing a notice of re-assessment detailing any additional taxes and interest owing, plus penalties.
If you don't agree with the assessment, all is not lost. You can always appeal through the normal CRA assessment appeal process.