How Does the CRA Conduct a Business Audit?

Tax Season 2017: CRA Income Tax Audits

The Canada Revenue Agency (CRA) assesses more than 14 million returns each year, and while it doesn’t say how it selects a return to be audited, small businesses are popular targets simply because there are a lot of small businesses in Canada.

A whopping 97.9% of Canadian businesses have fewer than 100 employees; micro-businesses, (one to four employees) make up 54.1% of all private employers—the biggest group in the country.

Because the vast majority of Canadian small business and agribusiness owners submit their tax returns electronically, they don’t send receipts. But it’s still important for small businesses to have an effective, well-organized recordkeeping plan in place.

The CRA has the authority to examine all books, records, and supporting documentation when they conduct an audit.

Even if everything is in order, an audit can be stressful and time-consuming. If your small business or agribusiness has been selected for a CRA business audit, here is what you need to know.

About Canada Revenue Agency’s Business Audit

The CRA chooses a business to be audited based on a number of conditions, including errors on tax returns, the appearance of non-compliance, large or unusual changes in deductions or credits, and even having less revenue than those in the same neighbourhood or same profession.

The CRA also compares your business’s current tax return with the information it has on file and might even compare it to similar files. Then again, even if everything is in order, your business can still get randomly selected for a business tax audit.

It’s not as if an audit isn’t in the best interest of the CRA. Whether intentional or not, there are a lot of errors on tax returns.

In the 2014-2015 tax year, the CRA identified $21.9 billion in non-compliance; the biggest culprit was GST/HST. Each year, the CRA completes more than 70,000 GST/HST audits.

Steps Involved in a CRA Business Audit

Because of electronic filing and receipts not submitted, it’s not entirely uncommon for the CRA to send a letter asking for proof of a claim, like a charitable donation or contribution to a Registered Retirement Savings Plan.

That’s not an audit. It’s simply a request for information that you would have normally sent if you had filled out your tax return by paper and sent it in the mail. A business audit is much more detailed.

The CRA will write or call you to let you know your business is being audited and where the audit will take place. In most cases, the audit will take place at your business (on-site audit). This makes it easier for you to provide the CRA auditor with any information they need. In some, rare situations, an audit might take place at a CRA office (office audit).

Should you ever receive contact from CRA, don’t commit to anything over the phone. Let them know you need time to contact your tax preparer and they can contact CRA on your behalf.

What Happens During a Business Audit?

Whether it’s an on-site audit or office audit, the CRA auditor will look at books, records, documents, and any relevant information. This can include previous tax returns, business records, personal records (banking, mortgage, credit cards, etc.), and personal and/or business records of other people or entities (spouse, family members, partnerships, etc.).

The CRA auditor may even want to look at any adjustments your bookkeeper or accountant did to arrive at your income level. Minimizing the amount of taxes paid to the CRA isn’t illegal, but tax evasion is.

During the audit, the CRA auditor will raise and discuss any issues with you. You can raise any issues or discrepancies with the auditor as well. Once the audit is completed, there are two possible outcomes.

  • Correct Assessment: If the CRA auditor decides the taxes you filed were correct, there is nothing more to do, and you will receive a letter saying the audit is closed.
     
  • A Refund or More Taxes Owed: Sometimes, the auditor finds that your return needs to be reassessed further; this means two things: you will either get a refund or need to pay additional taxes.

    You will get a letter explaining why your taxes need to be reassessed, at which point, you have 30 days to agree or disagree with the reassessment. If you do disagree with the reassessment, you should have your tax preparer speak to the auditor to try to resolve any issues. If that doesn’t resolve anything, your case can be escalated to the auditor’s team leader to discuss the reassessment.

FBC—Provides Audit Representation to Farmers and Small Business Owners

Getting a letter or phone call from the CRA and learning your small business is being audited can cause a lot of anxiety. In the unfortunate event that you are audited, FBC can help make the process a lot less stressful. Since 1952, FBC has worked exclusively with Canadian farmers and small business owners helping them minimize their tax burden and maximize their assets.

As the country’s largest and most experienced small-business and agribusiness income tax consulting firm, we understand the unique needs of our clients. That’s why we’re the only firm in Canada that offers integrated tax services on a year-round Membership basis. For a fixed fee, Members get access to our tax planning, tax preparation, audit protection, consultation, bookkeeping, and financial planning services.

We’ll even help you prepare for a tax audit. We’ll review the tax return and supporting documentation for the tax year(s) being audited and create a strategy for dealing with the CRA auditor, which could include having the audit take place at our office.

At FBC, we want to make sure your taxes are done properly and ensure you are not subject to a tax audit. To that end, FBC provides all new Members with a review of their previous 3 years’ tax returns.

For more information on FBC and the services we offer, call us today at 1-800-265-1002 or submit an online form and an FBC tax specialist will contact you at your earliest convenience.

Request The Top 6 CRA Audit Triggers to Avoid to learn more

"I admit when I first became an FBC Member, I thought it was expensive. But after a CRA audit, it was pretty cheap. The day the CRA auditor arrived at my place of business, a tax specialist from FBC had not only prepared me for what to expect, but also attended the meeting."
- Dan Pearsoll, Valley Collision