More small and medium businesses are being audited these days. Canada Revenue Agency (CRA) has ramped up audits of small- to medium-sized enterprises.
Audits are nothing to fear if you comply with tax rules and regulations. 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.
Many taxpayers are simply chosen at random from among all tax filers.
In selecting taxpayers for audit, CRA will often pay closer attention to cash businesses such as restaurants, businesses where receipts may not be needed, and businesses whose margins or incomes are not within the norm for that industry. CRA will also look more closely at taxpayers who claim rental or business losses.
Then there are CRA audit projects. At various times, CRA will target certain groups or industries that tend to have a high level of tax non-compliance, such as construction, real estate or hospitality industries.
In other cases, CRA may do what is known as a secondary review. That's when CRA audits a spouse, investor, supplier or subsidiary of an individual or company on which it is already doing a main audit.
Specific items on tax returns will draw particularly close CRA scrutiny. Knowing about these items, and then handling them correctly on your tax return, could help you reduce the chance of audit. Many of these items are specific types of expense claims. Several more are related to investment issues.
Eligibility to claim employment expenses is limited to very few people, so such claims are a flag to CRA to look more closely.
Several audit "flags" are related to investments. For example, CRA will check very closely any losses claimed on investments in small business corporations, mainly because the tax rules regarding allowable business investment losses are so complex.
Be sure you retain all supporting documentation to substantiate your claim for an allowable business investment loss as CRA often wants to review losses. Claims of capital losses and gains also receive close scrutiny from CRA because many taxpayers do not track them correctly.
Failure to remit source deductions for employees, such as tax, CPP and EI, on a regular basis or failing to pay your GST and PST correctly and on time also could lead to an audit.
What to do if CRA flags you
Accurate, detailed records are your best tool in making any audit process easier for you.
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.
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 open up a new can of worms.
Once an audit is completed and CRA decides tax adjustments are required, the agency will send you a proposed statement of adjustments for rebuttal, usually within 30 days, prior to issuing a notice of re-assessment detailing any additional taxes and interest owing, plus penalties. If you don't agree with the CRA assessment, all is not lost. You can always appeal through the normal appeal process.
If CRA ever audits you or challenges a tax return, as one of our clients we will represent you all the way to Tax Court if warranted – and we’ll cover the court costs and legal fees.
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