It’s not the end of the world. If you are an honest person who keeps reasonably good records, you should have little to worry about.
Reasons CRA Audits People
In Canada, we use a self-assessment tax system which means each Canadian is responsible for reporting income and expenses for each taxation year. CRA says they use random samples of taxpayers to ensure the fairness and integrity of our tax system. Realistically speaking, you are more likely to be audited if there is a large change from one year to the next. For example, if you have a large moving expense or your income has increased dramatically, you are more likely to be audited.
What to expect during an audit
The auditor will begin by contacting you and will tell or ask you the following:
- The scope of the audit – what exactly they will be looking at
- What year or years they want to look at
- Estimate of how much time the audit will take
- Specific information the auditor will require from you to do the audit
Generally, the audit will be conducted at your place of business. The auditor will ask you questions and discuss issues with you during the audit process. At the conclusion of the audit, the auditor will discuss with you any proposed adjustments and explain the rationale behind them. The auditor will generally give you 30 days to respond to the proposed adjustments.
Once you have agreed to the auditor’s findings or (agreed to disagree), the CRA will send out a Notice of Re-Assessment based on the auditor’s findings.
If you still do not agree with the auditor’s findings and resultant Notice of Re-Assessment, you can file a Notice of Objection. Please note, this must be done within 90 days of the CRA mailing out the Notice of Re-Assessment. You should use the services of a qualified accountant when discussing the results of an audit or filing a Notice of Objection.
Taxpayer Responsibilities
You must keep adequate books and records for a minimum of the last six taxation years. If you use a computer system to keep your accounting records, you must keep your accounting files in an electronically readable format.
During the audit, you are required to give the auditor what they ask for (within reason) and answer any questions they have.
What to Keep
- Actual receipts showing purchase details (they generally do not accept credit card statements)
- Keep a physical copy of anything you give or send to CRA
- Bank statements – keep a physical copy for yourself for the last six taxation years (many banks delete older ones)
- Keep your TPC file up to date with tax returns and bank statements, etc.
Helpful Hints
You should engage the services of a qualified accountant to help you through the audit process. Generally, accountants have experience dealing with auditors and can help expedite the process by giving the auditors exactly what they require to complete their work.
Only give the auditors the exact information and records (for the tax years in question) that they ask for. Do not volunteer any extra information neither verbally nor physical nor electronic records.
Believe it or not, CRA auditors are human and as such you should treat them with respect, be cooperative and courteous. They are not there to destroy you. They are simply doing their job.
Did you know?
Sometimes, audits result in the taxpayer getting refunds of taxes. It is actually quite common for audits to uncover additional expenses that the taxpayer originally forgot or did not know they could claim. The CRA will not only give you the refund but will also give you refund interest as well. Ironically, the refund interest is taxable in the year you receive it.