What is a CRA Audit?
We live in a self-assessing tax regime, which means the government of Canada entrusts us to honestly report our income and our deductions.
When you receive an audit, the CRA is seeking to verify through supporting receipts, invoices, and other records, that the claims made on your tax return are accurate.
The audit process typically begins by way of a letter, which lets you know that you have been selected for an audit. The letter will likely include the area or areas that will be audited and a list of documents that you will have to provide.
The first thing to do is to remain calm. The person conducting the audit is just doing their job and you should engage with him/her in a respectful and collaborative way.
However it is advisable that you contact a tax lawyer immediately. Taxpayers should never navigate through an audit without guidance or representation. Critical errors made at the audit stage can have great impact down the road and often times it is difficult for a tax lawyer to overturn the decisions of the auditor if an appeal is later filed. The best course of action to ensure you are not over assessed for tax by the auditor is to obtain the assistance of tax counsel during the audit stage.
People are often hesitant about involving a tax lawyer during an audit. They erroneously fear that this may indicate they are somehow ‘guilty’. This couldn’t be further from the truth. The CRA’s auditors routinely deal with tax counsel in conducting and coordinating the audit. The CRA makes no distinction between tax counsel or a tax accountant in assisting in the audit and providing the submissions. Oftentimes the CRA will not even know that your tax lawyer is not your tax accountant as both have the same representative ID and authorization. All the CRA knows is that they are dealing with your tax representative who is better equipped to navigate through the audit on your behalf.
So, why hire a tax lawyer instead of a tax accountant to assist during an audit? Accountants are specialists in their field of bookkeeping, financial reporting and annual T-form preparations (T1, T2, T4’s etc). They are not however trained in the art of persuasive writing, oral advocacy or negotiation. They are also not trained in statutory interpretation of law. At the end of the day, the Income Tax Act is a piece of legislation. Just as you would hire a criminal lawyer if you were charged with a criminal offence, so too should you hire a tax lawyer when alleged that you have mis-reported income.
The benefit of tax counsel is that tax lawyers are well apprised if the rule of law, the Income Tax Act, the Excise Tax Act and the jurisprudence (which are judicial rulings by the Tax Court of Canada). During an audit, the auditor will propose to assess you for tax as a result of their audit findings called a Proposal Letter. Tax lawyers prepare in-depth written responses (called submissions or representations) to the Auditor in which they argue that the proposal is incorrect and there has been an over assessment of tax. Tax counsel cites statutory as well as the common law in support of their submissions. Tax counsel further supports the written submissions with documentary evidence to support the position claimed. In doing so, an in depth piece of persuasive argument and supporting documentation is presented to the CRA. In our experience, the results produced by a tax lawyer as opposed to an accountant during an audit is astounding.
How Long Can an Audit Last?
The length of the audit may depend on the designated scope of the audit—Is the area being audited narrow or large in scope? Does the audit seek to verify one area, multiple areas, or everything that was filed? Often times auditors will audit a single issue – such as your entitlement to the GST/HST New Housing Rebate or your entitlement to the Principal Residence Exemption on the sale of your home. These latter smaller audits are fairly quick and are usually concluded in 30-60 days.
The length of the audit may also depend on the number of files that the auditor is dealing with at any given time. Having incomplete records will also lengthen the audit process, as you will be required to make corrections and carry out the required calculations to complete any missing records.
It cannot be stressed enough that it is imperative to keep all your accounting and financial documents organized so that everything that is claimed on you tax return can be verified.
Even if your claims are 100 percent accurate, if you fail to provide supporting evidence or persuasive argument in lieu of supporting documents, your claims may be denied.
The CRA Review Process
It is fairly simple to find documentation of expenses and claims by looking at your bank statement, credit card statement, or email confirmation. However, the auditor may also seek verification for how the expense was paid by asking for reference number, cheque number, or a note if you paid in cash. The receipt and records must be consistent with the claim, type of business you are operating if any, and the lifestyle that you are living. If something does not seem right, the auditor can investigate in greater depth and seek to have you provide additional documentation from the bank or the people that you have dealt with. They may also ask you to provide records from your online bookkeeping or accounting program.
What is a Business Audit?
A business audit occurs when the CRA examines the books and records of a small or medium sized business. A business audit can be an audit of an entire business’s income and expenses, or it can be a subset of a business’s income such as a particular line item or employee benefits. The CRA can also audit the businesses GST/HST or payroll deductions and remittances. These are called trust examinations.
The auditor will examine the following records when conducting a business audit:
- information available to the CRA (such as tax returns previously filed, credit bureau searches, or property database information);
- your business records (such as ledgers, journals, invoices, receipts, contracts, and bank statements);
- your personal records (such as bank statements, mortgage documents, and credit card statements);
- the personal or business records of other individuals or entities not being audited (for example, a spouse, family members, corporations, partnerships, or a trust [settlor, beneficiary, and trustee]); and
- adjustments made by your bookkeeper or accountant to arrive at income for tax purposes.
How long does it take to complete a business audit?
The length of time for the CRA to conduct a business audit can vary widely. Some factors that impact the length of an audit are the following:
- size and complexity of the business
- missing or incomplete records. It may be necessary for you to go back to the original person, business, or entity for them to re-issue documents no longer in your possession
- delays in providing the requested documentation
- the type of business audit (general audit, trust examination, employee benefit audit etc)
Results of the Audit
In both the personal audit and business audit, the auditor will communicate their findings with a letter called an Audit Proposal Letter. Typically, the Auditor will provide you with 30 days in which to present argument or evidence to overcome the proposal made in the letter which seeks to assess you for additional tax.
It is at this crucial stage that you should hire a tax lawyer to assist in the preparation of these submissions. If you choose to submit on your own, be sure your submissions are comprehensive and backed by supporting documentation. Also be sure that your submissions are presented within the allowable timeframe.
After the expiration of the 30 day period the Auditor will review any additional documentation or explanation that you provided. The auditor will then issue a decision called a Final Proposal Letter. A Final Proposal Letter could result in one of three things:
- Your documentation supported your claims and income statements, which means that no additional tax is owing.
- An adjustment was made with the findings that you are entitled to a refund.
- An adjustment was made with the finding that you owe taxes. The letter will explain their findings and ask you to sign the letter.
After the conclusion of an audit, in the case if (b) and (c) above, the CRA will send you a Notice of Reassessment in which they will reassess you as owing more tax or as being entitled to a tax refund.
If you disagree with the Notice of Reassessment, you have 90 days to file an appeal.
Hire a Tax Lawyer
If you have received an audit letter, reach out to a tax lawyer for guidance or representation. A tax lawyer is also trained in the art of persuasive writing and argumentation which is crucial in waging a fierce defence against the auditor who proposes to over-assess you for tax or seeks to use questionable a audit technique methods.
If you are audited, or receive an audit proposal letter, reach out to a tax professional for assistance so as to minimize your tax liability at an early stage and seek the assurance, guidance and help you need during this critical time.
-Shira Kalfa, BA, JD, Partner and Founder
© Kalfa Law 2019