Making a Canada Revenue Agency Audit Less Painful
“The CRA wants to conduct an audit.” For the stress this statement can cause, the best antidote is well-kept books. The knowledge that every expense claimed is a business expense, fully documented, greatly reduces the discomfort of an audit.
So does a confident approach to the audit itself. Here’s a look at the typical CRA audit process:
The Audit Letter Arrives
The CRA will typically notify you that they wish to conduct an audit in letter format. This letter sets out details — the years under audit, auditor contact information and so on. It also includes a list of documents CRA wants to inspect, which could include financial statements, tax returns, depreciation schedules, payroll records or other material.
The letter will identify what level of audit they wish to conduct. They generally have three levels of audit. The first and least invasive is a request for more information, which usually follows a tax filing. On occasion this request could also be made via telephone.
The second type of audit is a desk audit. More thorough than the first type, an auditor will conduct their review of the file in detail from their office. Additional information may be requested during the course of the audit to help clarify the auditors understanding of the filing positions taken. A desk audit is generally triggered when something unusual is filed such as an atypical expense claim or filing position taken, and/or if a recent adjustment was requested.
The third type of audit, a field audit, is the most extensive type of audit as CRA will want to review source documents. In this instance the CRA wants to physically examine your books and records. Sometimes these audits are random, and sometimes they result from an unusual tax filing.
Call Your Accountant, Review Your Records, Then Deliver
Once contact is made by CRA notifying you of an upcoming audit, it is recommended you call your CA immediately. Your CA is familiar with your tax filings and has had previous experience with CRA auditors. Having your CA involved will reduce the amount of your own time required to deal with the audit and will also lessen any stress the process may cause. Consider having your CA direct the audit, minimizing your dealings with the auditors.
Once it is understood what areas/filings are being audited, you and your advisors should review any supporting documents that will be supplied to CRA carefully. You can’t change the record, but you can familiarize yourself with it, especially the parts that concern the CRA’s areas of interest. You may discover errors, gaps or other apparent oddities, and your accurate explanations for these will help avoid confusion or contention.
Next, organize the documents in an accessible format for CRA. Your CA can help you decide between digital files and hard copies. Be sure to provide everything requested, but nothing more, and keep perfect copies of all documents submitted to the auditor. Stick to facts and avoid providing justifications or reasons for a given filing position before it is warranted.
Meet the CRA
The first meeting of the audit will l ikely take place at your office or possibly your CA’s office. You, your advisers and one or two CRA agents will become acquainted, review schedules and talk about your business. You’ll be asked a standard set of questions — how i s the company organized, what’s the extent of owner involvement, and so on. The next step is to deliver the requested documents.
It is important to set a good tone from the start. Treat your guests professionally, give them a brief tour of the office and answer their questions directly and fully. If you need to consult with employees or advisors, the auditors should accommodate that.
It’s true that these professionals have the authority to dig into most aspects of your business. But don’t walk into an audit expecting a vendetta. To the auditors — if not to the audited — most audits are routine and uneventful.
Auditor on Board!
Keep in mind that the ful l audit may take weeks or even months, but generally a CRA auditor spends only a few days to a few weeks at the offices of the audited company or its representative. In either case, provide the auditor a comfortable, convenient and private place to work.
Scheduling the auditor’s work at your CA’s site is less disruptive to your operations. Your CA can answer most questions, consulting with you when necessary. Your privacy is important, too — an audit shouldn’t be a hot seat for a business owner trying to run a company.
The auditor can also make follow-up requests at any time. Normally CRA will have selected one or more areas to focus on based on its analysis of your company’s tax return. Since the auditors will be looking at your financial records the audit can overlap with other areas. If for example a commodit y tax auditor not ices a problem with the payroll remittances, they may or may not advise the CRA’s payroll group that there is an issue.
An audit might find errors or reject one or another of your company’s tax positions. Such negative decisions will require payments — taxes, penalties, interest or all three — and these could be significant. But remember that very few audits result in catastrophe. A company that keeps its books in order should come through in good shape.
However, if you and/or your CA do not agree with the audit findings, an appeal can be filed once the notice of assessment is received. You and your CA will meet with an appeals officer who will either correct an error in the audit findings or agree wi th audi tor ’s findings. During the appeals process you have the right to all of the information in the CRA’s audit file. This will aid in your plea to the appeals officer.
If unsuccessful at appeals you can appear before a judge at the Tax Cour t of Canada. Of course the cost and time involved in taking your case to cour t needs to be weighed against the possibility of a successful outcome.
What Currently Interests the CRA?
Tax trends come and go, and the CRA shifts its focus over time. Here are some current attention-getters:
- Outsized expenses always draw interest.
- Charitable Donation Receipts:
- Due to recent donation schemes, this area is being reviewed by CRA.
- Cash Transactions:
- CRA is looking for contractors who don’t claim all revenues. Another project involved looking at restaurants using software on cash registers that hid some cash transactions from their records.
- The HST i s s t i l l new in Ontar io and many areas such as rest r icted ITCs are st ill not well understood by many taxpayers.
Your DJB advisor can guide you through the entire audit process to ensure the best possible outcome.