With over 2.5 million GST/HST registrants, the Canada Revenue Agency (CRA) has the monumental task of trying to administer this tax. While trying to police the GST/HST, the CRA are concerned about false documentation on the underground economy. This has been evident by the introduction of the electronic suppression of sales software (zappers or phantomware) penalties that came into effect in 2014.
There are two types of ‘audits’ performed by the CRA – the pre-assessment review and a ‘field audit’. The pre-assessment review is undertaken prior to your return being assessed. Recently, if your GST/HST return has had a refund, it has been redirected to the ‘refund integrity division’ to perform this review. During these reviews, they will normally ask for general ledger details and supporting documentation for your input tax credit (ITC) claims, as well as sales invoices to support the GST/HST you collected.
Regarding field audits, the CRA has stated that they conduct approximately 78,000 audits annually (or approximately 3% of all registrants). Of these field audits, approximately 73% result in reassessments. If your company is selected for audit, the audit may consist of a review of the prior four years, but in many cases may be less than that. If the CRA thinks there has been fraud or misrepresentation due to willful default, neglect or carelessness on the part of the taxpayer, the period can be expanded past 4 years. If you and/or your company are pulled for a field audit, there are some tips that may help you navigate through this process:
Before the audit begins:
- Ensure you have copies of any GST/HST elections you have been relying on.
- Ensure your documentation is neatly organized and in order. The CRA will likely request a copy of your electronic books and records.
- If you have a combination of exempt and taxable supplies, ensure your ITC allocation methodology is documented and explained.
- If you have relied on a valuation for a self-supply or a rebate claim, ensure you have a copy of the valuation or support of how the fair market value was determined.
When the auditor arrives:
- It is common that the auditor will sit down for an interview at the start of the audit to better understand the business. Make sure they have a good understanding of any complexities in your business.
- It is recommended that you have a key person that handles the communication (verbal and written) with the auditor to ensure consistency in your replies.
- Be cordial to the auditor!
When the audit is complete:
- If the CRA found some errors, ensure your system is properly updated so the same mistakes do not keep reoccurring.
- Consider if any returns already filed after the audit period need to be amended to reflect the errors noted.
Navigating through a CRA audit can be time consuming and costly if the auditor does not fully understand your business from the start, or if your books and records are not properly organized. If you get the dreaded audit notice and need some assistance, please contact DJB to help you through this process.
Article written by: Greg Sawatsky, MAcc, CPA, CA