Changes made
Canada Revenue Agency (CRA) has many different departments, with many different types of audit; income tax, GST, and payroll audits are those you are most likely to encounter.
- Random selection
- Project
Computer program - Secondary files
Leads - Sector
Returns are selected for audit by:
The best way to avoid an audit is to file all the required information with your returns, file on time, and not claim deductions subject to abuse.
The most commonly audited type of income is business or professional income. Income from property such as rental income is also a target for audits. Employment income and pension income are seldom audited, although certain deductions such as moving expenses, childcare expenses, and employment expenses are often reviewed. Tax shelters such as limited partnerships are often audited as project files.
We recommended that you have your return prepared by an accountant, or at least use tax software to prepare your own return. 40% of returns done by hand contain arithmetic errors. An accountant can help you avoid common audit triggers such as:
- Questionable appearing investments.
- Large variation in income from year to year, or in financial statement ratios of interest to the tax man.
- Financial statements that are unusual for your industry.
- Unusual deductions or incorrect expense categories.
The best way to survive a tax audit relatively painlessly is to have good books and records. You are required to prove that you have correctly prepared and filed your tax returns. If your books and records are poor, you won’t be able to effectively dispute the auditor’s adjustments.
If you are audited, get your accountant involved early. He or she has the expertise to deal with the audit, and because he or she is not personally involved, can handle the auditor better. Cooperate with the auditor, but don’t volunteer information.
An audit will generally follow 5 steps:
Your return will be selected for audit.
- You will be notified and an appropriate time for commencement of the audit arranged.
- The auditor will interview you, then examine your books and records.
- The auditor will issue a proposal letter and give you an opportunity to respond.
- A reassessment (and bill) will be issued.
A tax audit is a civil matter, and you are required by the Income Tax Act to cooperate with the auditor and provide information to him or her. A tax investigation is another matter entirely. It is a criminal matter, and the target of the investigation is entitled to his or her Charter Rights such as the right to remain silent, the same as someone dealing with the police. If you are subject to a tax investigation, you should consult a lawyer.
The CRA has published a Declaration of Taxpayer Rights that affects you when dealing with CRA (except for tax investigations). This Declaration says you have the right to:
- Fair treatment
- Courtesy and consideration
- Privacy and confidentiality
- Bilingual service
- Information
- ntitlements
- Formal review
If you feel your have not received these rights, you have several possible recourses. The first level is to speak with the auditor and present explanations and further information. You can then speak to the auditor’s superiors, or you can appeal to the Appeals Division of CRA. You can appeal to the courts, all the way up to the Supreme Court, if required.
If you feel that your Charter Rights have been violated, you can take your complaint to the human rights commission (Federal Department of Justice).
No matter what the results of the reassessment, you should be prepared to negotiate and try to reduce or eliminate the adjustments. The tax system is so complex that an auditor can usually find adjustments in any tax return, but if you (or your accountant) can persuade the auditor early on that the potential adjustments are small, he or she may drop the audit.