How to Get Through a Tax Audit With Ease

What is the CRA?

The CRA, or the Canada Revenue Agency, is a federal department that collects taxes and administers tax laws for the Government of Canada and for most provinces (except for Quebec) and territories. 

The CRA is primarily responsible for collecting taxes, administering tax credits and benefits, and enforcing compliance with tax laws. Overall, the CRA’s goal is to ensure everyone pays their fair share of taxes. 

What is a CRA audit?

A CRA audit is a tax assessment where the CRA reviews your financial records to confirm you are:

• fulfilling your tax obligations
• following tax laws 
• receiving the eligible benefits and refunds

A tax audit begins with the CRA contacting you by mail and/or phone to arrange the audit’s date, time, and location. An on-site audit usually takes place at your home, business, or your representative’s office. Alternatively, the audit can happen at a CRA office, possibly with an auditor from another location. 

Regardless of the location, the auditor may make copies of electronic records or borrow your documents. You’ll get a receipt for these loaned materials and receive them back when the audit is complete.

What triggers a CRA audit?

The CRA uses a risk assessment system to pick files for audits. In this assessment, the agency checks the information they already have about you for anything unusual—like if you claimed an unusually high number of credits and deductions.

The CRA might also compare your current filing to other similar cases or information from your past returns. If your previous returns had problems or if you work in an industry known for tax issues, you might be more likely to get audited.

While the CRA follows this risk assessment system to select both individual and business files, the risk of audit is typically higher for business owners. Let’s look at the common triggers for CRA business audits:

1. Claiming unreasonable expenses compared to revenue or industry norms. For instance, $20,000 in car expenses on $60,000 in sales can trigger an audit.
2. Using rounded-off numbers on tax returns, such as $2,500 instead of $2,486.32, suggests imprecise record-keeping and increases audit risk.
3. Operating in high-risk sectors like restaurants, construction, and retail are more likely to be audited due to higher cash transaction risks.
4. Overpaying salaries to family members above market rates can prompt an audit to verify the legitimacy of the payments.
5. Reporting losses for multiple years can attract an audit to investigate the sustainability and legitimacy of the business operations.

It’s worth noting that sometimes the chances of getting audited by the CRA are random—just to ensure you’ve been following the rules fairly.

What does the CRA examine in an audit?

The auditor generally examines the following records:

1. Tax slips filed with your tax return, such as T4 slips, T5, T2125, T776, and more
2. Business records such as ledgers, invoices, contracts, receipts, and bank statements
3. Personal records like bank statements, mortgage documents, and credit card statements
4. Records of other individuals or entities such as spouses, family members, corporations, partnerships, or trusts
5. Adjustments made by a bookkeeper or accountant for tax purposes

The CRA recommends keeping all these records for at least 6 years. If you are missing some documents, you need to contact the parties who created them, like banks or suppliers, to get copies. You can also consult an accountant or bookkeeper who might help you retrieve the records or suggest alternative documentation to satisfy the CRA’s requirements.

If you still can’t get hold of the records, talk to the auditor or their team leader to figure out other ways to confirm the amounts on your tax return.  You can find the team leader’s contact information in all the correspondence you receive from the auditor. 

Does the CRA audit your bank account?

Yes, during a tax audit, the agency can audit your bank account, accessing certain bank records to verify the income and expenses you reported while filing your tax return. This information may include bank statements, account balances, and transaction details.

The CRA is required to handle this information confidentially and use it only for purposes authorized by the law.

How far back can the CRA audit?

For most taxpayers, the CRA can assess a return within 3 years from the date it sent the original notice of assessment (NOA). This means that the CRA can audit your tax returns for any of the past 3 years.

The CRA audit time limit can extend to 4 years if you fail to report more than 25% of your income on the tax return. 

If the agency believes that you’re involved in fraud or misrepresentation, there is no limitation on the assessment period. In such cases, they can audit your tax returns for any past year.

What are your rights and responsibilities?

You have certain rights and responsibilities to ensure fairness and transparency during a tax audit. Let’s take a closer look. 

Your rights

The Taxpayer Bill of Rights guarantees 16 rights that you’re entitled to receive when working with the CRA. These rights ensure the CRA serves you accurately, professionally, courteously, and fairly. The Taxpayer Bill of Rights also includes 5 additional commitments to small businesses to make your CRA business audit effective and efficient.

Besides these rights, there is a separate federal law—the Privacy Act—that safeguards how the CRA handles your personal information. This Act gives you the rights to:

• Access the information that the CRA holds
• Request corrections of personal information
• File a complaint with the privacy commissioner of Canada

Your responsibilities

You must cooperate with the CRA auditor by providing accurate information and answering their questions truthfully and to the best of your ability.

You need to maintain accurate books and records of your tax obligations for at least 6 years. If you use a computer for your accounting records, you must keep your records in an electronically readable format. Failure to provide the required documents is an offense under the law.

How to send your records online to the CRA

Due to security concerns, you cannot send your records to the auditors by email. You can instead send your records online to the CRA by following these steps:

1. Log in to the relevant CRA online portal (My Account, My Business Account, or Represent a Client) using your login credentials.
2. Look for the option to “Submit documents.” You can either follow the instructions using your case/reference number or select the applicable task under the “I do not have a case or reference number” link.
3. After submission, you’ll receive a confirmation number and a reference number. Keep these numbers safe for future reference.
4. If you have more documents to include later, you can use the same case or reference number at any time.

What are the potential outcomes of the audit?

After the assessment is complete, you’ll receive a final letter with one of the following outcomes:

1. No adjustments—If the auditor determines that your tax return is accurate and complies with tax laws, they’ll conclude the audit with no changes to your return and you’ll receive a completion letter.
2. More taxes owed—If the adjustment requires you to pay additional taxes, the auditor provides an estimated amount before the CRA issues a notice of reassessment. You can avoid interest charges by paying this amount right away.
3. Refund—The assessment could also find that you owe less tax than you paid, making you eligible for a refund from the CRA.

What if you don’t agree with a reassessment?

If you disagree with a reassessment resulting from an audit, here’s what you can do:

1. Contact the auditor or their team leader: Reach out to the auditor and explain your reasons for disagreeing and provide any additional information or documentation that supports your position.
   If you’re still unable to resolve the issue, you can escalate the matter to the auditor’s team leader. Look for their contact details in any communications you receive from the auditor. 
2. Raise formal objection: If you’re still unsatisfied with the outcome after speaking with the auditor and their team leader, you have the right to file a formal notice of objection. You have 90 days from the date of the notice of reassessment to file an objection.
3. Appeal to the Tax Court of Canada: If the objection is denied or not resolved to your satisfaction, you can appeal to the Tax Court of Canada. You’ll need to provide evidence to support your position during the appeals process.

Top CRA audit tips

If the CRA contacts you about an audit, their initial request is often part of a “verification” process to ensure you provided legitimate information when you filed your tax return.

If you receive a notice, there are a few key things to keep in mind:

1. Taking a systematic approach to answering requests and having a cooperative attitude about the process can reduce the challenges of the audit.
2. Responding promptly.
3. Staying respectful and courteous when speaking with your auditor but asking questions if you’re unsure. There might be something you claimed that you shouldn’t have and there also might be things you didn’t claim that you should have.