Tax Audit Survival: How to Understand, Prepare, and Avoid CRA Audits

Nobody likes being audited. It takes a lot of time and is stressful. However, audits don’t have to be frightening. You can easily handle tax audits in Canada if you are prepared and knowledgeable.

As a Canadian taxpayer facing an audit, this page will provide all the information you require, from an explanation of the various audit types to detailed instructions on how to proceed with the audit. To reduce interruption and avoid recurring audits, you will also learn proactive tactics to use during and after an audit.

The Canada Revenue Agency (CRA) examines a taxpayer’s financial records and tax returnsas part of a tax audit to confirm reporting conformity. The CRA also ensures that taxpayers accurately declare their income, take the appropriate deductions, and generally abide by the tax code. In writing, the CRA will notify taxpayers which tax years and items they plan to review if they are chosen for an audit. After that, auditors ask for pertinent records to back up the data on tax returns.

Basics of Tax Audits in Canada

For the benefit of the Government of Canada and some provinces and territories, the Canada Revenue Agency or CRA oversees the administration of tax legislation and other benefit programs. A significant component of the CRA’s array of initiatives to ensure that the tax system is equitable for all is auditing. The CRA carefully reviews a taxpayer’s books and records during an audit to verify that they are meeting their tax obligations, appropriately adhering to tax rules, and getting the advantages and refunds to which they are legally entitled.

The majority of Canadian taxpayers abide by the tax regulations. In addition to assisting these taxpayers in better understanding and fulfilling their responsibilities, the CRA’s auditing procedures support the preservation of public trust in the integrity and fairness of Canada’s tax system.

Who is Most Likely to Get Audited?

In Canada, working for yourself raises your risk of being audited. The “high-risk” taxpayers are the focus of the Canada Revenue Agency’s (CRA) attention, whereas “low-risk” taxpayers are typically audited less frequently. Self-employed people are more likely to be audited for several reasons, including:

  • No tax withheld at source: Unlike T4 workers, self-employed taxpayers do not have taxes automatically withheld from their paychecks. This implies that they rely entirely on self-assessment for their income tax reporting. Any mistakes or omissions are more likely to trigger an audit.
  • Increased chance of inaccurate reporting: Self-employed taxes are typically more complicated due to many revenue sources and allowable business cost deductions. For auditors, missing invoices, shoddy record-keeping, or dubious assertions of company expenses might raise red flags.
  • Prior problems: The CRA may place a self-employed taxpayer on a “watch list” for upcoming audits if the taxpayer has a history of aggressive tax planning or reporting errors.

Therefore, although anyone could be audited, self-employed people are typically subject to more scrutiny because of the increased likelihood of non-compliance, whether deliberate or inadvertent. Careful tax documentation must be kept to reduce the chance of an audit.

How Long Does an Audit Take?

An audit’s completion time is determined by several factors, including:

  • The condition of the documents
  • The audit’s scope
  • possible hold-ups brought on by missing paperwork and speaking with additional CRA tax experts

An audit will take less time if you keep good records and cooperate with the auditor. Delays may occur if required records are not produced or are difficult to locate. You must attempt to obtain copies from the people who produced the records, such as suppliers or financial institutions if you no longer have them.  You can speak with the auditor or the auditor’s team leader about this if you are unable to obtain the records, and they will work with you to find a solution to verify the numbers on your return.

Types of Tax Audits

In Canada, there are three primary categories of tax audits:

  • Mail audits: A letter asking for supporting documentation for specific entries or claims on your tax return is sent by the CRA. This is also the most popular and least intrusive kind of audit.
  • Office audits: You present supporting paperwork for your tax return to a CRA auditor in person at a nearby tax office. The auditor can now ask clarifying questions as a result.
  • Field audits: To perform a thorough examination of your financial records, a CRA auditor comes to your residence or place of business. This kind of examination is the most thorough.

A tax audit does not always indicate that you committed fraud or made a mistake. Returns are occasionally chosen at random or just because anything seems out of the ordinary. Cooperate completely by supplying accurate and comprehensive records, regardless of the type of audit. To have someone prepare your paperwork and communicate with the CRA on your behalf, think about hiring a tax expert. Remain composed and keep in mind that the main goal of audits is to encourage tax compliance, not to target individuals.

 

What Happens During the Audit?

Books, documents, and information—collectively referred to as records—will all be examined by an auditor. These consist of the following:

  • Data that the CRA has access to, including credit history, submitted tax filings, and property information
  • on your company’s documents (including bank statements, journals, ledgers, receipts, invoices, contracts, and rental records).
  • Your private documents, including credit card statements, bank statements, and mortgage documents
  • records of other people or organizations that are not being audited, such as corporations,  family members, spouses, partnerships, common-law partners, or trusts [settlor, beneficiary, and trustee]
  • modifications made for tax purposes by your accountant or bookkeeper

The auditor may identify problems during an audit and talk to you about them. At any moment, you can also voice your concerns to the auditor. Following the auditor’s review of the submitted records, several things may occur:

  • Accurate assessment: Nothing further needs to be done if the auditor determines that your earlier evaluation was accurate. The audit will be closed and you get a completion letter.
  • Refund or further taxes due: You will receive a proposal letter outlining the rationale for the reassessment if the auditor determines that your return needs to be reevaluated, which might result in either a refund or additional taxes due. You have 30 days to decide whether or not to accept the proposition.

You can discuss a problem with the auditor’s team leader if it hasn’t been fixed. Every email the auditor sends you includes the team leader’s contact details.

What Happens When the Audit is Finished?

You will receive a final letter after an audit, and one of the following will take place:

  • There will be no changes made to your prior assessment; if there are changes that result in a higher tax liability (reassessment), you will be required to pay the remaining amount; or if there are changes that result in a lower tax liability (reassessment), you will be eligible for reimbursement.
  • Before the CRA sends you a note of assessment or a note of reassessment, the auditor can estimate the amount of tax that will be due if an adjustment results in a higher tax liability. By paying all or a portion of what you owe now rather than waiting for a notification, you will have the chance to avoid interest costs.

4 Ways to Prevent a Tax Audit

There are a few things you can do to reduce the likelihood of a tax audit, even though you can’t completely prevent one. These consist of:

  • Keep thorough and accurate records: Maintaining thorough and accurate records of your earnings and outlays will help guarantee the accuracy of yourtax returns and lower the possibility of mistakes or inconsistencies.
  • Make use of automated accounting software: Automated accounting software like Quickbooks or Xero can streamline the process of keeping records and lower the possibility of mistakes. 
  • Verify your GST responsibilities: Make sure you comprehend and abide by GST regulations and laws if you are registered for them.
  • Examine your tax returns: Make sure all the information is correct and complete by carefully reviewing your tax forms before filing them.

You may prevent the stress and the financial repercussions of a tax audit by being proactive in reducing your risk of being audited.

File With Confidence with Clearwealth

A necessary part of managing a corporation is navigating tax audits and assessments. Businesses may reduce the stress of audits by keeping well-organized documents, being aware of potential red flags and triggers for tax audits, and creating a strong tax audit checklist. In the event of an audit, keep in mind that knowing your rights, comprehending the procedure, and reacting quickly to alerts can all have a significant impact. For any firm hoping to be successful and compliant, it is essential to comprehend the nuances of tax audits and how they relate to the larger structure of Canadian business taxation. With Clearwealth, you can now get guidance and responses along the way. Clearwealth’s highly qualified team of accountants is ready to assist you with tax audits, bookkeeping, tax planning, and much more. Do not worry about your financial affairs getting in the way of your growth – contact us right now to set up a consultation meeting. Call Clearwealth at  (437) 290-5117 or email us at info@clearwealth.tax and make your financial future secure!