Your business file is chosen for an audit by the Canadian Revenue Agency. What does this mean? What happens next? How can you ensure a successful audit? Read on to find answers.
What is a Tax Audit?
A tax audit is a detailed examination of a company’s records and books by the Canadian Revenue Agency (CRA). It’s intended to confirm that your records/books support your tax return. Audits ensure that the Canadian tax system is fair for all.
How is a Business Chosen for Audit?
11,328 small and medium-sized business audits occurred in 2020/2021. Files are chosen for audit based on a risk assessment; factors such as non-compliance with tax obligations, frequency of errors on tax returns, and comparison to similar files. If your company’s file is identified as high risk, a CRA officer reviews your information to determine whether the CRA should go forward with an audit.
What Issues Prompt an Audit?
The CRA may consider an audit due to any/all of the following:
- Multiple or repeated errors on your tax returns
- Expenses not in line with others in your industry
- Major changes in income or expenses
- Repeated losses
- Overly large charitable donations
- Under-reported earnings
- Discrepancies between GST returns and Tax returns
- Unsubstantiated home office deductions
- Missing information
- Shareholder loans that should be considered income
- A lifestyle incongruent with your declared income
- Real estate transactions
- Vehicle expenses
- Audit of a related party
- Informant tips
What Happens During an Audit?
A CRA auditor contacts your company via mail or phone and sets a date, location, and time for the audit. A review is held at your business location, accountant’s/representative’s office, or a Canadian Revenue Agency office. Your company is given the CRA agent’s contact information and informed of the scope of the upcoming audit. You’re asked to provide supporting documents for the review. The auditor copies your records/books and/or borrows your documents. The agent discusses any questions and addresses any concerns that arise during the audit.
Tips for a Successful Audit
The following suggestions help smooth the audit process.
- Provide all documents requested: This may include:
- Business records (ledgers, invoices, bank statements, receipts, journals, contracts, rental records)
- Personal records (mortgage documents, bank statements, credit card statements)
- Records of individuals related to the business (family members, spouses, corporations, partnerships, trusts)
- Records from your accountant that relate to the books and tax returns of your company
- Ensure books are accurate:
- Reconcile bank balances to ensure no mistakes have been made
- Review accounts
- Record every expense, categorizing expenses alongside cash flow tracking
- Save and organize your receipts
- Keep business and personal expenses separate
- Backup your data
- Use accounting software to increase accuracy and ease record-keeping
- Consider outsourcing your accounting
- Communicate with auditors: Keep auditors informed. Be courteous. Prep everything requested. Periodically request updates on the procedure. Ask questions for clarity.
- Make yourself available to assist, to answer questions, and to gather further information.
- Review the findings: Ask for an explanation of any changes. Go over these changes with your Chartered Professional Accountant. Decide if you are in agreement or whether you wish to challenge the findings.
- Challenge the findings: If you disagree with the assessment, contact the auditor and explain your concerns. Provide documents to support your position. If you are unable to resolve the disagreement, you may appeal.
Filing taxes for a business is a complex and complicated procedure. A Chartered Professional Accountant ensures your tax return is accurate/complete, you receive the deductions you’re entitled to, and the chances of your file being chosen for an audit are minimal.
Contact Cook and Company Accountants for all your tax needs. Whether you operate a sizable corporation with multiple subsidiaries or a sole proprietorship, we use our experience/expertise to make tax time a breeze. In the event of an audit, we’ll assist in dealing with the CRA. Contact us for a complimentary consultation.