A tax audit is a detailed examination of a business’ books and records by the Canadian Revenue Agency (CRA). It’s conducted after you’ve received a notice of assessment and is intended to check that your records support your tax return. Audits are meant to ensure that the Canadian tax system is fair for all.
How does the CRA choose a file for audit?
From 2017 to 2019 an average of 5,900 audits of small businesses and 1,800 audits of medium-sized businesses were undertaken each year. These files are chosen for audit based on a risk assessment; factors such as frequency of errors on tax returns, indication of non-compliance with tax obligations and comparison to similar files. If your file is identified as high risk, a CRA officer will review information from a variety of sources to determine whether they should go forward with an audit.
What are the most common issues that prompt an audit?
For small and medium sized businesses the CRA may consider an audit if they discover:
- Multiple or repeated errors on your tax returns
- Major changes in income or expenses
- Repeated losses
- Expenses not in line with others in your industry
- Under-reported earnings
- Over large charitable donations
- Unsubstantiated home office deductions
- Discrepancies between GST returns and Tax returns
- Shareholder loans that should be considered income
- Missing information
- Audit of a related party
- A lifestyle incongruent with your declared income
- Real estate transactions
- Vehicle expenses
- Informant tips
What is the procedure for an audit?
A CRA auditor will contact you by mail or phone and set a date, time and location for the audit. A review may be held at your place of business, your representative’s/accountant’s office or at a CRA office. You’ll receive the agent’s contact information and be informed of the scope of the audit. You’ll be asked to provide supporting documents for the review. The auditor may make copies of your records and/or borrow some of your documents. The agent will discuss with you any questions that arise during the audit and address your concerns.
What documents are required for an audit?
The documents requested may include:
- Business records (ledgers, journals, invoices, receipts, contracts, rental records, bank statements)
- Personal records (bank statements, mortgage documents, credit card statements)
- Records of other individuals related to the business (spouse, family members, corporations, partnerships, trusts)
- Records from your accountant that relate to the books, records and tax returns of your business
What happens when the audit is complete?
- The auditor will prepare a schedule of proposed adjustments to your tax assessment including detailed calculations and explanations
- The agent will hear and discuss your explanations before closing the audit
- You’ll receive a letter explaining the results of the audit
- If changes are made, you’ll receive an amended notice of assessment
What do I do if I disagree with the results of the audit?
If you disagree with the reassessment, contact the auditor, explain your concerns and provide documents to support your position. If you are not able to resolve the disagreement, you have the right to appeal.
Filing taxes for a small or medium sized business is a complicated procedure. A CPA will ensure your tax return is complete and accurate, reduce the chances of your file being chosen for an audit and ensure you’re rewarded the deductions you’re entitled.
For all your tax needs contact Cook and Company Accountants. Whether you operate a sole proprietorship or a sizable corporation with multiple subsidiaries, Cook and Company uses their experience and expertise to make tax time a breeze. We will assist in dealing with the CRA in the event of an audit. Contact us for a complimentary consultation.