As a Tax Accountant, I believe that it is my responsibility to reduce the chances of my clients being audited.
In fact, being audited can be overwhelming and it is definitely something you’d want to avoid. In this article, I explain, Why CRA audits? and What a tax audit is?
Why does CRA audit?
Canada Revenue Agency (CRA) is responsible for administering tax and benefit programs for all Canadians. In order to ensure that the tax system is fair for everyone and that all Canadians receive the benefits and amounts that they are eligible for, the CRA audits businesses that may not have calculated their taxes correctly. In fact, the Canadian tax system relies on self-assessment. This means individuals register their business as applicable and at the end of the year or at the end of the reporting period, individuals calculate their own taxes and submit a tax return to the CRA along with any payments required. So the auditing is one way to ensure that businesses fulfill their obligations and receive any amounts and benefits that they are eligible for.
What is a tax audit?
When CRA receives a tax return it typically goes through an initial processing that checks basic information and calculates the information. From this initial processing, you receive a notice of assessment.
A tax audit, on the other hand is a more detailed examination of your books and records. Records are financial documents that sum up your transactions and include documents to support these transactions. A tax audit is conducted after you’ve received your notice of assessment to find out if you’ve calculated your taxes correctly.
While undergoing a tax audit, the CRA first reviews the income and expenses you’ve reported. GST registrants might be more familiar with the terms supplies and input tax credits.
Next, the CRA may compare the income and expenses you’ve reported with other sources they have on file in order to affirm that you’ve followed the tax laws and that your calculations are accurate.
During this time, CRA also checks to see that you’ve reported revenues from all sources and that the expenses you claimed are deductible and supported by receipts. For GST/HST audits, CRA ensures that GST/HST is collected and reported on all taxable supplies, that you are entitled to the input tax credits you’ve claimed and that you have receipts to support your claims.
Finally, at the end of the audit, CRA will send you a letter and affirm one of three things.
1) that the previous Notice of Assessment was correct and nothing more needs to be done, or 2) that an adjustment needs to be made in more tax (reassessment) and you will have to pay the balance owing or 3) that an adjustment needs to be made, resulting in less tax (reassessment) and you will qualify for a refund. In most cases, audits result in a reassessment with mores taxes being owed to the Government of Canada.
If the adjustment results in more taxes being owed, the auditor can provide you with an approximation of the balance owing before the CRA issues a notice of assessment or notice of reassessment. This will give you the chance to prevent more interest charges from accruing by paying all or part of what you owe immediately. For more information, go to Make a payment to the Canada Revenue Agency.
I believe that a good Tax Accountant reminds clients of their responsibilities and requirements as tax-paying citizens. Businesses are obligated to to meet registration, reporting, filing and payment responsibilities which are written under the CRA laws.
Specifically, this means that you must keep your books and records up to date and generally for six years from the day that you file your tax return. You must also keep your books and records in an accessible and readable format either on paper or electronically. Lastly, you must also provide your books and records and supporting documents to the auditor upon request. All these steps will help reduce the chances that you will be audited and help ensure that you report your taxes correctly.
If you require additional consultation or a tax planning strategy, please do not hesitate to contact us.
Polina Presman, CPA, CA
Shani Marzin, CPA, CA
S&P Accounting Services LLP
2727 Steeles Ave. W. Suite 300
North York, ON, M3J 3G9