By Pavel Tishchevskiy – www.777Taxes.com
Auditing allows the Canadian Revenue Agency (“CRA”) to monitor and inspect GST/HST and income tax returns, customs import documents, and payroll records. CRA has wide powers of inquiry and investigation under the Canadian Income Tax Act, including the power to demand records and information. A person who refuses to comply with the requirement to provide information is subject to prosecution under section 238 of the Tax Act.
In most cases CRA audit is a costly and time consuming experience, but it is not the end of the world. Below are some easy steps you should follow to survive it:
- If you receive a phone call from CRA, DON’T discuss anything with the CRA representative – ask him or her to send you a written request for information.
- Don’t panic if you receive a letter from the CRA. You didn’t do anything wrong; you just have to prove it.
- Don’t hide or ignore this letter, call us immediately.
- It is almost always a good idea to request an extension from CRA. This will let us put the whole case together.
- Know your rights. Read the CRA’s Taxpayers’ Bill of Rights, prior to your audit. Research tax legal issues by using free CRA publications and commercial tax guides.
- Identify your potential problems. These could include missing receipts, bank/credit cards statements, incomplete auto logs and so on.
- Make sure you have all the documents that support your tax return as filed. Try to organize all records the auditor might ask for before the audit.
- Have realistic expectations. Don’t expect to come out of the audit without owing something — the odds are against you (bad news). In some rare cases though your taxes could actually be decreased (good news). The latter normally happens where we uncover a tax-filing method, provision or receipts that have been missed or misinterpreted.
- Give the auditor no more information than he/she is entitled to, and don’t talk any more than is absolutely necessary.
- Don’t bring to an audit any documents that do not pertain to the year under audit or were not specifically requested by the audit notice.
- Stick to the facts. You know much more about your business than the CRA auditor does, and in most cases Judges understand that we do not have the benefit of hindsight when making business decisions.
- Negotiate. Ask the auditor about disallowances he/she is considering, and defend your position. Don’t try to negotiate the amount of taxes to be paid. Instead, negotiate tax issues — for example, whether a certain deduction should be allowed. Needless to say, our accountants know how to do that.
- Appeal the result if needed. When you get the proposal letter from the auditor (the 30 day letter), call the auditor if you don’t understand or agree with it. Meet with him/her to see if you can reach a compromise. If you can’t live with the audit result, you may appeal within the CRA or go on to Tax Court.
Now take a look at couple more interesting facts most Canadian taxpayers aren’t aware of:
- If you fail to file Canadian income tax returns the tax department may arbitrarily assess you, and you have the burden of disproving the arbitrary assessment. But even if you do file the return, CRA may still reassess the taxes payable arbitrarily – they are not legally bound to accept a return as filed by the taxpayer. By Law (Section 152(8) of the ITA) CRA’s assessment of your taxes will be accepted as fact, unless you decide to exercise your burden of proof and challenge their assumptions.
- If you fail to keep proper books and records CRA may do a net worth assessment, which looks at the increase in your assets over time and assesses income tax on that increase.
- Canada Revenue Agency employees do not have the right to enter taxpayer premises, home or business, without a search warrant. If they do show up a taxpayer does not have to admit them or speak to them. If they refuse to leave the police can be called to remove them.
- If you are assessed for income tax by the Canada Revenue Agency and do not pay the amount assessed or file a Notice of Objection, CRA can seize your assets, including your bank account, without a court order.
Once the Canada Revenue commences an investigation to look for evidence of tax evasion, the protections afforded by the Canadian Charter of Rights are applicable and CRA can no longer use its statutory audit and investigation powers such as the requirement to provide information set out in the Income Tax Act.
This article is written by Pavel Tishchevskiy, a founder of 777 Taxes Inc., the company pioneering the concept of Tax Coaching for Canadian small business owners. He is the author of numerous articles on financial topics and he also runs seminars and workshops on taxation issues. Pavel Tishchevskiy offers a free one-hour tax consulting meeting to our readers; he can be reached at firstname.lastname@example.org or by phone416-857-7570. You can also check the website www.777Taxes.com for more details.