Help! I’m Being Audited

Here’s what to do if the CRA wants to look at your books.

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There’s one word that no tax-paying Canadian wants to hear: audit. Most people think of an audit as painstaking work that results in a big tax bill at the end, but if you know what you may be getting into in advance, then it doesn’t need to be something to fear. Here’s what you need to know.

What triggers an audit?

There are many factors that can trigger an audit. But essentially, a change in reporting is the main attention-grabber.

For small business owners, contractors or freelancers, big swings in revenue or expenses – it could be a large increase in one year and big drop the next – or a company’s gross margins being different than others in an industry, or a low rate of GST collected compared to revenues generated, can all raise a red flag with the Canada Revenue Agency (CRA).

“Anything that is not generally consistent may be an audit trigger – though there’s no guaranteed audit trigger,” says Sheryl Troup, Director, Tax & Estate Planning with Investors Group.

With individual Canadians, something as simple as claiming a specific deduction for the very first time may cause an audit. However, Troup points out that no one specific new deduction will cause an audit and the CRA doesn’t provide any guidance on what might force one to happen.

In many cases, audit selection is completely random, she says. It’s used as a way to keep our self-reporting tax system honest.

You’ve been chosen for an audit. Now what?

If you’ve been chosen for an audit, you’ll receive a letter from the CRA telling you what they are looking at and what taxation years are being reviewed.

The audit process often begins with a personal interview between you and the auditor representing the CRA. “Be open and honest,” says Troup. “Hostility will get you nowhere. Often the auditor is there to do their checks and balances, and they will leave without any changes.”

Troup adds that while the CRA does have the ability to request documents from you, such as books and records, invoices, bank statements and more, offering up information that has not been requested is not required. Only provide them with what they requested, and nothing more.

Audits are just part of our tax system – no one’s out to get you. Prepare your tax returns regularly and honestly, and you should have nothing to fear if the CRA does want to double-check what you submitted.

You can also refer the CRA to your authorized representative, typically your lawyer or accountant, who can act on your behalf and deal directly with them. “This is standard practice,” says Troup. “It does not signal to the CRA that you are hiding anything.”

Depending on the complexity of your books, an audit can take a few weeks or a few years. If you do owe money at the end, the payment will be calculated at your prescribed income tax rate with a 5% interest rate compounded daily. In rare cases, your tax bill may get lowered. You may also end up not owing anything at all.

Don’t take an audit personally

Audits are just part of our tax system – no one’s out to get you. Prepare your tax returns regularly and honestly, and you should have nothing to fear if the CRA does want to double-check what you submitted.

“Audits are less painful if you maintain good books and records,” says Troup. “Justify the positions you’ve taken, and work cooperatively with the auditor. Follow those steps, and the experience of being audited should be a smooth one.”

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