Tax audits are stressful. However, audits occur quite frequently and are part of the day-to-day workings of the Canada Revenue Agency (CRA) and other tax administrations such as Revenu Québec (RQ)1. With this in mind, we have put together a guide to help take the fear out of an audit and to help ensure that your business is ready if selected for a CRA audit.
What can the CRA audit?
Put simply, the CRA can selectively audit GST/HST and income tax returns, payroll records, and excise taxes and duties. For Canadian-controlled private corporations (CCPCs), the CRA generally has up to three years, from the time of issuing a notice of assessment regarding income tax and payroll for a taxation year, to go back and audit that specific year. For GST/HST purposes, they have up to four years to audit for that specific tax year. However, if a waiver for the particular year or period is provided, this timeframe can be extended. Should you sign such waiver, you should ensure you limit the scope of the waiver. We also recommend that you file a notice of revocation of the waiver to ensure that the year or period does not stay open after the conclusion of the audit.
How does the CRA select files for a business audit?
The conditions for audit selection are quite broad. According to the CRA, they look for “the potential for errors in tax returns or indications of non-compliance with tax obligations” in information they have on file. The CRA may even go so far as to compare that information to similar files or consider information from other audits or investigations. The CRA has a number of data scientists on staff who can compare your tax returns to other taxpayers in a similar business, and look for data in your tax return that is significantly different from comparable taxpayers. In addition, material changes in how you file your return from prior years could also trigger questions from the CRA. Once your organization is selected for an audit, BDO can help you understand what the CRA will most likely want to cover during the audit, which will help you to more effectively prepare.
What can you expect when your business is audited?
In most cases, the audit will take place on site at your business. In certain rare situations, the audit may be classified as an “office audit” and will be conducted at a CRA office. Office audits are usually limited to one or two items. In some cases, office audits can lead to a more comprehensive audit, depending on what the CRA finds. Therefore, it is important to take office audits seriously to prevent the scope of these audits from increasing.
At the outset of a business audit, the auditor will show you their identification card, give you their contact information, and explain the scope of the audit. They will also identify the tax years or reporting periods that will be audited as well as the documents and information the CRA wants you to provide.
It is important to be informed and ask for clarification from the auditor where needed. Before the auditor begins the audit, make sure you know exactly what they are auditing and why. It is also good to get the contact details for the auditor's supervisor should you need to involve them at a later time. You should also provide only the documents they need and nothing more. Under no circumstance can an auditor request you to prepare a document that does not exist. If during the course of the audit the auditor asks for documents that weren't originally requested, you should ask why they want to see them. Understand your rights as a taxpayer and don't be afraid to assert yourself where appropriate. For example, if an auditor's request would require an extensive amount of time to compile the requested documents, you can address this concern with the auditor. The CRA has committed to take into account the cost of compliance when administering tax legislation.
Before beginning the audit, the auditor will likely take the opportunity to first explain the audit process, learn about your business, tour your business premises, and ask to see your books and records.
Worried? Don't be. Your BDO advisor will be with you every step of the way. The earlier you notify us of the CRA's request for an audit, the better equipped we can be to help. In addition, talking to us before providing the CRA with any records or answering any questions will also better position us to help you prepare for the audit process. BDO also has a Tax Controversy and Dispute Resolution Team that can assist, particularly if the audit becomes difficult.
What is the CRA auditor allowed to examine?
In a nutshell, a lot and likely more than you would expect. As a business owner, you may be surprised to learn that your personal records and the personal or business records of other individuals or entities are legally considered to be part of the items that relate, or may relate, to the business being audited. This means that an auditor can examine the records of you and your family members as part of your business' audit.
Here's what the CRA auditor can ask to see:
- previously filed tax returns, credit bureau searches, or property database information;
- your business records (such as ledgers, journals, invoices, receipts, contracts, and bank statements). The CRA will usually asked for a copy of these records in a digital format;
- your personal records (such as bank statements, mortgage documents, and credit card statements);
- the personal or business records of other individuals or entities not being audited (for example, a spouse, family members, corporations, partnerships, or a trust [settlor, beneficiary, and trustee]); and
- adjustments made by your bookkeeper or accountant to arrive at income for tax purposes.
The only documents the CRA cannot access are those that are protected by solicitor-client privilege.
When the audit is completed, there should be no surprises. In the course of the audit, you have the right to receive complete, accurate, clear, and timely information. We recommend that during the audit, you regularly communicate with the auditor to learn about any findings they may have that could lead to an adjustment to your tax returns. This will allow you to respond more effectively to the findings should you disagree with them, by providing additional information to support how your return was prepared, or to escalate an issue to the auditor's supervisor, if you disagree with a position taken by the auditor. Once everything had been addressed, if the auditor concludes that your previous assessment is correct, you will receive a completion letter and the audit will be closed. If the auditor concludes that your return has to be reassessed, you will receive a proposal letter explaining the reason for the reassessment. In most cases, you will have 30 days to respond 2. The CRA will consider the explanations and responses you provide before finalizing the audit. Where an adjustment is made to your return, the CRA will issue a notice of reassessment to you.
If an adjustment results in an increase in the balance of tax that you owe, the CRA should provide an estimate of the amount before a reassessment is issued. If you disagree with the notice of reassessment, you have the right to object to it by filing a notice of objection. In most cases, businesses must serve the notice of objection within 90 days of the notice of reassessment being sent. If you need an extension, you must submit the application within one year from the date on which the 90-day objection period ended along with a letter explaining the reasons that prevented you from filing the objection within the 90-day period.
The filing of a notice of objection will suspend the collection of any income tax amount owing to the CRA as a result of the audit, but not of a GST/HST amount owing. However, larger corporations will have to pay 50% of the amount owing even if an objection is filed. In many cases, it is prudent to pay the amount owing to prevent interest from accumulating.
What can you do to prepare your business for an audit?
- Maintain good records: Have the receipts and documentation to support your claims ready in case your business is selected for review. You are required to keep your records, supporting documents, and financial information for at least six years. If you keep electronic records, you must retain them in an “electronically readable format” for the same timeframe. Certain records, such as your general ledger or directors' minutes for a corporation, must be kept longer. Well-kept records may reduce the time required to complete the audit.
- Be knowledgeable and ask questions: Before the auditor begins the audit, confirm what taxation years are under review and what records will be required. This will help ensure you have everything ready when the auditor arrives.
- Know your rights: As discussed above, do not give the auditor free reign over your files. Understand your rights as a taxpayer and do not hesitate to exercise them, when necessary. The Taxpayer Bill of Rights is outlined on the CRA website. You are also entitled to file a complaint with the CRA complaint services should you feel your rights have not been respected.
- Understand the information you are providing: Carefully review all information provided to the CRA, and ensure that you are not providing more information than requested. Make a copy of everything you give them because if an issue arises later, you should know what they know.
- Be courteous and professional: It is important to cooperate with the CRA and provide them with the information they request, as long as the request is legitimate. Creating a rapport and responding promptly and professionally may make the process smoother.
- Put your responses in writing: If the auditor asks complicated questions that require judgment, give those responses to the CRA in writing to create a record of your response.
- If you do have sensitive records subject to solicitor-client privilege, assert privilege.
You need to improve your tax planning strategies, we're here
Tax audits are a fact of life for any business, regardless of size or structure. An unfortunate fact, but a fact just the same. So don't be afraid - be prepared. Take comfort in knowing your BDO advisor, supported by our Tax Controversy and Dispute Resolution Team, will be actively involved in the process and will provide the help you need. We can help you understand the auditor's questions and recommendations, and can assist with the negotiation process. We can also assist you if you need to file a notice of objection.
Christiane Maurice, Senior Manager, Indirect Tax Controversy Services
1 For simplicity, we will refer to the CRA only. However, please note that the process is similar for audits conducted by other tax administrations, including those conducted by RQ.
2 For audits by RQ, you will only get 21 days to respond, subject to being granted an extension upon request.
The information in this publication is current as of June 10, 2022.
This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.