A tax audit can be an intimidating and costly process. The Canada Revenue Agency (CRA) tax auditor will typically request books, records, and bank statements for review and may even ask you to complete questionnaires. Any inaccurate or incomplete information, even if due to an error, can be used against the taxpayer.
Engaging a tax professional or legal expert early in the process can significantly improve the outcome of the audit.
Tax Audit Process
When you are selected for an audit, the CRA will notify you of their intention to audit, typically outlining the preliminary information they require. This is the critical point where engaging legal representation is strongly recommended. Early legal intervention can help in dealing with potentially unreasonable demands or inaccurate assumptions by auditors.
If the CRA reassesses you unfavorably, you have the right to appeal by filing a Notice of Objection. This must be done within 90 days of receiving the reassessment. Legal representation at this stage is crucial to ensure your appeal is professionally prepared and your rights are fully exercised.
Why Taxpayers Are Audited
The CRA conducts over 350,000 audit and review actions annually for various reasons, including:
- Random Selection
- Third-party Tips
- Discrepancies Between Filed Returns and Third-party Information
- Past History of Non-compliance
Audits ensure compliance with tax laws, primarily the Income Tax Act and the Excise Tax Act for GST/HST purposes.
Common Audit Issues
Here are common reasons taxpayers may face reassessments after an audit:
- Overstated expenses or deductions
- Credits unsupported by proper receipts (e.g., charitable donations)
- Underreported income, including offshore income or assets
- Errors in reporting GST/HST input tax credits
Maintaining thorough and accurate records is the best defense against these challenges.
Tax Audit Case Studies
Case Study 1: Resolving Payroll Tax Issues for a Tech Startup
A Toronto-based tech startup was audited for discrepancies in payroll tax remittances. The CRA alleged underreported employee benefits and issued a reassessment with penalties exceeding $150,000. The company retained our tax law firm to review their payroll records and provide representation. We discovered discrepancies in how benefits were categorized and submitted a comprehensive argument to the CRA, supported by additional documentation. The penalties were significantly reduced, and a manageable payment arrangement was negotiated, enabling the company to continue its operations without disruption.
Case Study 2: Navigating Offshore Income Disclosure for a Consultant
Samantha, a management consultant based in Vancouver, maintained overseas investments generating income she hadn’t reported, assuming the income was exempt under the tax treaty. The CRA initiated an audit, raising concerns of potential penalties for non-disclosure. We stepped in, assessed the situation, and prepared a voluntary disclosure application. By leveraging treaty provisions and submitting evidence supporting her position, we avoided penalties and resolved the issue with no criminal implications.
Case Study 3: Reinstating Input Tax Credits for a Wholesale Distributor
John, a wholesale distributor in Calgary, faced an HST audit where the CRA denied over $500,000 in Input Tax Credits (ITCs), claiming insufficient documentation. Our team conducted a thorough review of his financial records, organized the supporting receipts, and built a detailed case. After several rounds of correspondence with the auditor and escalating the matter to the team leader, the CRA reinstated 95% of the denied ITCs, preserving the business’s cash flow and avoiding significant operational impacts.
Tax Assistance for Audits
If the CRA has initiated an audit or if you disagree with an audit’s outcome, consult our expert tax advisors immediately. Whether it’s defending your position during the audit or appealing a reassessment, professional representation ensures that your interests are protected and that all legal avenues are explored.
Conclusion
Tax audits require careful navigation, especially when dealing with complex tax situations. Engaging a tax expert early can mitigate risks, address CRA concerns effectively, and protect your financial interests.
Don’t face an audit alone—contact our professionals for assistance tailored to your unique tax situation.
This article is written for educational purposes.
Should you have any inquiries, please do not hesitate to contact us at (905) 836-8755, via email at [email protected], or by visiting our website at www.taxpartners.ca.
Tax Partners has been operational since 1981 and is recognized as one of the leading tax and accounting firms in North America. Contact us today for a FREE initial consultation appointment.
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