The Canada Revenue Agency (CRA) administers tax laws and various benefit programs for the Government of Canada and on behalf of several provinces and territories. The CRA auditing process is aimed at maintaining public confidence in the fairness and integrity of Canada’s tax system. During an audit, the CRA carefully examines the books and records of an individual taxpayer or a business to confirm whether they are fulfilling their tax obligations, following tax laws correctly, and receiving the benefits and refunds to which they are entitled.
How does the CRA choose who to audit?
The CRA will review tax returns at random, at which point you may receive either a Notice of Assessment outlining what is owed or the CRA may opt to audit. The CRA will choose a file (an individual or a business) to audit for a variety of reasons related to a risk assessment of that file. The assessment looks at several factors, such as the likelihood or frequency of errors in tax returns or whether there are indications of non-compliance with tax obligations. Also, the CRA examines the information it has on file and may compare that information to similar files, or information from other audits and investigations. Anybody can be audited; however, the CRA will more likely choose a file if there are certain ‘red flags.’ Red flags, such as large revenue discrepancies year-over-year, large HST claims, or unusually low income reported compared to other similar files.
What happens first?
The audit process begins when the CRA advises you by letter, phone, or both, that you have been selected for an audit. The CRA will specify the date, time, and location of the audit. Typically, an on-site audit takes place at your residence, your place of business, or at your representative’s office. If an audit is not done on-site, it will take place at a CRA office. If you are assigned an auditor who is located outside your region, they will ask you to bring or send any supporting documents required for the audit. With the notice, the auditor will outline what information they will require from you; however, it is always best practice to maintain records.
Wherever an audit takes place, the auditor may need to make copies of your electronic records or borrow some of your documents. The auditor will give you a detailed receipt for any borrowed documents and return them as soon as possible. Auditors are not allowed to receive records by email because the information sent this way may not be secure; the CRA will provide information about how you can send documents online using the CRA’s secure services.
What will be audited?
An auditor will examine books and records, documents, and information. More specifically:
- The information available to the CRA – filed tax returns, credit history, and property details.
- Business records – ledgers, journals, invoices, receipts, contracts, rental records, and bank statements.
- Your personal records – bank statements, mortgage documents, and credit card statements.
- Adjustments made by your bookkeeper or accountant for tax purposes.
- Personal or business records of other individuals or entities who, according to the CRA, relate to a tax return being audited. For example, the records of family members or an auditor may ask the employees who do your accounting entries about your business operations.
During an audit, the auditor may find issues and discuss them with you. You can also raise concerns with the auditor at any time.
What are your (taxpayer) responsibilities?
By law, you have to keep adequate books and records to determine your tax obligations and your entitlements. Generally, books and records must be kept for a minimum of six years.
If you use a computer for your accounting records, you must keep your books and records in an electronically readable format, even if you also keep them on paper. Using the services of a tax professional does not relieve you of your responsibilities.
For an audit, you must make available to the auditor all of your relevant records (both paper and electronic) and supporting documents, and provide complete and timely explanations to the auditor’s questions. Failure to provide required books and records is an offence under the law.
What happens after the audit?
After the auditor examines the information above, one of three things may happen:
- Correct assessment– If the auditor finds that your previous assessment is correct, nothing more has to be done. You will receive a completion letter, and the audit will be closed.
- More taxes owed(reassessment) – an adjustment resulting in more tax owing will be made, and you will have to pay the balance due. The auditor can give you an estimate of the amount before the CRA issues a notice of assessment or notice of reassessment.
- Issue of a refund(reassessment) – an adjustment resulting in less tax owing will be made, and you will be entitled to a refund.
What happens if you disagree?
Following an audit, you will receive a proposal letter explaining the reason for the reassessment. You will have 30 days to agree or disagree with the proposal.
The CRA encourages you to contact the auditor to explain why you disagree and provide any other documents that support your position. The auditor will carefully consider your explanations and respond to your questions about the proposal. If an issue is not resolved, you can contact the auditor’s team leader to discuss it. The team leader’s contact information is included in all correspondence sent to you by the auditor.
If you do not agree with a reassessment even after contact with your auditor, you have the right to appeal it – you will have 90 days to file an appeal with the Tax Court of Canada.
Your rights as a taxpayer
The Taxpayer Bill of Rights outlines 16 rights that you have as a taxpayer in your relationship with the CRA. These rights confirm the CRA’s commitment to serving you with a high degree of accuracy, professionalism, courtesy, and fairness. To make sure the interactions of a small business with the CRA are as effective and efficient as possible, the Taxpayer Bill of Rights also includes the Commitment to Small Businesses.
Under the Taxpayer Bill of Rights, you have the right to file a complaint if you are not satisfied with the service you receive from the CRA.
Under the Privacy Act, individuals have the right to access, request correction of personal information, and file a complaint to the Privacy Commissioner of Canada regarding the institution’s handling of the individual’s personal information.