In the CRA’s own words,”being audited can be overwhelming.” Millards Chartered Professional Accountants has extensive experience guiding clients through the auditing process. In this three part series of articles, we’ll explain everything you need about audits to know including your responsibilities, what happens during an audit and perhaps most importantly, the rights guaranteed to you by the Government of Canada.
We’ll also be sharing some videos produced by the Canadian Revenue Agency that outline the audit process and answer many of the basic questions surrounding audits in Canada.
So why are audits required?
Brad Sinclair
CPA, CA & Partner
Millards Chartered Professional Accountants
Brad Sinclair, CPA, CA and Partner at Millards Chartered Professional Accountants in Brantford says that audits are necessary because the Canadian tax system is based on self-assessment.
“That means that people are responsible for calculating their own taxes at the end of the year or a reporting period and submitting a tax return to the CRA along with any payments required. An audit is one method that the CRA use to confirm that the submitter is following the rules. Audits may cause anxiety but in the end they are an attempt to keep the tax system fair for all Canadians.”
Tax audits ensure that individuals and businesses are applying the tax laws correctly. To make sure they have calculated their taxes properly, the CRA selects files for tax audits. It’s one way of making sure that businesses fulfill their obligations and receive any amounts they are entitled to.
What is a tax audit?
When you submit a tax return, the CRA goes through an initial process that checks basic information and calculations. Based on their findings, you receive a notice of assessment.
“A tax audit is a more detailed examination of your books and records. It’s conducted after you’ve received your notice of assessment to find out if you’ve calculated your taxes correctly.”
The CRA advises you by letter that you have been selected for an audit and they specify the scope of the audit.
First the CRA reviews the income and expenses you’ve reported. GST registrants might be more familiar with the terms “taxable supplies” and “input tax credits.” After that they may compare the amounts with other sources they have on file to confirm that you’ve followed the tax laws and that your calculations are accurate.
“The CRA also make sure that you’ve reported revenues from all sources and that the expenses you claimed are deductible and supported by receipts. For GST/HST audits they make sure that GST/HST is collected and reported on all taxable supplies and that the input tax credits you claimed are eligible and also supported by receipts.”
At the end of the audit, the CRA confirm one of three things. That the previous assessment was correct and nothing more has to be done, that you have to pay additional taxes, or that you are entitled to a refund.
“Statistically most audits do result in a reassessment with more taxes being owed to the Government of Canada.”
How tax returns are selected for review?
There are a number of reasons why an income tax return may be selected in one of the CRA review programs. These reasons include random selection, comparison of information on returns to information received from third-party sources, or types of deductions or credits claimed along with an individual’s review history.
Sinclair dismisses a common myth regarding how returns are selected for audit.
“The process of selecting returns for review is the same whether the return is filed on paper or electronically. The chances of a return being selected for review are not influenced by the method you use to file your return.”
The CRA website says that most income tax returns filed each year are processed within two to six weeks.
“The CRA processes most returns without conducting a manual review of the information reported so that a Notice of Assessment and/or refund can be issued as quickly as possible. However, all returns are screened by the Agency’s computer system and may be subject to review at a later date.”
Watch the video below for more information about why the CRA conducts audits and what a tax audit is all about. The video is one of three videos that correspond with our three part series on CRA tax audits.
How should you react to an audit?
“We recommend that clients cooperate fully, respond promptly and supply all the information necessary so that the CRA can do their job.”
You may be asked by the CRA to submit select receipts or records or all the receipts and records of a certain kind.
“An audit can be a stressful process. Understanding the reasoning behind an audit and knowing your responsibilities and rights as a Canadian is critical to minimizing your stress. Millards Chartered Professional Accountants is here to provide audit expertise and direction.”
In the next two articles we’ll look at your responsibilities regarding a CRA audit and your rights as a Canadian.
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