Audits are one way that the CRA ensures that Canadians are following Canada’s tax laws, thereby protecting all its citizens from the consequence of fraud. One type of audit is the business audit. Interestingly, the majority of CRA employees are busy conducting audits of small and medium sized businesses, with the GST/HST audit, comprising the largest share of all audit types.
What is a business or corporate audit?
This type of audit conducted by the CRA is an examination of a business’s books and records to make sure the business has fulfilled its tax obligations with respect to income tax, deductions, employee benefits, payroll remittances, and GST/HST. Outside of a general business audit, the CRA could conduct a smaller subset of a business audit over only say employee benefits or payroll remittances. A smaller payroll audit or GST/HST audit is also known as a trust examination.
What are the risk factors for being audited?
Each year the CRA refines its system of determining high-risk indicators.Except for random compliance checks, there areseveral triggers that alert the CRA that your business many not be in compliance:
- GST/HST claims: GST/HST is the issue most likely to attract the CRA’s attention. The risk of being audited increases after a business amends a prior GST/HST return or income tax return.
- Outlier claims: If a business makes claims for deductions or reports income that is considered out of the ordinary for their particular industry, this will alert the CRA.
- Poor Compliance: Industries known for transacting in cash payments, such as the construction businesses, are at higher risk of being audited.
Aside from the common instances above, the CRA may decide to conduct an audit randomly or decide to focus on specific sectors, such as offshore accounts or type of industry.
What happens during a business audit?
During an audit, you can expect to first receive a notice from the CRA of their intention to audit with an outline of the preliminary information that they require from you and the mandate of the audit. The auditor will inform you about the scope of the audit, what area they will audit, and how many tax years or reporting periods are being audited.
During a general business audit, the CRA will do the following:
1. Review the income and expenses you’ve reported
2. Review that GST/HST has been paid on the business’s taxable supplies
3. Review that the input tax credits you claimed are eligible and supported by receipts.
4. Review that receipts support all deductibles
5. Compare the business’s numbers with numbers from other sources on file
6. Review if you’ve claimed revenue from all sources
7. Read and review submissions that your tax representative has provided which explain variances in your tax reporting, the law regarding the deductibility of certain items or other submissions.
It is your responsibility to meet registration, reporting, filing and payment obligations, to keep your books and records up to date, and to provide
books, records, and supporting documents to the auditor upon request.
Trust Examinations for GST/HST & payroll remittances
A trust examination is a type of business audit that seeks to audit only the GST/HST or payroll deductions and remittances of your corporation. Its objective is ensure the compliance of the employer with respect to reporting employee income and taxable benefits and making payroll deductions.
Employer Benefit Audit
An employer benefit audit is an audit that looks specifically to the ‘benefits’ that an employee may be receiving which are taxable. For instance, parking, cell phone and gym memberships are all taxable benefits. This type of audit will look to review all of the benefits an employee receives from the company to ensure that their income is being ‘grossed up’ to account for the value of the benefits.
If an employer provides benefits to its employees, he must fulfill the following responsibilities:
- determine if the benefit is taxable;
- calculate the value of the benefit;
- calculate payroll deductions (CPP, EI); and
- file an information return.
How long does an audit take?
If your records are up to date and you are able to provide your books, records, and supporting documents upon request, then the audit should proceed in a timely manner. Generally, you must have records going back 6 years from the date you filed your tax return. An auditor can ask for documents going back these six years to verify your reported income, GST/HST submissions, and input tax credits. A general audit is normally concluded within 3-6 months despite the thirty day timeframe that the CRA will likely advise the audit to take.
What to do if you do not have receipts:
If you cannot find all records to support your claims, try to produce at least a portion of them, as some records is better than not having any and will help in garnering credibility.
You should also considering hiring a tax lawyer who can prepare legal submissions which provide the supporting jurisprudence (case law) that states the CRA may still allow the deduction even if you do not have receipts.
Begin by conducting a thorough search. Sort through your paperwork and label your documentation by expense.
To supplement any records that you find, contact vendors for copies of receipts. Finally, you should examine your bank statements, credit card bills, and cancelled cheques for any items that can back up or explain your deductions.
Statements and Affidavits
Along with any credit card and bank statements, duplicates, and cancelled cheques you can find, you can submit either a written or oral statement or affidavit, signed by a notary, explaining why your records are not complete.
After the Audit
Before concluding the audit, the auditor will prepare proposed adjustments to your tax assessment. If you don’t agree with these proposed adjustments, you will have 30 days to respond to the auditor. The auditor will consider your explanations before closing the audit. It is largely imperative that a tax representative (either accountant or lawyer) review the proposal letter and prepare a response. If you do not respond, the auditor will presume you agree with the proposal to increase your tax and will issue an assessment. Once the 30 days have passed you no longer have the ability to provide your submissions as to why the proposed tax is wrong and the auditor will no longer accept any documents from you.
The conclusions of the audit will be mailed to you in a notice of re-assessment which is a listing of the increased tax you must pay. As well, you will receive a final proposal letter which summarizes the findings of the audit. Rarely will an audit conclude without finding an increased tax liability however certainly that is possible as an audit is just a review of your tax compliance.
When the audit is completed, the CRA may conclude with one of three results:
- Your previous tax filings were correct and you do not need to pay more tax (rare).
- You have to pay additional taxes.
- You are entitled to a refund (even rarer).
A business audit will most likely result in the CRA assessing you for additional taxes. While these assessments are sometimes correct, often the assessments are higher than warranted as the CRA auditors may be overly aggressive.
What if you don’t agree with the conclusions of the audit?
If you don’t agree with the conclusions as outlined in the notice of re-assessment, you have 90 days to file a Notice of Objection which is a type of internal appeal of these findings within the CRA. You have to explain why you disagree and include all relevant facts and documents.
While the rules of compliance relating to taxpayers may seem onerous, the CRA must also be compliant to the Taxpayer’s Bill of Rights, a document of 16 rights that ensure taxpayers are treated professionally and fairly.
Of the 16 rights in the Taxpayer Bill of Rights, three pertain to the taxpayer’s rights during a tax audit:
- You have a right to privacy and confidentiality. Auditors must use safeguards to ensure that your documents remain secure and private.
- You have the right to be treated professionally, courteously and fairly.
- You have the right to complete, accurate, clear and timely information.
To see the taxpayer Bill of Rights and Commitment to Small business, click here.
It is almost always the case that an audit will result in the CRA finding that you owe more in taxes. That’s why it is imperative that you obtain qualified representation from an experienced tax lawyer to ensure that you get the best outcome possible. For example, an auditor could propose to deny a deduction for which you are rightfully entitled under law. CRA auditors are often not accountants nor tax lawyers and are unaware of the same level of deductions that tax representatives are. A tax lawyer can cite the law in support of the deduction. A tax lawyer is also well versed in the jurisprudence from the tax court which may provide a nuanced piece of law on an obscure issue. In almost all cases, a tax lawyer will reduce the amount of tax that otherwise the CRA will proclaim you owe.
The start of an audit is the best time to obtain legal representation, as you want strong legal counsel to prepare explanations that support the manner in which you filed your taxes.
You work hard for your money; we work hard for you to keep it™ .
-Shira Kalfa, BA, JD, Partner and Founder
© Kalfa Law 2019