The CRA Audit
The Canada Revenue Agency’s (“CRA“) audits mainly focus on those categories of taxpayers who are most likely to have under-reported their income. As employees and salary earners can have their income easily cross-checked against the information returns filed by their employers, it is self-employed taxpayers, corporations, and trusts that are the most likely to be selected for an audit. The CRA describes the primary purpose of its audit programs as “monitoring and maintaining the self-assessment tax system” and maintaining public confidence in the tax system.
How Far Back the CRA can Audit
The CRA is generally permitted to reassess tax returns for individuals three years from the Notice of Assessment date. For Canadian-controlled private corporations, there is also a three-year limit from the Notice of Assessment date during which the CRA can conduct an audit. For large corporations, this timeframe can extend to four years. For GST/HST, the CRA can audit those returns for up to four years from the specific tax year. So, for example, if you are an individual and receive your Notice of Assessment for your 2020 tax return in May 2021, the CRA is permitted to audit your 2020 tax return until May of 2024. In cases where the CRA suspects fraud or negligence, there is no audit time limit, and the CRA will be able to audit as far back as it wants.
CRA Audit Triggers
While the CRA can audit anyone, there are various factual scenarios that can make a taxpayer more likely to be the subject of an audit by the CRA. For example, if you are self-employed, you are generally more likely to be audited than someone who is employed. In addition, claiming large numbers of business expenses or having unusual deductions can also make you more likely to be a target of an audit by the CRA.
Furthermore, certain industries and certain types of businesses are more likely to be audited than others. For example, you are more likely to be audited if you operate a restaurant or are in the construction industry, as many transactions in these industries are conducted in cash.
The CRA is also more likely to audit a business that reports repeated losses, as the CRA will question why the taxpayer chooses to operate a business with repeated losses and will suspect unreported income. The CRA is also more likely to audit those who own offshore assets outside of Canada.
The Commencement of the Audit
The audit process starts when the CRA issues a letter to the taxpayer, stating that the taxpayer is subject to an audit. The CRA will generally specify the date, time, and location of the audit. The audit can take place in the taxpayer’s place of business, residence, or at a CRA office. The audit can also take place at the office of the taxpayer’s representative.
The CRA generally provides a list of documents for the taxpayer to make available for inspection in the audit letter. The CRA can request all books, business records, bank statements, invoices, and any other documents from the taxpayer, which would be required to justify the taxpayer’s claims on their tax return for the year or years under audit.
Audits are also sometimes commenced with a formal “requirement” for information, which will cite a relevant section of the Income Tax Act (“ITA“), which requires you to legally comply with the request. The CRA will produce particulars of the documents and information that it wants the taxpayer to provide, along with a deadline for doing so.
Powers of the CRA During an Audit
Sections 231.1 to 231.6 of the ITA provide the inherent rules for the CRA during an audit. Under section 231.1, CRA auditors have the power to inspect and examine the taxpayer’s books and records and enter the taxpayer’s business premises without a warrant. The CRA auditor also has the right to require the cooperation of the taxpayer and third parties and require the owner or manager of the business premises to provide “all reasonable assistance.” The CRA auditor also has the right to make a copy of any document required for the audit.
Under subsection 231.1(2), if the audit is conducted at the “dwelling-house” of the taxpayer (i.e. the personal residence of the taxpayer), prior consent has to be given by the occupant. Otherwise, a legal warrant will be required for the CRA to enter the residence. If the CRA needs information from third parties or any individual not directly linked to the audited party, the CRA must get judicial authorization to get the information.
Under section 231.7, failure to comply with the CRA on any of their lawful requests for information under the ITA can result in a compliance order issued by a judge. Failure to comply with the CRA’s requests after that order can result in fines and penalties ranging from $1,000 to $25,000 and even imprisonment.
Professional Legal Help With Your CRA Audit
If the CRA audits you, it is important that you understand your rights and obligations as a Canadian taxpayer. In addition, it is important to know that the CRA will be relentless in finding hidden tax dollars during the audit process. For these reasons, it is crucial to have professionals on your side during the audit process. Our lawyers can assess your situation, help you prepare for the audit, represent you against the CRA, and provide you with the best chance of success.
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By Kaveh Rezaei – Attorney at KR Law Firm
**Disclaimer
This article contains information of a general nature only and does not constitute legal advice. All legal matters have their own specific and unique facts and will differ from each other. If you have a specific legal question, it may be appropriate to seek the services of a lawyer.
