TAX AUDITING – BUSINESS

For a business to fulfill its tax obligation, Business Tax Audits are a key way the CRA can do so. Whether it’s Payroll, Income Tax, Benefits, HST/HST or Remittances. During a business tax audit, it allows the CRA to examine the books, records, financials and other documentation that is relevant to the business.

The CRA determining which business to audit is done by their own risk assessment. This risk assessment can look for things such as errors & omissions, false statements, whether the business is doing business with another business that is currently being audited, regional or national levels and comparing previous years tax returns to the current year.

Documents That May Be Requested

During a business tax audit, the CRA may ask for a business to provide the following documentation and in detail:

  • Ledgers, journals, financial institution statements
  • Receipts
  • Contracts
  • Owners personal bank and credit card statements
  • Personal records of the owner, employees and representatives

The CRA may also request third party information such as documents from their accountant and legal documents from a lawyer.

Income Verification

The CRA uses a few notable methods for indirect income verification.

  1. Bank Deposit Analysis: While this method is limited to which accounts the owner has, it can be used to calculate gross revenues, which can be used to identify any unreported income.
  2. Projection Audit Method: If there is any indication of unreported income or understated, this method is applied. This application can be used to project sales within a certain business and determine the business’ activities and whether the business’s expenses are reasonable.
  3. Net Worth Method: This is the most common method used by the CRA. It allows the CRA to dig further into the business owner by examining their personal lifestyle, assets, liabilities and personal records. This also allows the CRA to examine anyone who is associated with the business. While this method is most used, it is also has its issues. This method does not allow the CRA to see any unreported income. This also does not paint a clear picture of any family members associated with the business. It can not be 100% accurate when it comes to an individual’s tax situation. As determined by several court proceedings, this method should be the last resort the CRA uses when conducting an audit as it is “unsatisfactory and imprecise”

Timeframe

There is no set timeframe for an audit to be completed. Every situation is different from business to business and auditor to auditor. Depending on the complexity of the audit, the time that is needed for the business owner to gather the required documents and the time to put everything into a clear package for the auditor, there is no black and white answer to this.

Your Rights

There are certain rights that a business owner should be aware of when facing an audit:

  1. Article 5 – Taxpayers Bill of Rights: “Taxpayers have the right to be treated professionally, courteously, and fairly when dealing with the CRA”
  2. Article 11 – Taxpayers Bill of Rights: “Taxpayers have a right to expect the CRA to be accountable for its decisions pertaining to their tax affairs, specifically concerning its errors and omissions.”

Taxpayers also have the right to submit a claim if they feel their rights are being fringed upon or they are dissatisfied with the CRA services.

The Audit is Done – Now What?

When the audit is complete, all documentation has been submitted and the CRA auditor as completed the examination two (2) things may occur:

  1. The auditor has determined that all information submitted for the business is accurate and no changes need to be made to the business’s tax return. The audit will then be closed.
  2. If the auditor determines that changes need to be made, the business owner has 30 days to respond. The taxpayer’s representative should contact the CRA agent immediately to determine a deadline to submit any further information requested. It is the CRA agents’ discretion on how long they will give the taxpayer to provide the additional documentation. If no response is given to the CRA within the 30 days, the CRA will assume that the taxpayer agrees with the decision and the CRA will issue a Notice of Reassessment. If a business does not agree with the Notice of Reassessment, they may object to it. According to the Income Tax Act, the limitation period to file an objection is “on or before the day that is 90 days after the day of sending the notice of (re)assessment”

This is general comment, and you should contact Tax Partners for any questions by sending an email to info@taxpartners.ca or (905) 836-8755. 

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