It’s every taxpayer’s worst nightmare: A notice from the Canada Revenue Agency (CRA) informing you that you’re going to be audited.
The CRA will send out around 30,000 such letters this year, according to tax lawyer David Rotfleisch, and those who get them are right to be afraid.
“A CRA audit is a lot of process, paper, and powers-that-be,” he told Global News via email.
So who is most likely to be audited?
Technically, everyone can be audited. However, the CRA tends to zero in on certain categories of taxpayers. Some elements of your tax return could also raise red flags and lead to an audit. According to Rotfleisch, you’re especially at risk if:
- You’re self-employed. Tax returns for self-employed people are usually more complicated. There isn’t a single piece of paper, like a T-4 slip, that the CRA can use to cross-reference the income you declared.
- You work in construction, retail or the restaurant industry. The CRA has singled out those industries, where businesses are often heavily cash-based, for extra scrutiny due to high rates of tax evasion.
- You keep reporting rental and/or business losses. Are you really bleeding cash or are you stashing it away in the Cayman Islands? The CRA will wonder.
- You reported drastic swings in income, especially if self-employed. See above.
- Your income doesn’t match your postal code. Are you making significantly less than your neighbours? The CRA could start to wonder how you can afford to live where you do.
- You have offshore assets. Owning assets abroad is also something that could attract unwanted scrutiny.
- You received wire transfers from abroad of $10,000 or more. Since 2015, all financial institutions must report to the CRA, international electronic funds transfers (EFTs) of $10,000 or more. If your bank accounts have been on the receiving end of several of those, the CRA might have some questions.
Tax reviews aren’t audits
The first step when you get a letter from the CRA saying it wants to take a second look at your taxes is to take a deep breath and really understand the piece of paper in front of you.
Most likely, what you got in the mail is a tax review notice, not an audit letter. Tax reviews are the most common type of interaction people will have with the CRA after submitting their return, said Rotfleisch.
In a review, the taxman often wants to check out the records and receipts you used to claim expenses, said Rotfleisch. You show them the paperwork, and the matter is over.
However, run-of-the-mill tax reviews can turn into full-on audits, warns Rotfleisch.
How audits work
Usually, it starts with a letter advising you that you are being audited, according to Rotfleisch. The note will specify the years the CRA wants to examine, and the documents and records it wants to see.
You have the opportunity to make submissions, and the auditor is required to “review and respond to those submissions, dealing with every point of accounting issue and every tax law concern raised,” Rotfleisch wrote via email.
Audits generally stretch through several months, but can last multiple years in particularly thorny cases, according to Rotfleisch.
Should you hire professional help?
Rotfleisch’s answer is “Yes,” and “always.”
If yours is a simple audit, it’s probably enough to turn to a tax accountant. A straightforward audit might be a case in which the CRA disallowed a tax deduction or credit for which you are clearly eligible and have the paperwork to show it, said Rotfleisch.
“That’s a simple submission — it’s numbers and receipts — your accountant can definitely handle that,” said Rotfleisch.
But make sure to go for a certified accountant, such as a chartered professional accountant (CPA), he added.
Even easy-peasy audits are full of “pitfalls and traps” for taxpayers who try to deal with it on their own or rely on the advice of tax preparers who aren’t properly qualified, warned Rotfleisch.
On the other hand, “if there are legal issues involved, or it’s a complex tax pattern, then you certainly want to have a tax lawyer involved,” he said.
Sometimes, you’ll need both a lawyer and a CPA, said Rotfleisch. In those cases, hiring the lawyer first is key, because that guarantees that your communication is privileged, and the CRA won’t be able to use it against you. The lawyer can then extend that privilege to exchanges between you and the CPA, according to Rotfleisch.
If things go awry, keep calm and hang on to your tax lawyer
Even with a lawyer by your side, audits can take a toll on your mental health and your finances.
Rotfleisch recalls the case of a taxi driver client who had to painstakingly account for mileage travelled in his cab to see his family in Kingston, in order to show he did not, in fact, fail to declare some $50,000 in annual income, as the CRA alleged.
And sometimes, the end of the audit is not the end of the story. Once the process is completed, the CRA will send you a notice of assessment or reassessment, indicating taxes owed as well as any interest and penalties. You then have 90 days to file a notice of objection, which ensures the CRA will take yet another look at your case.
WATCH: Canada Revenue Agency takes too long to resolve tax objections: Auditor General
It took one such notice of objection to finally get the CRA to grant one of Rotfleisch’s clients $900,000 worth of GST/HST refund and interest for a case involving the export of second-hand vehicles. (Goods and services that are normally subject to the GST/HST may be exempt from it when exported from Canada.)
Whatever your audit might involve, the key is to promptly collaborate with the CRA without volunteering information the agency is not entitled to have, said Rotfleisch.
“You want to do co-operate as you’re required to co-operate — not beyond that.”