I could almost hear the anxiety in the voice over the telephone.
“I’m being audited.”
Those three little words are enough to raise the blood pressure of any Canadian taxpayer. Fortunately, most are spared the experience of being audited.
The Canada Revenue Agency reports that it processed more than 27 million individual and 1.6 million business returns in the 2008-09 tax year. It conducted 41,000 audits of international and large businesses and 323,000 audits small and medium-sized enterprises. Slightly more than 870 audits were carried out under the agency’s special enforcement program and 164 income tax and GST/HST investigations were referred for prosecution.
“Auditing is one of many ways for the CRA to ensure compliance with Canada ‘s tax laws,” the agency says. “We undertake a number of enforcement activities including examinations, investigations, and verifications at the domestic and international level.”
Generally, “the CRA reviews tax returns randomly, so there is no way to guarantee that your return will not be reviewed or re-assessed,” says Cleo Hamel, Senior Tax Analyst with H&R Block.
There are some tax credits that are more likely to come under review than others.
Moving expenses are usually the number one credit to be reviewed followed by tuition transfer credits. If you have claimed these credits then it’s more likely you will be asked for documentation to prove your claim.
“Unusually large expenses can trigger a review of receipts, like a large, lump sum RRSP contribution or an excess of medical expenses,” Hamel says.
Self-employed individuals also may be more likely to be reviewed and audited than others. Business expenses need to be reasonable and you need to have some expectation of revenue. Your business cannot be just a hobby and you cannot claim losses indefinitely.
“It’s important to keep good receipts and records to make the process easier,” says Hamel. “If the CRA does disallow some of your business expenses, you will receive a tax bill for the adjusted amount as well as accrued interest.”
The CRA usually reviews one of the last three years but it can review another three years beyond that. That’s why it’s important to keep records for six years back.
Your compliance history also can play a role in whether or not your return is reviewed. “If you have a history of late filing or not responding, it is more likely your return will be reviewed,” Hamel says.
The CRA receives copies of all T slips (or income slips) issued by employers or financial institutions. It has a program that tracks slips issued by employers and matches them against slips filed by employees to make sure the income was declared.
If you do get audited, don’t panic. It doesn’t necessarily mean you’ve done something wrong. Sometimes auditors will find that too much tax has been paid.
It’s pays to cooperate with the auditor so they can do their job more quickly and efficiently. By law, you are required to keep all records that are used to determine your tax obligations and entitlements. Have them handy, in good order and ready to turn over to the auditor if required.
Get any supplemental information that is required as quickly as you can.
You will be told of any proposed adjustments or assessments, will receive an explanation of why they were made, and then you will have 30 days to respond.
If your return is adjusted, you’ll get a notice of assessment, which can be contested.
Although only a small portion of tax returns in Canada are audited, it’s a good idea to conduct your financial affairs as though one day you might be. In that case, you’ll be ready if the CRA comes calling.
Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors. He can be contacted at firstname.lastname@example.org.