Business Tax Audit & Appeals

How the CRA selects a file for an audit

The CRA’s risk-assessment systems identify tax returns that are considered to be at high risk for non-compliance. When a return is identified as high-risk, a CRA officer will review information from various sources to determine whether an audit is needed to address the risks identified.

What makes your business a high-risk one

  • Business income declared in the tax return being significantly higher or lower than the norm in the same industry
  • Deduction large business expenses
  • Late or discrepancies in payroll tax submissions
  • Suspicious dollars values in shareholder loans
  • Possible non-compliance of GST/HST collections
  • Running cash business
  • Recurring losses
  • Mix use of business and personal assets (claiming home office deduction, claiming high percentage business use of vehicles, having family on the payroll, etc)
  • Someone called CRA to report you and/or your business with their real name or anonymously

How the CRA will contact you

A CRA auditor will usually contact you by phone to begin the audit process. The auditor will also send you a letter confirming details of the audit. Normally the auditor will first let you know if this is a “tax review / preliminary business review” or a formal audit.

We do recommend that your first step is to verify the identity of the CRA auditor, given the fact that there are many scams going on nowadays. We also suggest you not to be in a rush to immediately answer the auditor’s questions, instead, prepare yourself well by communicating with your accounting team and consulting with the professionals.

Where the actual audit happens

Normally, the auditor will work at the place of your business! Occasionally, the auditor will borrow documents to complete the audit at a CRA office or an alternate location, such as your accountant’s office. The auditor will make arrangements to speak with you or your representative to discuss any questions that arise during the audit.

What documents that are required

  • the business records (such as ledgers, journals, invoices, receipts, contracts, and bank statements);
  • the personal records of the business owner(s) (such as bank statements for personal accounts, mortgage documents, and credit card statements); and
  • the personal or business records of other individuals or entities related to the business owner(s) (such as a spouse, family members, corporations, partnerships, or a trust).
  • In addition to these documents, the CRA may ask for input from your accountant, book-keeper, and/or employees, about the information that relates to the books and records and what was reported in the tax returns.

After the audit

After the auditor finishes reviewing the records provided, the auditor will provide you with a written summary of the audit findings. If the auditor finds that no changes need to be made to the return (or you are innocent in plain English), then nothing more has to be done and the audit will be closed.

If the auditor determines that changes need to be made to the tax return (which means you are guilty), you will see the following happenings:

  • CRA will issue you a reassessment letter notifying you how much you have to pay for taxes, penalties, and interest
  • CRA will allow you a certain period of time to write back to CRA to say if you agree or disagree with their proposed findings
  • If you are found guilty in the income tax area (just for example), the income tax auditor will share their findings and workbook with the HST department (if your business involves HST) so the HST audit process will begin shortly. And vice versa, if you are found guilty in HST, the income tax auditor is showing up soon.

What we can do

  • We can take over all the communication on behalf of you to the CRA from the beginning of the audit process
  • We review your previous tax return and your current tax situations
  • We walk you through the entire process, facilitate submission of documents, accompany you or represent you to audit meetings, and sometimes we have to redo your bookkeeping in the first place
  • We challenge CRA’s assessment
  • We minimize penalties and interest
  • If you agree with the assessment after the audit, we represent you and bring the process to the next stage – Appeals.