How to Get Through a Tax Audit With Ease

Facing a tax audit can feel overwhelming, but with the right preparation and mindset, you can navigate the process with confidence. This guide will walk you through what to expect, what the Canada Revenue Agency (CRA) looks for, and how to manage the process effectively.

What is the CRA?

The Canada Revenue Agency (CRA) is the federal department responsible for collecting taxes, administering tax credits and benefits, and ensuring compliance with tax laws for the Government of Canada. It oversees tax matters for most provinces and territories, excluding Quebec. Its mission is to ensure fair tax contributions from all citizens.

What is a CRA audit?

A CRA audit is an official review where the CRA examines your financial records to ensure that:

• You are fulfilling your tax obligations

• You are following tax laws correctly

• You are receiving eligible benefits and refunds

Audits may take place at your home, business, or representative’s office, or even at a CRA office. During an audit, the CRA may borrow documents or make copies of electronic records, but they will return them after the audit is complete.

What triggers a CRA audit?

The CRA uses a risk assessment system to identify audit candidates. Common triggers include:

• Unusually high claims: Claiming a large number of deductions or credits can raise suspicion.

• Inconsistencies with previous returns: If your tax filings have raised concerns in the past or if they are inconsistent with similar cases.

• Industry risks: Certain industries like restaurants, construction, and retail face higher scrutiny due to cash transactions.

• Unreasonable expenses: Expenses that are not aligned with your revenue or industry standards may prompt an audit.

• Family salary payments: Overpaying family members above market rates can signal the need for an audit.

What does the CRA examine in an audit?

The CRA will examine various financial documents during an audit, including:

• Tax slips: T4, T5, and other relevant forms

• Business records: Ledgers, invoices, receipts, and contracts

• Personal financial documents: Bank statements, mortgage documents, and credit card statements

• Adjusted records: Changes made by accountants or bookkeepers for tax purposes

It’s important to keep these records for at least 6 years. If any documents are missing, contact the original source or consult with your accountant for guidance.

Does the CRA audit your bank account?

Yes, the CRA can review your bank accounts during an audit to verify the income and expenses you reported. They have access to bank records and are required to keep this information confidential.

How far back can the CRA audit?

Generally, the CRA can audit returns for up to 3 years from the date they issued the original notice of assessment (NOA). This period extends to 4 years if you fail to report more than 25% of your income. In cases of fraud or misrepresentation, the CRA has no limitation on the assessment period and can audit any past year.

What are your rights and responsibilities?

You have several rights during a CRA audit, including:

• Fair treatment: You’re entitled to be treated professionally, courteously, and fairly under the Taxpayer Bill of Rights.

• Access to information: You can access your personal tax information and request corrections if needed.

Your responsibilities include:

• Cooperating fully with the CRA by providing accurate records and truthful answers

• Maintaining proper records for at least 6 years

• Storing records in an electronically readable format if you use a computer

How to send your records online to the CRA

For security reasons, do not send records via email. Instead, you can securely upload your documents using the CRA’s online portal:

1. Log in to your CRA account (e.g., My Account, My Business Account).

2. Look for the "Submit documents" option and follow the instructions.

3. After submission, keep the confirmation and reference numbers for your records.

What are the potential outcomes of an audit?

After the audit is complete, you may receive:

• No adjustments: The CRA confirms your return is accurate.

• More taxes owed: If additional taxes are owed, you’ll be notified and can pay promptly to avoid interest charges.

• Refund: If the audit reveals you’ve overpaid taxes, you may be eligible for a refund.

What if you disagree with a reassessment?

If you disagree with the CRA’s reassessment, you can:

1. Contact the auditor: Explain your disagreement and provide additional documentation.

2. Escalate the matter: If necessary, escalate the issue to the auditor’s team leader.

3. File a formal objection: If the issue remains unresolved, you can file an objection within 90 days of the reassessment.

4. Appeal to the Tax Court of Canada: If the objection is denied, you can appeal to the Tax Court.

Top CRA audit tips

• Stay organized: Having all documents in order and ready for the auditor can make the process smoother.

• Be timely: Respond quickly to requests to show cooperation.

• Maintain a respectful attitude: Always communicate professionally, and don’t hesitate to ask the auditor questions if anything is unclear.

By being proactive and understanding the audit process, you can approach a CRA audit with confidence and ensure a smoother resolution.