The Canada Revenue Agency (“CRA”) conducts a broad range of activities to ensure taxpayers are compliant with tax laws and to maintain the integrity of Canada’s self assessment system. To support these efforts the Government of Canada has been investing heavily in the CRA. For example, the April 7, 2022 Federal budget proposed to increase the funding to the CRA by $1.2 billion over 5 years. This is in addition to the $304 million proposed in the 2021 budget.
Many tax and accounting advisors feel that audit activity for both individuals and corporations is increasing. This activity ranges from the requesting of support for income and deductions declared on a tax return to full audits of the taxpayer’s return. It also includes audits of federal and provincial sales tax, COVID-19 benefits, and other matters.
The verification process usually requires obtaining information from the taxpayer and the CRA officials have the legal authority to request the information at any time during an examination for any purpose related to the administration or enforcement of the Income Tax Act, Excise Tax Act, or any other applicable legislation.
The request usually comes by way of a letter or a call from the CRA. Often taxpayers feel intimidated by the CRA request or may not understand the nature of the information being requested by the CRA. You should consult your accounting advisor upon receipt of the letter or call as soon as possible. It is important to respond to their requests within the time requested, which can be as early as 14 days but is usually 30 days.
If you are unable to respond within the required time limit, you or your accounting advisor should request an extension to respond. Ignoring the requests in the hope that the CRA will go away seldom works out as the CRA will reassess. Once the CRA has reassessed, if you do not agree with the reassessment you have to file an objection to the reassessment. Often, simply providing CRA the information upfront may have avoided the reassessment.
Although it is important to respond to the CRA, one must be careful as there are many phone, text, and email frauds where imposters impersonate the CRA to obtain your personal information or take money from you. The CRA will not text you. If you are contacted by phone, we recommended that you ask for the name, phone number and office location of the CRA agent. If in any doubt, end the call and contact the CRA on the general line to check that the call from CRA is legitimate. The number for individual tax enquiries is 1-800-959-8281 and the number for business enquiries is 1-800-959-5525. If you have questions with respect to a CRA request or the legitimacy of a CRA request, you should contact your accounting advisor.
As mentioned above, the CRA has broad powers to obtain information and can request a large volume of information. Often the best audit defence is to maintain clear books and records and keep the supporting documents including relevant invoices and receipts in an organized manner. If this information is not available when requested, it can be very time consuming to respond and if you do not have the information the CRA is likely to reassess you.
CRA may also be looking at a specific transaction or the taxpayer may have taken a position on a matter where the law is unclear. In these cases, it is important that you collaborate with your accountant to submit a response that clearly supports your position. This can take a large amount of time if the position is not clearly documented at the time of the transaction. Therefore, we recommend that clients and their advisors keep records so that they are prepared if CRA wants to examine them.
The CRA has also moved into a stage of auditing the economic support programs that were available during the COVID-19 pandemic. These include the personal income support programs, the Canada Emergency Wage Subsidy, and the Canada Emergency Rent Subsidy. The information requested by the CRA to support the entitlement and claim amount is quite extensive. Once again, one of the best defenses against an audit of these programs is good supporting documentation and calculations.
Tax law is continually changing and the filing of tax returns and applying for the complex support programs is increasingly difficult for owner-managed businesses. Responding to audits is often not an efficient use of the owner-manager’s time. Your KMSS advisor has extensive experience in assisting clients with responding to audit requests and managing the audit process. If you find yourself in the unfortunate situation of having to respond to an audit request, our team is here to help.
Although having a good set of books and records and the supporting documentation can make the audit go smoother, the professional time incurred by your accountant to support you in the process can be significant. To help reduce your cost of supporting an audit, we offer our clients the option to acquire an insurance policy called Audit Shield. This policy provides annual insurance to cover the cost of fees (up to a specified maximum) to respond to certain CRA reviews, examinations, and audits of personal and corporate filings.
We would be pleased to discuss with you how the policy works including the benefits and limitations.