If you’re a corporation in Canada, getting audited by the Canada Revenue Agency (CRA) can be scary and overwhelming. But knowing the process and being prepared can help ease the stress and make the audit go smoothly. Check with a qualified corporate tax accountant to see if the CRA audit is simply a routine process to verify tax returns or something that is more serious. Here are some of the things you need to know.
Why Audits Happen
CRA audits can happen for many reasons. While random audits do occur, most are triggered by certain risk factors or red flags in a company’s tax returns. Red flags can include large variances between income and expenses, frequent late filings, big changes in deductions or income, and discrepancies between information provided by third parties (e.g. customers or suppliers) and the company’s returns. Sometimes audits can also happen because a corporation is in an industry that the CRA considers high-risk for tax non-compliance.
Types of Audits
The CRA can do different types of audits depending on the scope of the review. Here are the main types:
- Desk Audits: These are the simplest type of audit, done entirely by mail. The CRA may request specific documents such as financial statements, invoices or receipts to verify certain items on a tax return.
- Field Audits: These are more in-depth audits where CRA auditors visit the corporation’s place of business to review financial records. Field audits are typically for larger corporations or complex financial structures.
- Taxpayer Relief Requests: Sometimes the CRA will do an audit after a taxpayer relief request, such as waiving penalties or interest. These audits determine if the request is justified.
Knowing what type of audit a company is in can help them prepare for the specific documents and information that will be requested. If you are uncertain what type of audit your business is dealing with, reach out to a corporate tax accountant Toronto for professional advice.
Preparing for a CRA Audit
Proper preparation is key to a smooth audit. Businesses should start by making sure their financial records are organized, accurate and up-to-date. Keeping clear records of income, expenses, payroll and other financial transactions will help avoid complications during an audit. The CRA may request records from this year and previous years so having a good filing system is important.
Some key steps to prepare include:
- Reviewing Filed Returns: Before the audit starts, review the tax returns in question. Look for any variances or areas that need clarification. This will help you anticipate CRA’s questions and prepare supporting documents.
- Organizing Documentation: The CRA may request many records, including financial statements, tax slips, contracts, invoices and bank statements. Make sure these documents are easily accessible and organized by year and category.
- Consult a Tax Professional: Engaging with a corporate tax accountant or lawyer experienced in CRA audits will make the process much easier. A tax professional can help prepare the necessary documents, offer strategic advice and communicate with CRA auditors on behalf of the company.
The Audit
Once the audit starts, the CRA will send a formal audit notification outlining the scope of the audit and what records they need. The auditor may ask questions on certain items and request additional documents during the process. You must respond promptly and accurately, failure to do so can result in penalties or further investigation.
The auditor will review the company’s records and compare them to the information on the tax returns. They may also look for variances between the company’s records and those of third parties (e.g. suppliers, contractors). They will focus on areas where non-compliance is most likely, such as unreported income, excessive deductions or inaccurate GST/HST filings.
Post Audit Outcomes
After the audit, the CRA will issue a final report. The outcomes will be one of three:
- No Changes: The CRA finds the tax returns are accurate and no changes are required.
- Adjustments: The CRA finds variances and proposes changes such as additional taxes owed, interest or penalties. The company can dispute these findings through a formal appeal process if they disagree with the assessment.
- Penalties and Fines: In cases of gross non-compliance or fraud the CRA may impose penalties and fines. In extreme cases legal action may follow.
Conclusion
A CRA audit may seem scary, but with proper preparation it can be done. The key is to keep accurate financial records, stay organized and seek professional advice when needed. By knowing the process and complying with CRA’s requests, businesses can minimize penalties and comply with Canadian tax laws.