Have you ever received an audit notice from the Canada Revenue Agency (CRA)? The likelihood of getting audited is part of running a business. In the prior years, the CRA sent out around 30,000 letters concerning issues related to CRA tax audits.
CRA audits are in place to ensure businesses pay the appropriate taxes and receive any amounts for which they are eligible. It doesn’t automatically mean you’ve done something wrong. The odds of being audited may depend on your industry, the types of expenses you reported, and what’s in your tax return. However, CRA may also select your business at random.
Having a CRA auditor scrutinizing your finances can cause stress and anxiety. Thus, we’ve put together this guide to help prepare your business for a possible audit by the CRA.
Understand the Audit Process
One reason CRA audits are scary for many is that they don’t know what will happen. Meanwhile, educating yourself on the process can save you a lot of unnecessary worries. CRA initiates audits when something comes to their attention. It can be an error, an indication of fraud, or tax evasion.
The audit process starts when you receive a CRA notice. An auditor will contact you by mail, informing your business about the audit’s date, time, and location. While the audit usually takes place at the place of business, some may happen at a CRA office.
Regardless of location, the CRA expects you to have documents supporting your tax fillings. Note that due to the COVID-19 pandemic, audits are being conducted virtually. So you’ll likely be required to send your records online using the CRA’s secure services.
Know What the CRA Will Examine
Typically, the CRA will audit the most recent two or three tax years. However, there are cases where they can go back further. That’s why keeping your financial documents and records for at least six years is crucial. The CRA may request them to support the declarations you made in your tax returns.
Before the audit begins, contact CRA for a written request listing all specific documents and taxation years they want to review. If you have more than one business, ask which one is being audited. Only provide the documents the CRA auditor requested for the years under review. Remember that it’s unusual for them to examine records for the current year, which you still need to file.
Keep All the Necessary Documents
You may need to provide several different types of documentation during a CRA audit. Ensure everything is prepared before the audit begins to make the process easier and faster. Below are the necessary records you may need to keep.
- Previously filed tax returns, property details, and credit histories.
- Business records like invoices, bank statements, ledgers, contracts, receipts, and more.
- Personal records like credit card statements, mortgage documents, and bank statements.
- Personal or business records of your business partners, spouses, family members, or other individuals and entities that are not being audited.
- Information on any adjustments made by your accountant or bookkeeper for tax purposes.
Prepare for the Possible Audit Outcomes
Two possible outcomes may happen after the auditor examines the records you provided. If the previous assessment is correct, you’ll receive a completion letter, closing the audit.
But in other cases, the auditor may find that the return needs reassessment. This could mean you must pay more tax or be eligible for a refund. You’ll receive a letter with the proposed adjustments and the reason for the reassessment. Whether you agree or disagree, you will have 30 days to respond to the proposal.
Get Help from a Tax Professional
Handling a tax audit by yourself can be overwhelming. But as long as you have everything you need to support your claims, the CRA is less likely to reassess your return.
Still, getting help from a tax professional is best to ensure a positive audit outcome. Not only will they help you prepare all the necessary documentation. They will also help you avoid triggers in your tax filing and decrease the odds of getting audited.
