September 28, 2020
Last week, I was arguing an appeal in the Tax Court of Canada. The case was about the application of the specific anti-avoidance rule found in ss. 256(2.1) of the Income Tax Act (Canada) to a set of corporate taxpayers. I will give you an update on how that turned out once the decision is released…
In the meantime, we return to our regularly scheduled programming. Today, I wanted to talk a bit about audits.
Audits are generally not a fun thing to endure. An audit is a bit like going through security screening at an airport – the whole environment has the ability to make you feel guilty, even if you have not done anything wrong.
But if you are an honest person and have done your best to file your taxes properly, then you should not have much to fear with an audit. At worst, the auditor might find a mistake that was made, which might result in some additional tax to pay. You will also lose time dealing with the audit, which could otherwise have been spent with family, relaxation or perhaps on your business.
I often get asked by taxpayers what they should do when they are contacted for an audit. Here are 5 key tips to keep in mind:
- Always be prepared.
Once a girl guide, always a girl guide. I believe that you should start preparing for an audit when you are filing your tax return. You should not wait until you get the initial letter or the phone call. For example, are you claiming an expense? If so, do you have the receipt to support the expense, and do you know why the expense was incurred?
In a past blog post I provided some tips on how to prepare for the inevitable audits that will arise out of the various pandemic government subsidies (see my May 25, 2020 blog post, “CEWS, CERB, CESB, CEBA – You know the audits are coming – but are you ready?” for further detail: https://taxchickca.wordpress.com/2020/05/25/cews-cerb-cesb-ceba-you-know-the-audits-are-coming-but-are-you-ready/)
2. Recognize that CRA has broad audit powers
Whether we like it or not, CRA has the right to conduct an audit. They do not need to ask your permission. This is the case even if you just got audited the year before.
The definition of “books and records” is also quite broad. CRA has the right to ask for your general ledger. Your receipts. Your time entries. They also have the right to ask for certain electronic information (within reason). They have the right to ask you questions.
3. Know the limits
Even though CRA has broad audit powers, it is still important to keep in mind some limits that exist. For example:
- CRA is only permitted to audit within the normal reassessment period (3 years after original assessment for income tax, and 4 years after original assessment for GST/HST). If CRA wants to assess beyond that period of time, they are required to advise you as to the basis for their request, and they will bear the burden of proving that such assessment (if any) was appropriate.
- You should ask them to give you something in writing which sets out what taxpayer is being audited and the tax years under audit. If CRA asks for something from a different taxpayer, or from years that are not under audit, ask for further clarification as to how that relates to the audit.
- You are not required to provide documentation that is subject to privilege. For example, communication with your lawyer. Once you have handed the documentation over, you lose the right to claim privilege at a later date.
- You should ensure that someone is appointed to speak with CRA, and that person should be someone that has knowledge of the books and records. This ensures a consistent (and accurate) message is being provided. If the CRA officer takes notes of communication, you have the right to ask for a copy of those notes.
- Keep a record of all communication with the auditor, and a list of exactly what documentation was provided and the timing of such provision. This will be helpful to provide support at a later date if there is an allegation that you failed to provide certain documentation, or if documentation goes missing
4. Meet your deadlines
If you have promised to provide something to CRA by a certain date, please ensure you do so. If you need more time, you need to let the CRA officer know prior to the deadline and provide an explanation of why you cannot meet the original deadline.
5. Be polite and respectful
I had a client many years ago who decided that the first day of his audit was a great day to start cleaning out his pellet gun… on the front porch… at the exact time that the auditor pulled up in his vehicle to start the audit.
I have met some good auditors, and some not so good auditors over the years. It is important to have your guard up, and to ensure that you are answering questions truthfully and accurately. However, nothing is ever gained by being disrespectful to an auditor. At the end of the day, it is always preferable to provide the information that is being requested at the audit stage. If you can avoid something ending up in an initial reassessment, you avoid the need to go through the lengthy and expensive objection and appeals process.
For a more thorough discussion on the audit process, keep an eye out for the next episode of The Tax Chick Podcast, featuring special guest, Sophie Virji – we break down what it means to be a tax litigator and discuss all aspects of the tax controversy process – right from the audit to the Tax Court of Canada. Episode dropping October 8th!