Everyone’s worse nightmare is to get audited by the Canada Revenue Agency (CRA). There are multiple reasons why you may have been chosen for either a personal or business audit. However, the best thing to do when you are hit with an audit is to comply, be honest, and seek the help of a Chartered Accountant.
There are many reasons you could be getting audited, including: at random, if you run a cash business (such as a restaurant) your chances are higher, if your business claims to make more than the industry norm, because you are a spouse, investor, supplier, or subsidiary of a company or individual that is already undergoing the main audit, or if your recorded information does not match up with other records.
It is important to remember that just because you are audited does not mean you are in trouble or that you will have to pay more. Simply be compliant and honest and things will go smoothly.
Audit First Steps
The CRA will contact you if you have been selected for a financial audit. Make sure you receive a written notice to make sure it is not a scam. Ask them for a detailed list of all the documents they want to review. The first thing you should do then is contact your Chartered Accountant. You and your accountant should then compile all of the requested information, including receipts, bank statements, and supporting documents.
When the CRA audits you they will require certain documents. Sometimes they will ask for only a few specific ones and other times they will request everything. Records should show that you have included all income, and any claimed expenses should be documented with receipts. You may have to request bank statements or additional documents.
Be prepared to have an auditor review everything. Receipts, invoices, cheques, bank statements, tax calculation, and bookkeeping. It is best to hand over everything that they ask for, as withholding information can make things worse. If everything is in order and verified the CRA will not dive any further or request more money.
The CRA should tell you what issue they want to be resolved with the audit. Maybe you claimed income or expenses that the auditor does not believe is justified, or you claimed car expenses but did not accurately prove usage and mileage. The key to a smooth and successful audit is to show the CRA valid reasons, supported with documentation, for your claims.
Including your accountant in an audit will help you. They can help you find the correct documents, recalculate expenses, and help you negotiate with the auditor.
All issues should be resolved at the end of an audit. You might have to pay an outstanding balance if you made a mistake or the CRA found you did not have proper documents to support a claim you made. If all documentation is in order and there were no mistakes than there will be no additional taxes due.
The CRA auditor will advise you of their findings and confirm them to you in a written letter. You will then have 30 days to respond and either accept or question the findings. Consult your Chartered Accountant before you respond and make sure you still keep all your records for a minimum of 6 years, even after being audited.
As scary as a CRA audit can seem, it is not the end of the world. The best thing you can do is stay calm, be compliant, and be honest. It is a good idea to consult with your Toronto accountant and ask them for help during an audit. Remember that just because you are being audit does not mean you did anything wrong. A lot of people get audited for simple, honest mistakes. As long as you are cooperative and work with the CRA, you will not be in any trouble.