Corporate Tax Audit Documentation
When the Canada Revenue Agency (the “CRA”) selects a corporation for an audit, one of the first steps is requesting supporting records. The quality, accuracy, and accessibility of corporate tax audit documentation can determine whether the audit is resolved quickly or results in reassessments, penalties, and interest. Proper record-keeping not only helps businesses comply with the Income Tax Act and/or Excise Tax Act but also reduces the stress and disruption of a CRA audit.
CRA Record-Keeping Requirements for Corporations
Corporations are required to maintain complete and accurate records for at least six years from the end of the last taxation year to which they relate. These records must be in Canada, unless written permission has been granted to keep them elsewhere. Documentation must be in English or French and kept in a format that allows CRA auditors to verify income, expenses, and deductions.
Key Types of Corporate Tax Audit Documentation
Financial Statements Auditors will review corporate financial statements, including balance sheets, income statements, and statements of cash flow. These documents provide a high-level overview of the corporation’s financial position and performance.
General Ledgers and Journals
Detailed ledgers and accounting journals show individual transactions that support the financial statements. These records allow auditors to trace entries back to original source documents.
Source Documents
The CRA will expect corporations to produce receipts, invoices, bank statements, cancelled cheques, and contracts that support transactions. These documents prove that reported income and expenses are legitimate.
Payroll Records
Payroll documentation such as employee contracts, T4 slips, and payroll remittances help the CRA verify compliance with employment tax obligations. Missing or incomplete payroll records are a common audit issue.
Shareholder Loan Accounts
If a corporation maintains shareholder loans, detailed records of advances, repayments, and terms are required. Improperly documented shareholder loans are a frequent red flag during audits.
Corporate Tax Returns
Auditors will review previously filed corporate tax returns and compare them against financial statements and source documents. Discrepancies may result in reassessments.
Records of Capital Assets
Purchases and sales of capital assets, along with depreciation schedules, must be documented. This ensures that capital cost allowance (CCA) deductions are calculated accurately.
GST/HST Records
If the corporation is registered for GST/HST, documentation must support input tax credits and collected amounts. The CRA often reviews GST/HST compliance alongside corporate income tax.
Related-Party Transactions
Transactions with related businesses or individuals must be supported by contracts, invoices, and fair market value assessments. The CRA carefully examines related-party dealings to prevent income shifting or tax avoidance.
Electronic Records and Digital Documentation
The CRA accepts electronic records provided they are accessible, readable, and complete. Businesses that use accounting software should ensure backups are maintained. The CRA may request access to electronic files, including point-of-sale data and spreadsheets. Deleting or altering records after receiving an audit notice can result in serious penalties.
Best Practices for Managing Audit Documentation
- Maintain year-round record-keeping rather than waiting until tax filing season
- Reconcile bank statements and accounting records monthly
- Separate personal and business expenses to avoid confusion
- Store records securely, both physically and digitally
- Create organized filing systems for quick retrieval during audits
- Retain documentation for six years or longer if disputes remain unresolved
Risks of Poor Documentation
Failing to provide complete records can have significant consequences. The CRA may deny deductions, disallow credits, or reassess income if documentation is missing or inadequate. In extreme cases, poor record-keeping can lead to penalties for gross negligence.
How a Tax Lawyer Can Help
A tax lawyer can review your corporation’s record-keeping practices, identify gaps, and prepare you for a potential audit. If an audit is underway, legal counsel can manage communications with the CRA and ensure that only the required documentation is provided, reducing the risk of unnecessary exposure.
Schedule a Free Consultation
If your corporation has been contacted about a CRA audit, documentation will be central to the process. Schedule a free consultation with Rosen & Associates Tax Law to review your corporate tax audit documentation and protect your business.
Disclaimer: This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions, you should consult a lawyer.
Elias Zafiridis