Understanding Tax Audits in Canada
This post explains what tax audits are, how they’re conducted, and what to do if found non-compliant. A must-read for Canadian taxpayers.
As a Canadian taxpayer, it’s important to understand the process of tax audits, which are conducted by the Canada Revenue Agency (CRA) to ensure compliance with tax laws and regulations. This is essential to the CRA as the Canadian tax system in a self-reporting one, and audits are required to ensure compliance. In this article, we’ll discuss what a tax audit is, how it’s conducted, and what steps you can take to prepare for and navigate the audit process.
What is a tax audit?
A tax audit is a review of a taxpayer’s financial and tax records to ensure they’ve accurately reported their income and claimed appropriate deductions and credits. Tax audits can be triggered by a number of factors, including discrepancies in reported income, large deductions or credits claimed, or a history of non-compliance with tax laws.
How is a tax audit conducted?
When the CRA decides to audit a taxpayer, they’ll typically send a letter outlining the audit process, what line item or claim they are reviewing (in other words, the purpose of the audit) and requesting documentation to support the taxpayer’s reported income and deductions. The auditor may also request a meeting to discuss the audit and answer any questions the taxpayer may have. This meeting can take place virtually or in person.
During the audit, the CRA will review the taxpayer’s financial and tax records, including bank statements, receipts, invoices, and tax returns. They may also request additional documentation, such as employment contracts or rental agreements.
If the auditor finds discrepancies in the taxpayer’s reported income or deductions, they may issue a reassessment, which could result in additional taxes owing, interest charges, and penalties.
What can you do to prepare for a tax audit?
If you’re facing a tax audit, there are a few steps you can take to prepare:
Gather all relevant documentation: Before the audit begins, gather all the documents the CRA has requested, as well as any additional records that may be relevant to the audit.
Review your tax returns: Review your tax returns for the years under audit to ensure they’re accurate and complete. Make note of any areas where you may need additional documentation or where you may have made errors.
Seek professional advice: Consider hiring a tax professional, such as an accountant or tax lawyer, to help you navigate the audit process and ensure you’re fully prepared.
What are your rights during a tax audit?
As a taxpayer, you have certain rights during a tax audit, including:
The right to representation: You have the right to be represented by a tax professional during the audit process.
The right to privacy: The CRA must respect your privacy and only request information that’s relevant to the audit.
The right to appeal: If you disagree with the auditor’s findings, you have the right to appeal the reassessment through the CRA’s appeals process by filing a Notice of Objection. Ultimately you also have the option to appeal to the Tax Court of Canada, should you not agree with the findings of the objection.
What happens if you’re found non-compliant during a tax audit?
If the auditor finds that you’ve underreported income or claimed inappropriate deductions, they may issue a reassessment, which could result in additional taxes owing, interest charges, and penalties. The amount of penalties and interest charged will depend on the severity of the non-compliance.
In some cases, the CRA may also launch a criminal investigation if they suspect the taxpayer has intentionally avoided paying taxes or committed fraud. This can result in fines, imprisonment, or both.
It’s important to note that the CRA has the authority to request information from third parties, such as banks or employers, to verify a taxpayer’s reported income and deductions.
While the prospect of a tax audit may seem daunting, it’s important to remember that the CRA’s primary goal is to ensure compliance with tax laws and regulations. By being proactive and preparing for an audit, you can help ensure that the process runs smoothly and minimize any potential penalties or interest charges. If you’re unsure about your tax obligations or have concerns about an upcoming audit, consider consulting with a tax professional who can provide guidance and support throughout the process.
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.