What to Expect During an Audit — and How to Prepare
Getting audited by the CRA can be an arduous process, fraught with requests for extensive documentation and information. However, with diligent record-keeping and knowledge of your rights as a taxpayer, you can navigate your CRA tax audit with relative ease and limited stress.
What is an Audit?
The CRA conducts an audit to verify the information provided to it by a taxpayer. In so doing, the CRA will often inspect the books and records of the taxpayer in order to ensure that this substantiating documentation accords with the information the taxpayer has reported to the CRA.
The Audit Process
Initial Contact with the Taxpayer
The audit process typically begins with the CRA making initial contact with the taxpayer. During this initial contact, the CRA auditor will inform the taxpayer that they are under audit and will likely request substantiating documentation from the taxpayer. The auditor may also conduct a field audit, whereby they come to the taxpayer’s place of business to examine their books and conduct interviews.
The Audit Proposal Letter
Once the auditor has finished examining all of the information that has either been provided to or obtained by them, they will send a proposal letter to the taxpayer. In this letter, the auditor will explain their findings and proposed adjustments.
The Taxpayer’s Response
Following the receipt of an audit proposal letter, the taxpayer has the opportunity to respond by providing additional substantiating information and documentation to the auditor.
The Audit Decision Letter
The auditor will consider the additional information provided to them by the taxpayer, and once they have done so, will issue a decision letter confirming the CRA’s final position. At this point, the auditor may issue reassessments resulting in an increased tax liability for the taxpayer. The taxpayer has the option to object to this decision and these reassessments.
The Taxpayer’s Rights
Per the Taxpayer Bill of Rights, the taxpayer is entitled to a multitude of rights that are enshrined in both the Income Tax Act and Excise Tax Act. Some of the key rights during an audit include:
- The right to complete, accurate, and timely information
- The right to accountability
- The right to professional representation
For ease of reference, please refer here: https://www.canada.ca/en/revenue-agency/corporate/about-canada-revenue-agency-cra/taxpayer-bill-rights.html
Tips for Preparing for an Audit
- Ensure that you are keeping extensive and thorough financial records
- Review the Taxpayer Bill of Rights in its entirety to ensure you’re aware of all of the entitlements at your disposal
- If you don’t understand why the auditor has made a particular decision, ask them for an explanation or request their internal documents through an Access to Information and Privacy (ATIP) request
- Seek the assistance of a lawyer in communicating with the CRA and preparing submissions to the auditor
An audit can often feel incredibly burdensome, but understanding the process and what you can do to protect your interests can limit the amount of stress you experience. By keeping adequate financial records and engaging the services of a legal professional, you can confidently and competently navigate your audit experience.
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