When it comes to paying taxes, everybody’s worst fear is receiving a notice of a CRA audit.
It happens to many small businesses. In fact, small businesses and professional services are more likely subject to CRA audits rather than individual taxpayers.
From the government’s perspective, personal income tax returns are not a large compliance risk, simply because those funds are already withheld at the source. The amount of tax withheld is stated clearly on each person’s T4, so it is easily verifiable.
It is a different story for people operating small businesses or offering professional services. Those practices represent a higher compliance risk for the government, and as a result, the government places higher priority and more resources into auditing those areas.
It’s not a guarantee that as a small business owner you will be audited. It’s just an observation that your chances of being audited are greater.
However, if you find yourself the subject of a CRA audit, don’t panic. There are some things you can do to make the process easier.
Being cooperative is always the appropriate approach. It sets the tone for the rest of the process and could weigh in your favour at decision time.
At the starting point, promptly respond to the agency’s communications. Ignoring them will not make the auditor go away. If anything, it may make them less tolerant when you ask for some flexibility.
Provide the Information
You should provide all the information and documents that the auditors request.
Even though you are being cooperative, it is important to remember your rights in this regard. CRA has the right to review your documents, but they cannot go on a fishing expedition.
Consequently, it is perfectly reasonable to:
- Ask the auditor to explain their reasons for the request, and
- Provide the requested information only. Do not offer or provide additional information they did not ask for.
Seek Professional Help
A tax accountant can help you by providing documentation, advice, support and guidance. Most importantly, a tax accountant can make sure the auditor understands your business and your transactions.
If it’s a field audit, meaning the auditor will come to your premises, then it’s perfectly reasonable to ask the auditor to have the meeting in your accountant’s office. It will make the audit process go smoother by providing quicker responses to questions and faster access to documents.
If You Object, Don’t Delay
You do not need to accept the auditor’s word as gospel.
These processes are complicated, and auditors make mistakes too. Do not hesitate to ask your tax accountant for their opinion, or ask the auditor’s supervisor to review the work for possible errors.
If you want to file a notice of objection, do not delay. Keep your eyes on the deadlines and make sure you file your objection before time runs out.
Is There Flexibility in a CRA Audit?
Every taxpayer facing a CRA audit asks this question – whether there is “wiggle room.” The short answer is – it depends.
Every small business is unique, and every tax file will be judged on its overall circumstances. While some tax rules are black and white, it is safe to say that every file has areas where the auditor can use discretion and be flexible.
The best approach is to be cooperative and provide all the information requested. Making the auditor’s job easier will go a long way to getting that flexibility you are hoping for.
Have you been the subject of a CRA Audit?
What advice do you have for small business owners facing a CRA audit?