An overview of how tax audits work and who will likely be
targeted. This article is part of a two-part series.
It appears that tax audits are on the rise around the world and
Canada is no exception.
In 2008, during the financial crisis, governments were cutting
taxes in an effort to revive the global economy. Now, more than
ever before, tax authorities around the globe are collaborating
with one another. Tax authorities including the Canada Revenue
Agency ("CRA") are placing greater scrutiny on taxpayers
in an effort to recover lost tax revenues.
Since tax audits are coming, what can you do to avoid them?
1. Keep complete books and records
Canadian tax laws generally require taxpayers to keep complete
books and records for at least six years from the end of the year
to which they relate. Not all CRA notices represent comprehensive
tax audits. Some notices simply request additional information to
corroborate specific information already reported on your tax
filings, which is why keeping complete books and records is
essential. Many comprehensive audits arise because of failure to
provide corroborating information to the CRA. This raises red flags
for the potential of more unsubstantiated tax reporting.
2. File on time
Make sure tax filings are completed on time. Not only does this
prevent incurring penalties and interest charges on late filings,
it also shows that you adhere to rules and could reduce your
chances of being audited.
3. Consistency is key
Generally, if the proportion of expenses to revenues is
consistent from year to year, the CRA is unlikely to investigate.
However, if there is a significant difference from one year to the
next, the CRA may be inclined to follow-up with a request for
information or an audit. A request for information or an audit may
be unavoidable, even if variances are legitimate. Therefore, be
prepared to substantiate any variance.
4. Keep it clean
The CRA is more likely to flag returns of taxpayers for
follow-up or audit if they have found errors on a taxpayer's
return in the past. You should ensure accuracy and completeness of
returns prior to filing. However, if you find a mistake after
filing, be proactive and file an adjustment rather than let the CRA
find it for you.
CRA Initiatives you should know
1. Related Party Initiative (RPI)
The CRA is targeting high-net-worth individuals, which generally
includes individuals and related groups with a net asset value of
$50 million or more. These individuals are receiving questionnaires
requesting detailed information on a variety of related entities
that will likely be used as a basis for determining which taxpayers
2. Self Review Letter Initiative
Recently, the CRA introduced the Letter Initiative to inform
Canadians of their personal tax return obligations. This initiative
will likely continue. As part of this campaign, the CRA sends two
different letters to taxpayers. One letter states that certain
claims have been made on your tax return and provides you with an
opportunity to review your claim, allowing you to determine if you
need to make an adjustment. The other letter notifies taxpayers
that the CRA may be conducting audits in their sector of activity.
Sectors are flagged after several taxpayers within a certain group
send in adjustments and the CRA will likely target taxpayers in
that group for audit.
3. Investment and donation schemes
Investment and donation schemes are targeted and audited by the
CRA. Taxpayers participating in these schemes have a higher chance
of being audited. Such claims are red flags on tax filings. If
something seems too good to be true, it likely is.
More information will follow in a subsequent article on how to
prepare for and deal with a tax audit.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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With the 2017 federal budget likely due to be released in late February or March, there is speculation that the government may curtail the preferential tax treatment afforded to gains on the disposition of capital property
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