Canada: When The Canada Revenue Agency Checks Up On You

Last Updated: February 23 2015
Article by Crowe Soberman LLP

We've all felt it - that sense of impending doom when we check our mailbox and find a letter from the Canada Revenue Agency (CRA) questioning an item in our tax return. The initial feeling is panic, followed by questions of "What have I done wrong?" and "Why am I being audited?" However, there is no reason to fret; every letter from the CRA does not mean that you are being audited. In most cases, it simply means that your return has been selected for review. Take a deep breath; there is a significant difference between a review and an audit.

An audit is an extensive inquiry into one's entire income tax return, usually for more than one taxation year. The CRA will examine most amounts in the tax return, and support will need to be provided for discretionary deductions and filing positions.

A review, on the other hand, is simply a request from the CRA for support for a single amount in a tax return for a particular year. There are different types of reviews, but all are routine procedures that occur either before or after the CRA assesses an individual's tax return.

That being said, there are certain factors that tend to trigger a CRA review.

"Why me?" Potential reasons why your return may be selected for review

The CRA says that whether you file your tax return by paper or electronically does not impact whether you are chosen for a review. Our practice has indicated differently. Now that the majority of personal income tax returns are electronically filed without any tax slips or other supporting documentation, the number of pre-assessment and processing reviews (i.e. reviews that take place shortly after a return has been assessed) has increased significantly. Given that tax returns prepared by an accountant now almost always have to be electronically filed, we expect the high volume of pre-assessment and processing reviews to continue.

Tax returns may be selected for review for several reasons, including:

Your review history. If you were selected for review in a prior year, and an adjustment was made to your return as a result, you are more likely to be selected for another review in a future tax year.

A discrepancy was found between information reported on your return and information reported on a tax slip received by the CRA. This is the result of the CRA's matching program, where its computers match up the tax slips it has received with the tax slips reported by the taxpayer. If there is a discrepancy, your return is flagged for review.

Particular types of deductions or credits claimed. We have found that the following types of deductions and credits are most likely to result in a tax review: tuition, rental amounts claimed for the Ontario Energy and Property Tax Credit, Federal foreign tax credits claimed by individuals earning income outside of Canada, donations, medical expenses and childcare expenses.

Consequences: Why the Canada Revenue Agency review request should never be ignored

Neglecting a request from the CRA for information is never a good idea. The CRA will not simply go away, and there are many potential consequences if the request is ignored. If accurate and complete information is not provided in the specified time frame in the review letter (typically 30 days), the amount in question will be denied or modified based on the information available to the CRA.

For example, if the review request asks for the documentation to support the donation tax credit and all of your charitable donation receipts for the year are not sent to the CRA within 30 days, your donation credits will be disallowed and your net taxes owing will be adjusted accordingly. Any tax balance owing may be subject to interest and possibly penalties.

However, the CRA is fairly lenient and offers another chance at redemption. If you obtain and send your documents after the date indicated on the original review letter, the CRA will review these documents at the time that you send them and, more often than not, they will revise the amount in due course (although it is often a much longer process than if the supporting documents were submitted within 30 days of the original request).

Though they may seem intimidating, tax reviews are part of the system of "checks and balances" in our self-assessment tax system. As long as you ensure that accurate records are kept and all relevant receipts, slips and documentation are readily available, responding to these tax reviews is quick and painless.

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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