A tax audit is a frightening experience, and if the results are bad it can be a very expensive one. The CRA tax auditor will ask to see books and records and bank account statements. There may be questionnaires to be filled out. Any information that is wrong, even if due to an error, will be used against the taxpayer. A tax professional such as a Toronto tax lawyer should be involved as soon as the auditor contacts you.
Tax Audit Process
What happens when you are audited? Typically, you will first receive a notice from CRA of their intention to audit. The notice will usually outline the preliminary information that they require from you. They may then follow up and request more information. The beginning of an audit is the best time to obtain legal representation. Tax auditors are not always reasonable, and may not listen to your reasoning for filing your returns the way you did. We will speak to the auditors on your behalf, and begin the necessary legal work it takes to resolve all issues relating to your tax return.
If you disagree with the outcome of an audit, it is especially crucial to obtain representation as soon as you have been reassessed by CRA. You have appeal rights, but you only have 90 days to appeal by filing a Notice of Objection. As experienced Ontario tax litigation lawyers, we can provide detailed assistance in filing your income tax objection.
Canadian Tax Audits
There are over 350,000 audit and review actions conducted by the Canada Revenue Agency on a yearly basis. Around 15,000 of these audits deal with “cash only” businesses (i.e. the underground economy). Additionally, an estimated 35,000 are tax shelter audits.
CRA may choose to audit a taxpayer for several reasons. Here are just a few:
- Random selection
- Third party tips
- Comparison of information on returns to information received from third-party sources or
- Past history of non-compliance
The Canadian income tax system is based on “self assessment”. This means that it is up to every taxpayer to properly report their annual income on their income tax return. The CRA performs audits to ensure the “self-assessment” tax system continues to work properly. While most Canadians are truthful on their tax returns, there are some who are not.
Most audits are done to ensure compliance with the Income Tax Act or the Excise Tax Act fror GST/HST. An audit is an examination of a taxpayer’s returns and supporting records including bank accounts and receipts to make sure that income and expenses have been properly reported and are supported by accounting records.
Here are a few examples of issues that may arise in an audit that would cause a taxpayer to be reassessed at the end of an audit:
- Overstated Expenses
- Overstated Deductions
- Overstated Credits
- Underreported or unreported Earnings
- Unreported offshore income
- Unreported offshore income
- Unreported offshore assets
- Credits, such as for charitable donations, that are not supported by receipts
Be sure you have complete records detailing every expense and deduction you have claimed on your tax return!
Tax Assistance Centre
If CRA has informed you of an impending income tax audit, or you have unfavourable tax audit results, give our tax lawyers a call to set up an initial consultation. Our top Canadian tax law firm is your one stop tax assistance centre and can assist both during the income tax audit process and once the tax audit is been complete. CRA is not on your side, but our tax lawyers are!
We were retained by Don who runs a number of businesses near Kingston, Ontario and had various tax issues. One of his corporations was being audited for HST. His accountant was not able to properly represent him. We took over the audit file. We dealt with his bookkeeper to provide the records needed by the auditor and satisfied all of the auditor questions. All of the input tax credits (deductions) which were supported by receipts were allowed.
Z is based in Toronto and is in the business of purchasing cars for export. A GST/HST audit led to holds being placed on Input Tax Credit refunds of over $600,000, which the client relied upon for operating capital. We were referred by his accountant and retained when the accountant was unable to make any progress. We made detailed submissions to the auditor supporting the refunds and demanded a release of the withheld funds. After escalating to the auditor's team leader we were successful in achieving rolling monthly refunds for the remainder of the audit. By the conclusion of the audit we had been successful in protecting the client's cash flows and achieving a complete refund of the Input Tax Credits.
Dennis is retired and worked in finance. He lives in Newmarket, Ontario and in the Caribbean and had complex issues related to overseas holding corporations and assets. He retained our Toronto tax law firm to assist him with his CRA tax audit.The main tax audit issue was that the overseas bank accounts, assets and all supporting documentation were held in the corporation's name. Our Toronto income tax lawyers reviewed the records and then instructed the accountant to provide all of the relevant tax books and records to the CRA tax auditor and supplied bare trust documents. Our Canadian tax lawyers provided a detailed explanation and rationale regarding Canadian income tax law and the bare trust concept and its treatment for income tax purposes that resulted in a complete acceptance of Dennis's original filing position.