Updated on July 17, 2024 in Corporate Tax GST Payroll Personal Tax Small Business Tax Planning

AuditAUDIT is a SCARY word!!!

Why does the word “AUDIT” scare most taxpayers?

First, there is a misconception with the word AUDIT. Let me clarify between what CRA does and what Professional Accounting firms do.

Accounting firms use the word audit when performing an audit of your financial statements. For business purposes, an audit of your financial statements is generally done when required by investors, shareholders, bankers, etc. It is generally performed using a random sample of transactions, analytical procedures, discussions with shareholders and key staff, etc. NOT every single transaction is checked.

My focus here is on CRA Audits. Most taxpayers assume that when CRA audits them, it means that every single receipt, piece of paper, transaction, bank statement, credit card statement, etc. in your home and in your business will be rummaged through. Although there is a possibility, it is EXTREMELY RARE. In my 20+ years of Public Practice experience, I personally and professionally have not EVER had this happen to a client. I have heard from CRA and other Professional Accountants that this CAN happen although it is happening more often in recent years.

So now that you know YOU won’t likely be FULLY AUDITED unless you are guilty of not reporting all your income or your lifestyle not matching your income reported, let’s understand what AUDIT is and what actually happens during a CRA audit.

For personal tax purposes, CRA calls these audits pre-assessment or post-assessment reviews.

A pre-assessment review is when you file your personal taxes and upon submission to CRA, they decide they want proof of what was filed. With this type of review you will not receive your refund (if you are supposed to get one & yes, if you owe, you are still required to pay on time) until you supply the supporting documents they have requested. A letter is sent to you within a month or so of filing which will explain what information is being requested. Generally, they will request for 1-3 different items…but NOT usually every tax slip or receipt for ALL that was filed on your tax return. i.e. they may request your childcare receipts but not your medical and donations.

A post-assessment review is performed anywhere between a few months to a few years (up to 3 years) after you file your taxes. Again, CRA chooses a random sample of amounts,  categories, or line items which they want supporting documents for. When they request the information, you generally have 30 days to reply otherwise they will automatically deny the deduction or credit amount originally filed and claimed.

audit2.jpgWith both types of reviews, the audits are generally random however some can be triggered by the dollar amount or by key areas that CRA has chosen to get additional information on for that year. Documents are usually uploaded through your CRA My Account. It is RARE  that they would visit your personal residence or your Accountants office for this type of auditalthough this too is an area seeing more attention in recent years.

Over the years, I have noticed an increase (according to Audit Insurance as of March 2024 – 20% increase for all audit activity) in post-assessment reviews for taxpayers. Common ones include employment expenses, medical, moving expenses, donations, and tuition. They also do slip matching to ensure you reported all tax slips showing on their system to what you filed.

For other tax areas, like corporate tax, payroll, GST/HST, PST and WorkSafeBC there are a few other types of audits. Again, they are generally looking at one area and not the ENTIRE corporation. With corporate tax, they seem to have a cycle of what they target and the last few years it has been a cycle between professional fees, CCA rates on assets, and vehicle expenses. With payroll, they might be looking to make sure that automobile benefits are being recorded properly, if considered to be a taxable benefit. With GST, they might be looking to ensure that you are only claiming 50% of the GST on meals.

Secondly, I find most taxpayers who are afraid of AUDIT do not use a Professional Accountant. They either do it themselves, use a non-designated professional and/or are uncomfortable asking Professionals in their network for advice.

Not every taxpayer can handle all tax situations using a DIY approach. Don’t be afraid to ask for help. We, Professional Accountants, exist to help you, the TAXPAYERS!

I hope I have taken the SCARY out of AUDIT. Keep calm and call your Designated Professional Accountant!

***This blog is for information only and not to be used as tax advice or planning without first seeking professional advice. Information is subject to change without notice.