By now, most Canadians will have filed their 2016 tax returns — the formal deadline was midnight May 1st — but self-employed taxpayers and their spouse or partner have until June 15, 2017 to file. Once you’ve filed, you’ll likely receive your Notice of Assessment within a few weeks, which, for most people, will mark the end of their interaction with tax man until next year’s filing season.
But each year, the Canada Revenue Agency selects certain returns to audit, based on a risk assessment which considers a number of factors, such as the likelihood or frequency of errors in tax returns or whether there are indications of non-compliance. The CRA may also compare the information it has on file for you with information from similar files or consider information from other audits or investigations it has undertaken.
During an audit, the CRA will examine your books and records to confirm that the income, deductions and credits you claimed on your return are accurate and can be supported by the appropriate documentation.
If you have been selected for audit, a CRA auditor will either contact you by mail or phone (or both) to begin the audit process and inform you of the date, time, and location of the audit. For the most part, on-site audits will take place at your personal residence, place of business, or at your accountant’s office.
Alternatively, the audit may take place at a CRA office which may be outside your geographic region, meaning that you will be asked to send in copies of your records either by mail or through electronic document submission using the CRA’s secure online services.
An auditor can ask for your personal records as well as the records of family members. This information can include information available to the CRA, such as tax returns previously filed, credit bureau searches, or property database information. It can also request your business records, such as ledgers, journals, invoices, receipts, contracts, rental records and bank statements along with your personal records, including bank statements, mortgage documents, and credit card statements as well as the personal or business records of other individuals or entities not being audited, such as a spouse, family members, corporations, partnerships, or a trust.
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Once the auditor is done examining your records, he or she will either conclude that the previously-issued assessment was correct, in which case you will receive a completion letter and the audit will be closed or, if the auditor finds that your return has to be reassessed, you will receive a proposal letter explaining the reason for the reassessment. You will then have 30 days to agree or disagree with the proposal. Should you disagree, you may wish to contact the auditor to explain why you disagree and provide any additional documents that support your position; however, if there are issues that remain unresolved, you can contact the auditor’s team leader to discuss the matter further. If you ultimately disagree with the reassessment, you can formally appeal it.
A recent case decided last month demonstrates that if you are audited, it’s best to be co-operative with the CRA because in the end, in most cases, you will likely be forced by the courts to hand over your records anyway.
The case involved an appeal by a taxpayer from a decision of the Federal Court, which had upheld an order requiring the taxpayer to provide the necessary information and documents to the CRA in the course of an audit.
On April 16, 2014, the CRA advised the taxpayer, by letter, that his income tax returns for the 2006 to 2010 taxation years, which were under objection, and his returns for the 2011 and 2012 taxation years, which had not yet been assessed, were under review. In the letter, the CRA listed the specific records it required to carry out the audit.
The taxpayer and the CRA agreed to begin the audit on May 6, 2014; however, when the assigned auditor, along with her team leader showed up to perform the audit, the taxpayer stated that he would only allow one auditor to enter the premises and “no other person.” He also stated that he intended to videotape the audit process. As a result, the CRA decided not to proceed with the audit at that time as it was not confident that the taxpayer would have allowed the audit to proceed “without interference.”
In a letter dated May 28, 2014, the CRA notified the taxpayer that the Income Tax Act provided it with the authority to inspect the requested records and that the taxpayer “had failed to comply with CRA’s request to submit the records.” CRA advised that a failure to submit the requested records by the specified date would result in CRA seeking a compliance order.
The Federal Court of Appeal upheld the lower court’s decision that concluded that the CRA did not need the taxpayer’s consent to copy his records and that the taxpayer “could not dictate how the CRA conducts an audit or frustrate its ability to carry out its statutory duties by refusing entry to a second auditor or insisting on videotaping an audit process.”
It should be noted that this was not this taxpayer’s first litigation with the CRA. He sued the CRA in 2015 for $750 million and sought a court that would “render him immune from tax laws that apply to all citizens of Canada” and would prevent the CRA “from having any interaction in any way, shape or form with (him) ever again.”
He lost that case as well.