To promote adherence to Canadian tax laws and prevent tax evasion, the Canada Revenue Agency (CRA) conducts annual risk assessments on businesses and individuals after the tax season. For most business owners, this involves an informal review of specific aspects of their business, such as HST, and requests for certain online document submissions through CRA’s My Business Account. However, if the assessment identifies higher risk, formal audits of the entire business may be necessary.
Factors that Could Trigger Audits by the CRA
There are several factors that could potentially trigger an audit by the CRA. These include claiming unlikely deductions, a discrepancy between your reported earnings and expenditures, and discrepancies in comparison to returns filed by similar businesses in your industry code (SIC). Additionally, major changes or significant differences in your returns from previous years can increase your risk of an audit. Excessive claims, such as 100% of your vehicle expenses for business or recurring losses from self-employment, may also raise red flags.
In addition to these more obvious factors, the CRA also conducts random screenings, which means you could be selected purely by chance.
The Reason Behind Increased Audit Risk for Self-Employed Individuals
Self-employment carries a higher risk of audit because you are responsible for preparing your own financial statements, which increases the likelihood of errors in your deductions and claims, according to the CRA. However, utilizing online tools like QuickBooks Online by Intuit can help you keep a well-organized financial record of your business. This cloud accounting software is widely regarded as one of the most effective options for small businesses to set feasible goals and keep track of their money in real-time. While it requires human input to achieve optimal performance, our team of qualified staff offers comprehensive training to businesses from start-ups to take-offs under the guidance of our chartered accountants, as we are Intuit’s certified partner. By maintaining a clear record of your finances, you can rest easy even if you are selected for risk assessment.
The Typical Starting Point of Audits Process
The audit process usually begins with a call or email from an auditor informing you that you have been selected for screening. You will need to confirm the time and location, which may take place on-site at your business or over Zoom during COVID-19 lockdown periods. Before the screening, you will need to provide a long list of documents demanded by the auditor as evidence for your business finances.
During the screening, the auditor will review the documents you provide and compare them to the numbers you have reported on your tax return. If everything matches up, you are in the clear. While the experience may be nerve-wracking, using tools like QuickBooks Online can help you maintain clear financial records.
However, if the auditor finds discrepancies, you will be asked to provide clarifications. If your clarifications do not satisfy the auditor, your claims may be denied, and you may be subject to penalty charges.
Is it possible to dispute the finding of audits?
Yes, it is possible to contest the finding, but you must do so within a limited time frame (90 days from the day the Notice of Assessment is issued) by providing additional evidence and support to the CRA. You can do this by logging into your CRA My Account and selecting the “Register My Formal Dispute Option,” or by completing Form T400A and sending it in. If the CRA is satisfied with the additional information you provide, it will issue a Notice of Reassessment to overturn its previous decision.
However, there is a chance that the CRA will reject your dispute, leaving you with two options. First, you can pay the tax owed to the CRA before receiving the reassessment to reduce the interest accrued on penalties. Second, you can appeal to the Tax Court of Canada to contest the decision.