Income tax assessments are at first instance normally based on a taxpayer’s own calculations of their income or loss for the year. This is known as the self-reporting system, and for a large number of Canadians, the only correspondence they ever receive from the Canada Revenue Agency (CRA) is their yearly assessment after filing their taxes – usually based on the numbers they’ve provided. If discrepancies arise, seeking guidance from a Toronto CRA audit lawyer can help taxpayers navigate the complexities of reassessments and audits
That being said, a self-reporting system is ripe for abuse; in order to make sure that every taxpayer is paying their fair share, the CRA conducts hundreds of thousands of audits every year. The CRA audit process relies on multiple factors to determine who gets selected. The CRA audit representation team applies risk assessment models to select individuals or businesses, focusing on those operating in industries like construction, restaurants, and cash-based businesses. Additionally, third-party tips, past poor compliance, and even random selection influence the CRA audits process.
There are numerous “styles” of audits that the CRA undertakes. Some common examples include:
A simple credit or expense may be confirmed by way of a written letter to the taxpayer, asking for documents to support the expense and any required explanation. These types of CRA audits are referred to as desk audits; they are normally handled by a CRA tax auditor in one of the Tax Services Offices who work off a group inventory of cases. Often, the taxpayer will never directly speak to the auditor.
An active business may be selected for a more detailed CRA tax audit, where a CRA auditor visits the business premises. The auditor will conduct interviews, review accounting systems, examine bank statements, and assess internal controls. These field audits can last for months, and in many cases, a CRA audit lawyer can help in managing the process efficiently.
Taxpayers, whether individuals or businesses, who are required to file the T1134 or T1135 forms for foreign holdings, may be selected for a CRA compliance audit. These audits often begin with a written letter requesting information, followed by in-person interviews. The CRA will cross-check foreign banking details using international tax treaties to verify accurate reporting.
Where a taxpayer is suspected of not reporting all of their income, the CRA may initiate a net-worth audit. In this case, the CRA compares a taxpayer’s declared income against their actual lifestyle expenses. This type of CRA audit involves detailed scrutiny of banking transactions, real estate purchases, and financial records. A CRA tax audit lawyer can provide critical representation to challenge unfavorable reassessments and reduce potential penalties.
It should also be noted that the CRA’s audit powers are vast – section 231.2 of the Income Tax Act provides that auditors have the right to demand and inspect virtually any document from a taxpayer, including compelling third parties such as banks or business associates to turn over documents and information. Failure to comply may result in penalties or legal action. This is why having a CRA audit lawyer or CRA audit defense team is crucial.
All CRA audits can result in tax reassessments, interest, and in severe cases, gross-negligence penalties that increase amounts owing by 50%. If flagged for an income tax audit, it’s essential to consult a CRA audit representation professional immediately to reduce penalties or even eliminate reassessments.
If you have been selected for an audit, the best time to retain a tax lawyer is as early as possible to strategize confidentially. Our Toronto CRA Audit lawyers specialize in CRA audit defense, tax audit representation, and appeal processes. We ensure all CRA communication is handled through our office, minimizing the risk of adverse consequences. Contact us today to safeguard your rights and financial security. We offer multiple convenient locations in Toronto, Whitby, Barrie and more to serve our clients with ease. Find the office closest to you by calling us at 416-449-1400 or by visiting our locations page.
B.A., J.D.
