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.
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 uses a number of criteria to pick its targets, which it does not publish, though it can be inferred from experience. For example, the CRA focuses on “high risk” industries for greater scrutiny, generally those that typically operate on a cash basis such as restaurants and construction. Additionally, third-party tips, past poor compliance and even random selection form a part of the decision-making process.
There are numerous “styles” of audits that the CRA undertakes. Some common examples include:
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, and can even compel third parties, such as banks or business associates to turn over documents and information. Failure to do so by any one of whom a request is made can result in being charged with an offense under the Act.
All audits can result in a reassessment, penalties and interest owing, and in some cases the imposition of gross-negligence penalties which will increase the amounts owing by 50%. The key to managing audit risk is to have an experienced and knowledgeable tax counsel to guide the process – all communication with your tax lawyer is privileged & confidential meaning you can get advice and direction without fear of the CRA compelling it, as would be possible when dealing only with an accountant.
If you have been selected for an audit the best time to retain a tax lawyer is as early as possible so that you can discuss and strategize confidentially, and determine how best to respond in order to avoid damaging penalties or even eliminate the proposed reassessment where possible. Our lawyers can manage each stage of the process and ensure CRA communication is made only through our office, minimizing the risk of adverse consequences.
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.