The Canada Revenue Agency performs tax audits to help ensure a “self-assessment tax system” where taxpayers are compelled to accurately and honestly declare their taxes under the risk of being audited by the CRA and having various penalties, including criminal prosecution, applied for inaccurate tax filings. The Canada Revenue Agency maintains that an effective self-assessment tax system where Canadians voluntarily follow the tax laws can only be achieved via a “vigilant and continuous inspection of returns.” In other words, the CRA asserts that without the threat of the Canadian government auditing the tax filings made by taxpayers, the tax system would be rendered ineffective. The CRA also states that the one-on-one contact with an agent of the Canada Revenue Agency affords the opportunity for Canadians to get a more personalized view of the tax system and helps to create an environment where taxpayers conclude that it is the responsibility of every Canadian to contribute their share to the Canadian tax system.

The CRA divides and categorizes taxpayers by groups, and these groups will either have a low tax compliance rating or a high tax compliance rating (based on past tax audits and other evaluations). Tax groups may be established using different criteria, including profession, type of business, and income levels. To maximize efficiency, the Canada Revenue Agency will thus focus their efforts on the groups that are least likely to be filing accurate tax returns with the objective that the auditing process will result in an improvement of that group’s tax compliance. The CRA, however, does state that each group should receive a minimal amount of tax audit investigations regardless of their tax compliance rating. Depending on the quantity of tax filings there were in each group and the amount of resources available at the Canada Revenue Agency, the CRA will then determine the tax audits that will be performed in each tax group.

In addition, there are three other ways in which taxpayers may be selected for the auditing process: 1) A tax group may be chosen for the CRA’s own testing purposes simply to obtain more information on a specific group 2) The CRA may have been given a lead on a specific individual or corporation from another file, tax audit or informer 3) The CRA may select a taxpayer that is somehow associated with another taxpayer already being audited. For example, if the individual being audited has a business partnership with another, then the CRA may then choose to audit both individuals.

A computer program generates a list of potential tax returns that may be audited, and the supervisor from each district office then decides which of those tax filings will undergo a tax audit. This selection is based on his or her own judgment and criteria.

The most common type of tax audit is a field audit, where one or more CRA agents inspect and scrutinize the financial records of the taxpayer, typically in his or her own place of business or residence. The CRA agent will contact the individual undergoing the tax audit to set-up a date and time for the audit. Prior to the meeting, the CRA auditor will examine the taxpayer’s file to familiarize him or herself with the case. The file will include the current tax filing under scrutiny and may include such information as past tax audits and financial statements. Based on this preparation, the auditor will go into the meeting with a list of questions for the taxpayer. The expert advice of a tax lawyer in this case is particularly important to advise you on the specific questions you should or should not answer or are legally required to answer to prevent damaging or self-incriminating statements from being made as well as to prevent any infringement of your rights by the CRA agent.

Upon commencement of the meeting, the CRA auditor will identify him or herself with the official CRA identification card. The tax auditor may then attempt to speak with the taxpayer rather informally to get more information about the taxpayer and/or the business or industry he or she is in. The auditor may also want to take a tour of the place of business. Again, the assistance of a tax lawyer is crucial to help assess whether or not these requests are legally required or to the best interest of the taxpayer.

The auditor will then begin with the analysis of the taxpayer’s financial records. How deep the auditor will dig into the taxpayer’s financial records is essentially up to the auditor and his or her supervisor. The CRA auditor may ask to examine bank account statements, invoices, journals, expense accounts, product inventory, sales contracts, appointment books, meeting minutes, shipping and receiving records, investments, etc. The tax auditor may also ask to speak with employees of the taxpayer. It is important to reiterate the benefits of legal representation at this stage of the auditing process, since a tax lawyer will defend your rights and represent your interests, unlike the auditor who is there solely to represent the interests of the Canadian government.

If the CRA agent decides that the information provided is inadequate or does not sufficiently explain the standard of living of the taxpayer, he or she may then have net worth statements drawn-up to establish or confirm the taxpayer’s income. According to the Canada Revenue Agency, this is done “in a small minority of cases.”

The CRA agent will normally save his or her queries for the end of the examination and will not question each individual item one by one. At the tax audit’s conclusion, the auditor will then decide whether a readjustment to your tax return is necessary. If it is so determined, then the taxpayer may request the proposed adjustments be put in writing for the taxpayer or his or her tax lawyer’s evaluation of these proposed changes, unless the taxpayer agrees with the auditor, in which case no proposal is drawn up and the CRA agent continues with the reassessment, where he or she issues a notice of assessment or notice of reassessment. If the auditor determines that the tax filing was accurate and there is no need for a readjustment, then the taxpayer or his/her representative will be informed.

Another way the Canada Revenue Agency may perform an audit is by way of an office audit, which is a tax audit that takes place in the CRA office. Here, the CRA agent will contact the individual or business being audited to request that the taxpayer send the information that the auditor needs in order to conduct the audit to the office of the Canada Revenue Agency.

According to the Canada Revenue Agency, the field audit itself can take anywhere from several hours to several weeks to complete, depending on the case under investigation. The time it takes to complete the entire tax auditing process is relative to complexities of the individual case, the size of the business (if applicable), and the organization and availability of the individual or company’s financial records. In Barrett Tax Law’s experience, it can take anywhere up to a couple years in extreme cases. Usually it is a matter of months or weeks.

Formal complaints must be done in writing via Form RC193 available at www.cra.gc.ca/complaints or by calling the toll-free line at 1-800-959-2221. The form has to be filled out and mailed or faxed separately from any other forms you may have for the CRA:

– Mailing Address:
CRA . Service Complaints
National Intake Centre
P.O. Box 8000
Shawinigan-Sud, Quebec
G9N 0A6, Canada

Fax: 1-866-388-7371

If you are not satisfied with the resolution offered by the Service Complaints office of the CRA, then you may contact the Taxpayers’ Ombudsman office to have them reassess the complaint and resolution made at the Service Complaints office. A complaint form, found at www.taxpayersrights.gc.ca/frm-fll-eng.pdf , must be filled out and mailed or faxed, along with other supporting documents to the following mailing address or fax number:

– Mailing Address:
Taxpayers’ Ombudsman
Suite 724, 50 O’Connor Street
Ottawa, Ontario
K1P 6L2, Canada

Toll-Free Fax Number: 1-866-586-3855

You can also call toll-free 1-866-586-3839 to have a complaint form mailed to you or to speak with a representative of the Taxpayers’ Ombudsman office.

Yes, according to the Income Tax Act, taxpayers are legally required to make their financial records available to authorized agents of the Canada Revenue Agency – but only those records specifically pertaining to the establishment of the amount of taxes that would be owed to the government. Also, the CRA may request to inspect the records of others, like your clients, to verify that your records are accurate. This information, however, does not have to come directly from you. You can, for instance, be represented by a tax lawyer and have an experienced tax lawyer help determine which financial records are absolutely necessary to comply with the tax law while at the same time ensuring your rights and interests are protected.

According to the Canada Revenue Agency, records are “accounting and other financial documents that should be kept in an organized way.” Financial records include bank statements, sales invoices, ledgers, journals, expense account statements and income tax records, among others. All financial records must be complete and be accompanied by supporting documents that would allow the auditor to verify that your financial records are reliable and true, like bank deposit slips, sales receipts and even emails that would support a particular financial record.

Taxpayers who have more than one business are legally required to keep separate financial records for each business.

Corporations are required to keep additional financial records, specifically: 1) Minutes of shareholder meetings 2) Minutes of meetings of the directors 3) Any financial information pertaining to the ownership or transfer of shares of the corporation 4) The general ledger or other books of final entry that includes summations of the corporation’s yearly transactions 5) Specific agreements or contracts that give any additional insight to the general ledger or books of final entry 6) Supporting documents to any transactions made by the corporation.

Basically, any individual who has a business or is involved in any commercial activity is required by law to keep adequate financial records. The Canada Revenue Agency defines “adequate” as those records that would be sufficient to determine the amount of taxes owed to the government of Canada. In addition, partnerships, corporations and trusts are also obligated to keep adequate financial records, including those who have to pay or collect taxes on behalf of the Canadian government, such as payroll deductions and GST/HST. And, of course, those individuals who have to file income tax returns and/or GST/HST returns, those who request GST/HST rebates or refunds, payroll service providers, non-profit organizations, registered charities, holding companies, inactive corporations, registered agents of registered political parties, official agents for federal election candidates, universities, colleges, municipal corporations, hospitals and school authorities are required to keep adequate financial records. Individuals who have more than one business are legally required to keep separate financial records for each business.

Unless specifically permitted by the Canada Revenue Agency, financial records must be kept in the place of business in Canada or residence of the taxpayer in Canada. Electronic records kept on servers outside of Canada but accessed from Canada are NOT in compliance with this requirement. Permission may be requested to have financial records be kept elsewhere, including outside of Canada, at the taxpayer’s respective tax services office. Registered charities and registered Canadian amateur athletic associations, however, are obligated to keep their financial records in Canada.

Generally, you must keep all of the records and supporting documents that are required to determine your tax obligations and entitlements for a period of six years from the end of the last tax year to which they relate. The six-year retention period begins at the end of the tax year to which the records relate, keeping in mind that if the taxpayer filed their taxes late that the six-year period begins as of the date in which the taxes were filed. The tax year is the fiscal period for corporations and the calendar year for all other taxpayers.

Financial records having to do with long-term acquisitions and disposal of property, the share registry, and other information relating to the sale or liquidation of a business, however, must be kept indefinitely. Corporations are required to keep all important documentation (all records and supporting documents to verify the tax obligations and entitlements; share registry, acquisitions, disposal of property, etc.) until two years after the dissolution of the corporation. The CRA may also explicitly require in writing via registered mail or delivered in person by a CRA representative for certain financial records to be kept for a longer period of time.

Financial records along with any supporting documents may be kept in paper format. Also, it is acceptable to take financial records originally generated in paper format and change and keep it in an electronic, readable and accessible format. For example, scanning receipts and invoices and storing it in your computer is allowed by the CRA. Moreover, electronic and readable financial records originally produced electronically are acceptable. It is important to note that you are obligated to keep any electronic records in its electronic format regardless of whether you have print-outs of these records. Individuals who have more than one business are legally required to keep separate financial records for each business.

You can find more information about keeping electronic records at the Canada Revenue Agency web page: http://www.cra-arc.gc.ca/E/pub/gm/15-2/README.html or by calling the Canada Revenue Agency toll-free telephone line for electronic record keeping at 1-800-959-5525.

According to the Canada Revenue Agency, taxpayers are legally responsible for their own financial records, regardless of whether they have hired a third party to maintain their financial records. If, for example, the bookkeeper loses or misplaces your financial records, the CRA will still hold the taxpayer responsible. As such, it is always a good idea to personally have a copy of all of your financial records.

The CRA requires that e-commerce businesses with internet-based or telephone-based sales transactions keep whatever information would be necessary to help substantiate claims made by the taxpayer regarding their sales activities, for instance, emails and web logs confirming sales transactions. If a third party is responsible for the e-commerce transactions of a business, like a separate online billing software, then it is still the responsibility of the taxpayer to retain this information. Plus, third parties may keep such financial records for a limited amount of time and likely less than the time required by the Canada Revenue Agency. It is important to note that financial records stored in a computer or server outside of Canada is NOT in compliance with the CRA’s requirement to have such information stored in Canada, regardless of whether you can access such information from within Canada. Permission may be requested to have financial records kept outside of Canada at the taxpayer’s local tax services office.

Taxpayers employing others and deducting contributions for the Canada Pension Plan, Employment Insurance, and other income tax payments must also retain records that indicate the time worked by each worker and any financial record that would support the payments made by each employee to the Canada Pension Plan, Employment Insurance and other income taxes. In addition, Form TD1, Personal Tax Credits Return, a form that must be filled out by all employees, must be kept as well as any CRA letters of authority that permits the employer to decrease the tax contributions made by some employees for certain years. Information slips and all tax returns that were filed must also be kept as well as registered pension information for each employee. If an outside company is being used to manage the business’ payroll tasks, the employer is still legally responsible for ensuring this information is kept for the period required by the Canada Revenue Agency, which is generally six years. NOTE: Those taxpayers employing individuals working in Quebec must also keep Form TP1015.3-V, Source Deductions Return, a form that must be filled out by all employees living in Quebec and available on the Revenu Quebec web site: www.revenu.gouv.qc.ca . For more information about financial record keeping for employers, you may also read the CRA’s guide, “Employers’ Guide: Payroll Deductions and Remittances” at http://www.cra-arc.gc.ca/E/pub/tg/t4001/README.html or for other useful information about the responsibilities of taxpayers employing others, visit www.cra-arc.gc.ca/payroll

In order to legally throw out or otherwise destroy the financial records of a deceased taxpayer, you must obtain a clearance certificate from the Canada Revenue Agency. To receive a clearance certificate, you must fill out Form TX19, Asking for a Clearance Certificate, located at http://www.cra-arc.gc.ca/E/pbg/tf/tx19/README.html and then send the form to a tax services office in your area.

The only way you can legally destroy financial records prior to the time prescribed by the Canada Revenue Agency is to receive expressed permission from the CRA. To request such permission, Form T137, Request for Destruction of Books and Records, must be filled out and sent to the tax services office. The form can be found at www.cra-arc.gc.ca/E/pbg/tf/t137/README.html . Those individuals who destroy financial records prior to the time allowed by the CRA run the risk of being criminally prosecuted.

If the financial records being kept electronically were damaged, destroyed or lost, then the CRA requires that they be contacted at 1-800-959-5525 to report the incident. It is also the responsibility of the taxpayer to recreate the financial files within a reasonable amount of time.

According to the Canada Revenue Agency, an audit trail is “the information that is required to recreate a sequence of events related to a business transaction.” You are legally required to keep any financial information that would be needed to create an audit trail, such as paper receipts and stock inventories. For e-commerce businesses, this includes emails or web logs that are used to confirm the sales transaction and even recorded voice confirmation, if that is what is used to confirm a sales transaction

Barrett Tax Law is pleased to offer the following tax audit tips to help prevent the likelihood of an audit. Of course, these audit tips do not serve as a guarantee that a tax audit will not occur, but are simply helpful preventative strategies to help reduce the possibility of CRA tax audit:

1. File on time! Tax returns filed after the prescribed deadlines are more likely to be red flagged and selected for a tax audit.

2. Do not file your tax return before obtaining all of the necessary financial documents you need to make an accurate tax filing. Filing too early will increase the likelihood of an inaccurate tax filing and thus the chances of having to make a tax readjustment, which then alerts the CRA and increases the chances for a tax audit.

3. Double-check, triple-check, quadruple-check your tax return. Any mathematical error may increase the likelihood of a CRA tax audit. Use a tax software program or the expertise of a tax professional to minimize mistakes.

4. Be honest. Exaggerating expenses or deductions and/or underreporting your income will increase your chances of being audited. The CRA has industry-specific information and will match the information you provide with the information they have, and if there is a major discrepancy, you may be selected for a tax audit. They may, for instance, see if your lifestyle matches the income you are reporting by doing a simple postal code check and assessing whether the neighbourhood you reside in fits your income level or even check vehicle registrations to see if the car you drive matches your declared income. Another common occurrence is unusually large home office deductions, where taxpayers working from home attempt to deduct a very large portion of their mortgage interest or maintenance expenses. If you are running your business from home, make sure that you deduct a reasonable amount for your home office or you may be targeted for an audit. Lastly, if your business expenses are enormous compared with your earnings, then that will act as an indicator that that you are overstating your expenses and will increase the chances for a tax audit.

5. Choose your partners wisely. If you are considering investing, partnering, merging or associating yourself with an individual or business, investigate whether they have ever had problems with the Canada Revenue Agency or are engaged in shady business practices, since the CRA will likely audit you if they choose to audit this business or individual, simply because of your association with the business or individual. The same holds true for charities to which you are considering contributing. If the charity offers to give you a receipt that is higher than the amount you are donating, then be aware that this charitable organization may be audited, which means you may come under investigation and be required to pay back your tax refund along with interest and possibly penalties.

6. Try to avoid major changes in income levels, expenses and/or tax deductions from one year to the next. Anything out of the norm will be red flagged and will increase the likelihood of a tax audit.

7. Avoid continuously declaring business losses. There is a reasonable amount of business losses that the CRA will accept, but after a few years of continuous business losses, the CRA will likely get suspicious and consequently select your tax return for auditing.

According to the Canada Revenue Agency,

There were over 370,360 audit and review actions performed by the Canada Revenue Agency during the 2008/2009 tax year. Of this amount, 12,800 dealt with acts involved in the underground economy, or what many refer to as “paying under the table.” Internationally, 1,439 audits were conducted. There were also 34,111 tax shelter audits. Of all of these tax audits, 164 cases were sent to the Public Prosecution Service of Canada and 58 GST audits to the Ministere de la Justice du Quebec for criminal prosecution.

1. Consult a tax lawyer. It goes without saying that due to the complicated nature of a tax audit, it is highly recommended to find a good tax lawyer to represent you during the tax audit. Tax auditors are trained to look through your financial records with a critical eye to find errors and omissions that could lead to a reassessment where you could end up paying more in taxes, interest charges, additional penalties, and not to mention possible criminal charges. Given all that is at stake (your financial welfare, your business’ survival, your mental wellbeing) it simply makes sense to have a trained legal professional on your side. If anything, seek a free legal consultation with a tax lawyer if only to find out what you can expect, the options you have at your disposal and to have your questions answered by an experienced legal professional who is trained to defend your interests at all possible legal means.

2. Do not volunteer any information to the tax auditor. The auditor will have a lot of questions for you and many specific requests. There is no need to volunteer any more information than you need to since you never know how that information can be used against you. It is best to stay quiet and only answer the specific questions asked of you and only hand over financial records specifically requested. Do not make conversation. Do not get drawn into what may only seem as harmless chit chat with the auditor.

3. When in doubt, remain silent. If you’re in doubt about answering a specific question or handing over some information because you fear that it could be incriminating, then consult a tax lawyer immediately. It is better to take note of the question or request and let the auditor know that you will be getting back to him or her with the reply shortly. It is a good idea to have a standard reply ready for such questions: “I am going to take note of the specific question you are asking me, just to make sure I understand it correctly, and I will get back to you shortly with the answer.” If they insist on getting a reply right away, simply restate what you have said with a little variation: “I understand that you would like to get your work done quickly, and believe me I want you to get it done as quickly as possible too, so I will take note of your question and get back to you just as soon as I possibly can.” If they keep insisting, keep repeating your answer. The CRA agent will realize sooner or later that you will not budge on your position. Afterwards, call a tax lawyer immediately to find out what potential risks there are in answering the question or handing over the information to the auditor.

4. Don’t let your guard down. Tax auditors are not your friends. They may try to speak casually to you, to make small talk, but do not for a moment let your guard down. Always remember that they are there for one thing and one thing only, to find mistakes in your tax return.

5. You have rights, learn them. The Canada Revenue Agency has published the Taxpayer’s Bill of Rights, and although some of these rights are not legal rights that have the force of law behind it, it is still a good idea to know the principals behind which the CRA hopes to conduct their tax audits. See the section on Taxpayer’s Bill of Rights found here.

6. Do not be afraid to appeal the results of the audit. If you believe that the audit was done unfairly or the CRA agent made a mistake in his or her assessment, then speak with the auditor to try to reach a compromise. If this doesn’t help, speak with the auditor’s manager. If the result is still not to your liking, then go through the appeals process outlined here.

7. Be organized. It is your legal duty to keep and maintain the financial records that would serve to prove the amount of taxes you should be contributing. Keeping those financial records in an organized format lends credibility to you as a responsible citizen and taxpayer. Making it harder for the auditor to go through financial information because the information is kept in a disorganized fashion will only lead the auditor to assume that a mistake was committed by you or that you are trying to hide something from the auditor and are thus attempting to make it hard for the auditor to find that mistake. If anything, this will only encourage the auditor to work even harder to find an error or omission in your tax return.

8. Make copies of all of the financial records being asked of you and keep all of the originals. Do not assume that the CRA agent will care for your financial records in the same way you would. These records could still get lost or misplaced and you will nevertheless be held responsible for those missing financial records.

9. Be polite. Yes, you are likely feeling very stresses out about the whole ordeal and perhaps are frustrated or even angry that you were chosen to be audited. However, taking it out on the CRA agent will get you absolutely nowhere. Tax auditors get yelled at all of the time and it would likely be very refreshing to encounter a taxpayer who is polite and refrains from rude or confrontational conduct. Behaving civilly will definitely not work against you, but rude or outright abusive behavior is very likely going to play against your favour. This in no way means that you need to be friends with the auditor and take him out for a cup of coffee afterwards, but you could consider offering him a cup of coffee and a muffin when he arrives in the morning. It couldn’t hurt.

Yes, yes and YES! Although it is not the norm, the Canada Revenue Agency can and does refer cases to the courts for criminal prosecution. During the 2008/2009 tax year, 164 cases were sent to the Public Prosecution Service of Canada and 58 GST audits to the Ministere de la Justice du Quebec for criminal prosecution. A total of 257 cases resulted in criminal convictions for tax evasion or tax fraud, as a result of previous years. referrals. If you fear you may be in danger of being criminally prosecuted for tax evasion, fraud or any other tax related charge, then it is imperative you stop reading this and consult with a tax lawyer now. Barrett Tax Law is pleased to offer small business owners and self-employed individuals across Canada a free legal consultation with an experienced tax lawyer at 1-877-8-TAX-TAX or consultations@fightthecra.ca . All legal consultations, regardless of whether Barrett Tax Law is hired to represent the client, are protected by lawyer-client privilege and is thus completely confidential.

A notice of assessment is a statement sent by the Canada Revenue Agency to the taxpayer indicating the amount of taxes that is owed to the Government of Canada. This statement will also include, if applicable, the tax refund that the taxpayer will receive as well as any tax credits or tax payments already made to the Canadian government. Lastly, the NOA will state the contribution that a taxpayer can make to his or her RRSP (Registered Retirement Savings Plan).

A notice of reassessment, on the other hand, is a notice given by the Canada Revenue Agency to the taxpayer indicating a modification to the taxpayer’s original NOA, either due to the taxpayer’s specific request or the CRA’s own initiative.