Trust Audits

Payroll and HST audits are performed both randomly and when there are risk factors. The CRA identifies returns with a higher risk of errors or omissions and targets those in conjunction with other files targeted at random.

Of course the CRA also performs certain targeted HST audit programs, such as the audits which have been ongoing in the gold bullion industry in Canada – a source of hundreds of millions of dollars of lost (disappeared) HST.  The employment agency industry is another good example.  There are other “carousel” schemes like those in the bullion and employment agency industries at play where HST eventually evaporates and goes offshore or into hiding.  People involved in industries where these carousel schemes are entrenched are likely to get audited – whether they participated in the scheme or not.

There is generally no difference in mechanics between a trust audit and a tax audit.  The auditors will generally ask for the same things and look at the same types of books and records.  Of course a payroll auditor will look at certain documents such as T4 summaries, which are usually of no interest to income tax auditors.  But the majority of the audit is the same.  Different auditors are just looking to make different types of reassessments.

And it should be noted that in the course of a payroll audit, the CRA will be looking into:

1. a) whether the business has been withholding and remitting the correct payroll taxes; and / or
2. b) whether all workers are correctly designated as employees or contractors.

It is not uncommon for an audit to examine both aspects.

Sometimes despite a business employing a worker as a contractor, the CRA claims that the worker is in fact an employee.  They like it better when people are employees.   But fear not, for an assessment that a worker is an employee can be challenged.

In preparation for a payroll audit, consider:

• Have all necessary payroll deductions been remitted?
• Is the business withholding the correct amount for Employment Insurance (EI), Canadian Pension Plan (CPP), and income tax?
• Are all employees adequately documented? For example, does the business have employees addresses and Social Insurance Numbers?
• Are all contractors appropriately documented? This takes the form of either a business number or a Social Insurance Number?
• Are the workers employees or contractors? What kind of agreements are in place? Legal counsel can help make those determinations before an audit.
• Are all relevant legal agreement and contracts available and up to date?

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