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What is a Net Worth Audit?
Under the Income Tax Act, The Canada Revenue Agency (CRA) has the power to raise an assessment regardless of whether a tax return has been provided. The CRA can review a taxpayer’s lifestyle or assets and compare it with his reported income. During this process, the CRA evaluates the appreciation of a taxpayer’s wealth by comparing the assets and liabilities. Any discrepancy between a taxpayer’s wealth increase and his reported income will be deemed as unreported income.
When should you expect a net worth audit?
The CRA will usually conduct a net worth audit if a taxpayer’s records are unreliable or there is evidence that indicates the taxpayer’s lifestyle doesn’t match his income on the tax return. In particular, the CRA focuses on cash-based businesses such as restaurants, hair salons or convenience stores because it’s harder for the CRA to track all of the transactions.
When should you expect a net worth audit?
The CRA will usually conduct a net worth audit if a taxpayer’s records are unreliable or there is evidence that indicates the taxpayer’s lifestyle doesn’t match his income on the tax return. In particular, the CRA focuses on cash-based businesses such as restaurants, hair salons or convenience stores because it’s harder for the CRA to track all of the transactions.
How to challenge a net worth audit?
The CRA tends to use incomplete information to reconstruct a taxpayer’s wealth increase, therefore the method often involves errors or omissions. Unfortunately, the only way to fight a net worth audit is to challenge every single element of the net worth assessment and it is almost always a painful and daunting task for a taxpayer who is not a tax professional. Therefore, it is highly recommended for a taxpayer to contact a tax lawyer right away when he’s notified of a net worth audit.
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