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What to Expect During a CRA Tax Audit: Tax can be a confusing and often stressful area to navigate, and it is easy to make honest mistakes when filling out the forms. These mistakes, accidental or intentional, however, will leave you open to the scrutiny of auditors. 

What to Expect During a CRA Tax Audit

A tax audit is designed to find potential discrepancies in tax return forms to ensure that everyone is paying the correct amount. Here we breakdown the process so that you understand why you may be subject to an audit and what you can expect in the case of an investigation!

What is a CRA Tax Audit?

The CRA refers to the Canadian Revenue Agency, and audits occur when this agency decides to inspect an individual’s tax returns to ensure that they are paying the correct amount of tax. During this time, the auditor is examining past tax returns for mistakes that could suggest that the individual owes more than they originally paid. 

Who is more likely to get audited?

The CRA is entitled to inspect the returns of anyone who pays taxes. It is normally businesses rather than specific individuals who are investigated.

Specific factors that may make you more likely to be audited include, but are not limited to:

  • Claiming that your vehicle is 100% for business purposes:

This is one tax deduction that is very likely to be disallowed by auditors conducting an investigation. This is because extensive records are very rarely kept properly. Small vehicles used by a company are very seldom used solely for business purposes.

  • Your business’ income compared to others in your industry: 

Is your income significantly higher or lower than the average in your industry that cannot be explained by the success of your business? If yes, you may be suspect to an investigation. 

  • Owning a cash-intensive business: 

Owners of cash-intensive companies may be tempted to under-report their profits to reduce their taxable income. Cash can be hard for the CRA to keep track of and investigate since large amounts can be left off of records. This could, therefore, lead to more scrutiny from the CRA so ensuring that you are keeping receipts and declaring all of your income will save you from the stress of an audit later down the line. 

What should you expect during this process?

The audit process starts when you receive a letter from the CRA stating that you have been selected for an audit. After this, you may be asked to schedule a time for a visit from an auditor or prompted to send in business receipts, journals and ledgers, details of expenses, sales invoices and financial records to help inform their investigation. 

Auditors will expect to speak with members of your accounts department about any discrepancies so that they can find out more information about your business’s cash flow. Depending on the size of your company, how detailed your records are and the number of discrepancies found, this process could take anywhere between a couple of weeks and several months. The auditor will suggest changes to the original tax return form and discuss next steps with you. 

To Sum Up

While an audit can seem like a long process, auditors aim to make the investigation as efficient as possible. Sending in what they require and opening up your business to investigation are two ways to make the process simpler. We also recommend that you always keep a detailed record of money entering and leaving your accounts and to file away all relevant receipts.