The Canada Revenue Agency’s (“CRA”) risk-assessment system selects files to audit based on a number of conditions such as the potential for errors in tax returns or indications of non-compliance with tax obligations. The CRA also looks at the information it has on file and may compare that information to similar files or consider information from other audits or investigations.
To start the audit process, a CRA auditor will write to the taxpayer or call them, or both, and inform the taxpayer of where the audit will take place. Normally, it is expected that the audit take place at the taxpayer’s place of business (on-site audit). This allows questions to be addressed quickly and minimizes delays in completing the audit. In certain rare situations, the audit may be conducted at a CRA office (office audit). At the end of the audit, a final letter will be sent to taxpayer and one of three (3) things will occur:
- No adjustments will be made to the taxpayer’s previous assessment;
- An adjustment resulting in more tax will be made (reassessment) and the taxpayer will have to pay the balance owing; or
- An adjustment resulting in less tax will be made (reassessment) and the taxpayer will be entitled to a refund.
If the taxpayer disagrees with the reassessment, they have the right to appeal by working through CRA’s objection process and potentially an appeal to the Tax Court of Canada.
Throughout the audit process, it is important to note that taxpayer’s have rights with regard to their treatment by CRA. The Taxpayer’s Bill of Rights (see here: http://www.cra-arc.gc.ca/E/pub/tg/rc17/rc17-11-13e.pdf) sets out such rights.
Finally, taxpayer’s have responsibilities relating to their books and records. Specifically:
- Taxpayer’s must keep adequate books and records for their tax obligations and entitlements. Generally, books and records must be kept for a minimum of six (6) years; and
- If the taxpayer uses a computer for its accounting records, it must keep its books and records in an electronically readable format, even if you also keep them on paper. Using the services of a tax professional (e.g. accountant, lawyer) does not relieve the taxpayer of their responsibilities.
