Are you at risk for a CRA audit? Although the audit and appeals process can be time-consuming and difficult, being prepared and managing the audit process in a mutually respectful manner can help you reduce conflicts with the CRA and hopefully make your audit go as smoothly as possible.
The CRA continues to devote significant resources to its audit activities, focusing on areas such as compliance across provincial borders, Harmonized Sales Tax issues, the treatment of taxable benefits and international tax planning. If you and your family have a high net worth, the CRA may also select your business and investment activities for audit as part of a project targeting wealthy individuals.
Given the current fiscal situation, the potential for tax disputes is increasing and CRA statistics show a dramatic rise in the number of taxpayer objections filed.
However, the CRA, like all government departments, is looking for ways to be more efficient in its operations. Other tax jurisdictions have been successful in reducing and resolving audit disputes via improved communications and outreach, enhanced relationships and dialogue, and pursuing reasonable settlements.
Keeping this in mind, here are some useful tips to help you ease the pain and expense of dealing with a CRA audit:
Document business reasons – Keep evidence on hand to show how a transaction helps meet your company’s business objectives. This can help support some of the transactions that the CRA may otherwise view as tax-motivated. Document the purpose and tax implications of your transactions in succinct, clear records that include executive summaries.
Actively engage with the CRA – Educate auditors about your business—by explaining your operations and giving them a guided tour, for example—to encourage your auditor to view your business beyond the narrow prism of tax planning.
Fix obvious problems – Now that the CRA is classifying taxpayers according to risk—and devoting more audit resources to higher-risk taxpayers—consider addressing recurring issues now before your audit is even on the horizon to help reduce your CRA risk score. The shorter audit cycle that comes with a lower risk score may also help to cut your tax costs.
Manage the agenda – When CRA auditors do not understand your complex transactions or the intricacies of the applicable tax law, they may be inclined to demand more information. Investing time to explain the transactions and your position on how the law applies can help narrow the CRA’s focus of enquiry.
Check the facts in CRA letters – In addition to reviewing the technical arguments set out in any letters you receive from a CRA auditor that requests information and documents, review his or her version of the facts with care. If there is a misunderstanding of these facts, you may be able to help refocus the audit enquiry.
Following this advice can help you prevent issues with the CRA auditor but, ultimately, if you aren’t able to resolve the dispute in the discussions and negotiations before a reassessment, you may file a Notice of Objection by writing to the Chief of Appeals of your local district taxation office. This filing, which initiates the formal administrative appeal process, must be filed with the CRA’s Appeals Branch either within 90 days of the date of your company’s assessment or reassessment to which you are objecting or, in the case of an individual, within one year of the original due date for the return. It’s important to file your objection before the deadline to protect your legal rights to object.
Once you file an objection, it’s then reviewed by an Appeals Officer within the CRA. Since the Appeals Officer is independent of the Audit Branch, he or she should conduct the review impartially and objectively. Although the Appeals Officer is normally your last level of appeal within the CRA, further appeal is available to the Tax Court of Canada. But, as always, the best way to manage a tax dispute may be to make sure it’s identified and dealt with before it gets to that stage.
