A CRA audit can cause a lot of stress for businesses. Not only do these audits cause you a lot of stress but they also take up your valuable time. An audit by the CRA is a reasonable concern since these audits are not random.
The CRA has a “matching” program which compares information from third parties, employers, financial institutions and other sources with taxpayer’s filing positions. This is done in order to confirm filing accuracy. The CRA is very competent in its ability to match this kind of information. This has significantly improved in recent years, enhancing this type of risk assessment.
The CRA is in the habit of aggressively pursuing a range of issues pertaining to employer compliance. These issues include timely remittance of source deductions, the status of workers as either independent contractors or employees, taxable benefits and relocation costs.
Inability to comply with CRA requests for information
The inability to comply with CRA requests not only damage your reputation as a tax payer for the year being audited but also flag you for future audit enquiries. The CRA is known to make comprehensive demands for documents and information to be made available. Every business should make this information available in a carefully managed fashion. This will help fulfil CRA’s requirements without the business divulging or over-disclosing information.
Requests to amend returns
Although amendments in order to ensure returns or conclude account closures might be a necessity, these steps attract unwarranted audit scrutiny at times. CRA may challenge certain tax strategies like re-filing of returns for past taxation years. This allows CRA to take advantage of loss carry–backs, which may not be supportable.
Unusual or notable changes in deductions or credits
Information related to deductions and credits ,which are claimed by taxpayers over multiple years along with crucial changes ranging from one year to another, is compiled by CRA. Any usual change is capable of attracting CRA enquiries. As a taxpayer, if you have a feasible explanation for the changes, then you have no reason to worry. However, if as a taxpayer you have been involved in any aggressive tax strategies, then you may be flagged for audit.
Involvement in high risk tax strategies
The CRA has a set of dedicated audit resources, which help it detect and reassess a number of different issues. These issues include artificial capital losses, loss trading transactions, surplus stripping, offshore investment accounts, donation arrangements, withholding tax, section 85 rollover transactions, permanent establishment/ residency issues, interest deductibility, RRSP appropriations and tax-free savings accounts.
It’s always good to be clear with your tax filings and be in the good books of CRA. If you want to know more about the CRA audit flags or if you are looking for counsel on issues related to document disclosure or legal privilege then get in touch with Prowse Chowne.