The Canada Revenue Agency (“CRA”) conducts audits on numerous taxpayers every year. Navigating one of these audits can be a challenging task, but there are numerous tips that can increase a taxpayer’s likelihood of success, as well as many traps taxpayers should be sure to avoid. The purpose of this article is to canvass some of these tips and traps for taxpayers that may find themselves under review by the CRA.
What types of reviews can the CRA conduct?
Each year the CRA conducts a number of review activities that are to promote the awareness of and compliance with the laws it administers. As such, a taxpayer, which includes both individuals and corporations, may be the subject of CRA scrutiny. This scrutiny can be the result of a correspondence examination, a CRA letter campaign, an audit examination or a special examination.
Regardless of the review conducted, taxpayers should ensure they respond to all CRA requests in a timely manner, and, if needed, seek assistance from a tax professional such as a tax lawyer early on, as failure to respond to CRA requests can be unfavourable for taxpayers.
What can the CRA ask for when conducting an audit?
The CRA is given broad powers under the Income Tax Act (Canada) to examine the books, records and any documents of a taxpayer that relate to the audit. On this basis, taxpayers or their tax professionals should carefully review each of the documents requested by and provided to the CRA. When providing documents to the CRA, a taxpayer should consider these tips:
- Ensure documents provided relate only to the time period being audited. If a taxpayer provides documents beyond the time period specifically requested there is a risk the CRA will expand the scope of the examination.
- Ensure documents provided relate only to the taxpayer being audited. If a business owner operates multiple corporations ensure only documents relating to the specific corporation under review are provided. If a taxpayer provides documents relating to other corporations there is a risk the CRA will begin a review of these additional corporations.
- Keep copies of all documents provided to the CRA. This allows a tax professional to review the materials the CRA has received to better understand what the CRA may be scrutinizing and help support the taxpayer’s position when dealing with the CRA.
- Do not provide documents that are subject to solicitor-client privilege. If a document is between a lawyer and a client for the purpose of seeking or giving legal advice, and the information is intended to be confidential, these documents may be considered privileged communications. Privileged communications are protected from disclosure to the CRA, regardless of how relevant they may be. A taxpayer should carefully consider whether documents are subject to solicitor-client privilege before disclosing to the CRA. If unsure if a document is subject to solicitor-client privilege, a taxpayer should consult with a legal professional before disclosing documents to the CRA.
- Do not create new documents if requested by the CRA during an audit. The CRA cannot compel a taxpayer to create records where they may not have existed before. For example, the CRA cannot compel a taxpayer to prepare an organizational chart if one does not already exist.
- The CRA can make copies of both electronic and hard copy documents. When considering what documents the CRA can request and review, a taxpayer should keep in mind both electronic and hard copy documents can be requested and reviewed by the CRA.
In considering these tips, a taxpayer should also be aware of various traps a taxpayer may become victim to when dealing with an ongoing audit and the various tips that can be employed prior to an audit to help protect one’s business in the event of a future CRA audit.