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Seeing a letter from the CRA in your mailbox can make any business owner nervous. But an audit or process review does not automatically mean you've done something wrong. Often, the CRA simply wants more information about a particular expense or account.
The good news is that if your records are in order and you respond promptly, a CRA review is usually much more manageable than it first appears.
Here's what you need to know about why the CRA might review your business, what to expect and what happens if they decide an adjustment is needed.
Why might the CRA audit your business?
The CRA can reveal several areas of your business, including:
- Corporate income tax
- GST
- Payroll
- Personal tax
A full audit is not the only type of review you might encounter. Process reviews are much more common. A process review looks at a specific account or expense on your return, such as vehicle expenses.
They're not necessarily something to worry about, but they do need to be dealt with quickly and accurately. You'll usually have about 30 days to respond.
If you're a True North client, send us any CRA process review or audit letter as soon as it arrives. We'll review what the CRA is asking for, gather the information they need and communicate with them on your behalf.
One less thing for you to worry about.
What increases your chances of a CRA audit?
The CRA uses a risk-based approach when deciding which returns and accounts to review. Certain expenses can attract more attention because there is more room for errors or confusion between business and personal use.
Some examples include:
- Alberta Investment Tax Credit claims
- Medical expenses, moving expenses or donations over $5,000
- Vehicle expenses over $15,000
- Home office expenses over $5,000
The CRA may also look for unusual patterns in your tax return. There are three common ways this can happen:
Ratio analysis: One expense category is much higher than expected compared with your revenue or other expenses.
Trend analysis: There are large changes in an expense or account from one year to the next.
Targeted reviews: The CRA decides to focus on a particular industry, expense or area of tax compliance.
Vehicle and home office expenses can receive extra attention because determining the business portion can involve some judgment (also known as tax grey areas). Good records and supporting calculations can help explain how you arrived at your claim.
What happens when you’re audited by the CRA?
You've received the letter. Now what?
First, don't panic. Read it carefully, check the deadline and send it to your accountant.
The CRA will often start by asking for a detailed list of the transactions included in a particular account. We'll pull this information from your accounting software, such as Xero, and make sure it matches the amount reported on your financial statements and T2 tax return.
Sometimes, that's enough. A phone call to the CRA explaining what's included in the account can resolve the review without going any further.
If the CRA needs more information, they may ask for supporting documentation such as:
- Proof of purchase: A receipt, invoice or lease agreement
- Proof of payment: A credit card or bank statement
- Supporting calculations: A mileage log or home office expense calculation
For receipts and credit card statements, the CRA may ask for a sample of transactions to review, often including some of the larger purchases.
You can submit documents electronically through your CRA My Business Account, or we can do it for you.
Keep your records
This is one of those situations where good bookkeeping really pays off.
Keep your receipts and supporting documents for the required retention period. In most cases, that means keeping them for six years from the end of the last tax year they relate to.
Digital records are fine. You don't need a filing cabinet full of paper receipts if you have reliable digital copies that you can access when you need them.
And it's not just receipts. Keep things like mileage logs and home office calculations, too. If the CRA asks how you arrived at a number, you'll want to have the calculation to back it up.
What happens if the CRA makes an adjustment?
An audit or review doesn't always result in an adjustment. But if the CRA decides that an expense or claim needs to be changed, the impact can extend beyond that one item.
Think of it as a domino effect.
For example, let's say the CRA reviews your business's vehicle expenses and determines that your business use was 40% instead of the 80% you claimed.
If your corporation originally claimed $20,000 in vehicle expenses, the allowable expense would drop to $10,000.
That could lead to several changes:
- Your GST input tax credits could decrease. For example, a $1,000 ITC could be reduced to $500.
- Your corporation could owe additional income tax because its taxable income has increased.
- There could be an impact on your personal taxes and payroll if the adjustment changes the taxable benefit associated with the vehicle.
- Your CPP and other payroll amounts could also be affected.
- Personal tax returns may need to be amended.
The important thing to remember is that one adjustment can have a ripple effect across your business and personal tax filings.
Ultimately, it's your responsibility to file any required adjustments. If you work with True North, we'll take care of this for you. In some cases, the CRA agent may make the adjustments directly.
Can you challenge a CRA audit?
What if you don't agree with the CRA's findings?
There are options for challenging an assessment, but it's important to weigh the cost and time involved. If you decide to take the matter to court, you'll need to work with a tax lawyer. True North does not represent clients in tax court.
For most audits and process reviews, the best approach is to be prepared, responsive and transparent. Clear answers and good supporting documentation can go a long way toward resolving questions quickly.
In other words, don't make things harder than they need to be.
What should you do if you receive a CRA letter?
Send it to your accountant as soon as you receive it, especially if there's a deadline to respond. The sooner we know about the review, the more time we have to understand what the CRA is asking for and gather the information they need.
A CRA audit or process review can feel intimidating, but you don't have to handle it alone.
If you're a True North client, send the letter our way. We'll help you understand what's happening, prepare the response and deal with the CRA on your behalf.
Have questions about a CRA audit or process review? Get in touch with us.
You can also explore our Corporate Tax and Personal Tax resources for more practical advice for your business and your bottom line.
