Any Canadian business can be audited by the Canada Revenue Agency. An audit usually occurs if the CRA has reason to believe the business underpaid or overpaid its taxes. An audit is meant to find errors that could impact the amount of taxes paid, whether these errors are intentional or unintentional. CRA audits provide some assurance that Canadian businesses are fairly paying their share of taxes.
CRA Selection for Audits
The CRA uses its own risk assessment system in determining what businesses to audit. Its risk assessment system is designed to assess the chance that a business improperly paid its taxes, and looks at numerous factors including the potential for errors in tax returns or indications of noncompliance with tax rules. The CRA may also compare the tax returns of similar companies and other audits to determine if a company’s tax payments are in line with its competitors.
What Happens to a Business Selected for an Audit?
The business will be contacted by a CRA auditor by mail or telephone. The auditor will indicate where the audit is to take place. The preferred location is at the business’ primary place of operation because it gives the auditor the best access to the information and documents needed to complete the audit. The other option is for the audit to be conducted at a CRA office. If the audit is to be conducted at a CRA office, the auditor will request the business owner brings or sends in all the required documents.
To determine if a business paid the appropriate amount of taxes, the auditor examines documentation including business records and documents, previously filed taxes, credit bureau searches, and even the personal records of those involved in the business. The auditor has the right to request personal records not only from the business owner but also those of people close to the business including family members, partners, and trusts. The auditor is not only looking into whether taxes were properly paid according to the amount of profit, but whether the business fairly implemented tax breaks, write-offs, etc. The auditor also tries to determine if a company is doing some of its business “off the books,” and thereby paying less tax than required for the amount of revenue it actually earned.
If the auditor finds that previous tax filings were correct, then the audit is closed with no further action required. If the auditor finds that more taxes need to be paid or a tax refund is warranted, the business will receive a letter detailing the findings. The small business owner has the right to appeal the auditors findings within 30 days. In a case where the auditor finds that more taxes are owed than were paid, the auditor can provide an estimate of the amount owed before the CRA issues its notice.