If the thought of being audited sends a shiver down your spine, you're not alone. Being audited is like crossing the border or passing through security at the airport; even if you’re doing nothing wrong, the fact that someone is taking the time to interrogate you can be unhinging. But the truth is an audit by the Canadian Revenue Association is a natural part of the tax process in Canada.
Tax Mistakes Are More Common Than You Think
According to a recent report released by CIBC on common tax return errors, recurring mistakes pop up despite the fact that 70% of individuals hire someone else to help file their taxes. “Statistics show that in recent years the CRA assessed over $1 billion in additional tax, primarily by comparing information on taxpayer returns to information provided by employers, financial institutions and other sources,” says Jamie Golombek, managing director of Tax and Estate Planning at CIBC Wealth Advisory Services in Toronto.
Top Audit Red Flags
While participating in gifting tax shelter schemes or wild fluctuations in income may raise a flag, audits aren't always triggered by high-risk behaviour. The following may also prompt a second look from the CRA: Underreporting income is certainly one way to catch the CRA’s attention, but committing other common recurring errors can also peg you as a person of interest. The following are non-deductible, but are still commonly incorrectly claimed.:
- Claiming a significantly higher amount of tax deductions and credits than in previous years
- Working in an industry the CRA deems high-risk for non-compliance
- Being self-employed or the owner of a small business
- Support payments
- Legal expenses for collecting or negotiating child or spousal support
- Separation or divorce legal fees
- Fees from establishing child custody
- Funeral expenses
- Wedding expenses
- Loans to family members
- Taking a loss on the sale of a home
The Proof is in the Paperwork
“Even if an expense or credit is permissible, if you can’t support it CRA could disallow the claim entirely,” says Golombek. In other words, keep receipts and proof of legitimate expenses or your claim could be denied. Avoiding letters from the CRA will also prompt interest from them. “(They) may send you a letter requesting that you submit supporting documentation for one or more tax return line items to ensure that income, deductions and credits are properly supported,” he adds. “If you do not respond, the CRA will assess your return based on the information available, possibly including additional income or denying deductions.” It’s important to ensue that your mailing address is updated so you don’t miss any important assessments from the CRA.
How to Avoid an Audit
- Be thorough: The first step is to check that you’ve reported all possible sources of income in your tax return before filing. “You may want to compare the tax slips that you receive for the current year to slips you’ve received in the past, to see if any might be missing,” says Golombek. “You may also want to compare income reported on investment statements to the amounts from tax slips, to see if there could be differences that could be due to slips that have not been received.” If you feel like you’ve missed an expected slip, be sure to connect with the issuer – your workplace or investment advisor – to request a duplicate.
- Make sure you’re eligible for a claim: This one is a no brainer. False deductions can lead to penalties and interest on your tax return. If you’re unsure what to deduct, the CRA’s website has info.
- Provide information that is requested by the CRA: While paper returns require you to send information slips, receipts and other documents to verify your income and deductions, the move towards digital has gotten rid of a lot of that tedious work. On the flipside, the CRA may ask to see them later (in fact it’s quite common to get a request). “You have 30 days to respond to a CRA letter requesting additional information,” cautions Golombek. “(But) the CRA will frequently grant additional time if you have reasonable grounds for an extension and contact them within the 30-day time period.”
So You're Being Audited... Now What?
If the CRA draws your name out of its “magical hat of audits” (i.e. you raised a red flag) the first step is to consult an accountant or tax lawyer before responding. Be sure to ask the CRA for a written request of what they require and review all your records to ensure everything you provided was accurate and complete. Do not volunteer extra info unless it is required. “While there is no such thing as an “unjustified” audit, if you feel you are being treated unfairly or inappropriately by the CRA at any time during the audit process, be sure to consult a tax professional who will advise you of your legal rights and give you steps on how to proceed,” says Golombek, adding that even if it’s your first time being audited, experienced tax professionals see audits all the time. “Remember, that no matter the result of the audit, you always have the right to object to any reassessment and ultimately, to have your day in court.”