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How to survive Tax Audits

There are over 350,000 audit and review actions conducted by the Canada Revenue Agency on a yearly basis. Around 15,000 of these audits deal with "cash only" businesses (i.e. the underground economy). Additionally, an estimated 35,000 are tax shelter audits.

CRA may choose to audit a taxpayer for several reasons. Here are just a few:

Random selection;
Third party tips;
Comparison of information on returns to information received from third-party sources; or
Past history of non-compliance.
The Canadian income tax system is based on "self assessment". This means that it is up to every taxpayer to properly report their annual income on their income tax return. The CRA performs audits to ensure the "self-assessment" tax system continues to work properly. While most Canadians are truthful on their tax returns, there are some who are not.

Most audits are done to ensure compliance with the Income Tax Act. An audit is an examination of a taxpayer's returns and supporting records including bank accounts and receipts to make sure that income and expenses have been properly reported and are supported by accounting records.

Here are a few examples of issues that may arise in an audit that would cause a taxpayer to be reassessed at the end of an audit:

Overstated Expenses;
Overstated Deductions;
Overstated Credits;
Underreported or unreported Earnings;
Unreported offshore income;
Unreported offshore assets and
Credits, such as for charitable donations, that are not supported by receipts
Be sure you have complete records detailing every expense and deduction you have claimed on your tax return!

What happens when you are audited? Typically, you will first receive a notice from CRA of their intention to audit. The notice will usually outline the preliminary information that they require from you. They may then follow up and request more information. The beginning of an audit is the best time to obtain legal representation. Auditors are not always reasonable, and may not listen to your reasoning for filing your returns the way you did. We will speak to the auditors on your behalf, and begin the necessary legal work it takes to resolve all issues relating to your tax return.

If you disagree with the outcome of an audit, it is especially crucial to obtain representation as soon as you have been reassessed by CRA. You have appeal rights, but you only have 90 days to appeal by filing a Notice of Objection. We can provide detailed assistance in filing your objection.

If CRA has informed you of an impending audit, or you have unfavourable audit results, give us a call to set up an initial consultation. We can assist both during the audit process and once the audit is been complete. CRA is not on your side, but we are!
"This article provides information of a general nature only. It may no longer be current. It does not provide legal advice nor should it be relied upon. If you have specific legal questions you should consult a lawyer."

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