Canada’s current income tax system is based on the concept of self-reporting. This system is great in a perfect world however, the reality is that most people don’t have their tax returns at the top of their to-do lists. Some may even feel deterred from completing their taxes because of the possibility of seeing a large bill at the end of the year that may be a struggle to pay back.
By placing the obligation of the income tax on the employer, the vast majority of Canadians are automatically in compliance with the obligations. In these cases, the employer is responsible for any shortfalls that may happen.
In a subcontractor situation, the hiring party is responsible for making payments to the subcontractor and it’s the subcontractor’s responsibility to complete and file their tax return and pay their taxes by the respective due date.
CRA conducts payroll audits as part of its normal operations. A regular payroll audit will surround the review of the subcontractor’s or employee’s income tax withholdings as well as the amounts that are required to be withheld under CPP and EI. So, what happens if an audit comes your way? Here’s what you need to know!
What Triggers an Audit?
There are many common reasons why someone may be selected for a CRA audit.
- The CRA might have a project that focuses on a certain section of the economy- into which you or your business fall!
- A tip may have been given to the CRA from an unsatisfied former worker or provincial labour authority, which will alert the CRA to investigate the situation at hand.
- The algorithms in the CRA’s internal systems may have come across some irregular activity which may trigger a closer examination of your accounts.
- Certain industries are labeled as “high risks” like construction, spas, and hair salons. These industries are more likely to be selected for payroll and other tax audits. This is due to the fact that these specific industries have high volumes of cash transactions.
- One of your other accounts has recently been audited and has indicated inconsistencies in payments to contractors or other third parties.
- Finally, it could be totally random!
Getting the Letter
When the assigned officer to the case of the audit is notified, they’ll usually begin by sending you written notice. The contents of the letter will explain the reasoning behind the investigation and will ask you to send in some documents that are required for review.
After you have reviewed the letter, the officer will ask you to complete a phone-based interview. This is to better understand the circumstances surrounding the audit. In rare cases, they might also conduct a field visit but this is not very common nowadays.
How to Prepare
It’s no secret that getting audited can be stressful, and even the thought of potentially getting audited can make people worry. That’s why it’s a good idea to get started right away once you have notice of an audit!
If you are unsure of the process, a good step to take is to seek advice from a professional who has experienced this situation before. They’ll understand the timeline of the process and know how to reduce fees where possible.
After receiving your letter, your first move should be to contact a lawyer with tax expertise so that you can determine whether or not you need an extension, what you need to provide to the CRA, what information you need to get from your accountant, and how to go about answering questions from the CRA in the best way possible. It’s important to note that you shouldn’t give the auditor any more information than exactly what they request.
In terms of preparing for the possibility of an audit, you can help yourself in the process by backing up documents and keeping your books and records up to date throughout the year. This organization is key as the CRA may want to look at the increases and decreases in your assets.
Taxpayer Bill of Rights
The Taxpayer Bill of Rights is a document that defines the sixteen rights of the Canadian taxpayer, as well as outlines the CRA’s values of professionalism, respect, integrity, and collaboration.
This bill lets you know what type of treatment you’re entitled to when you deal with the CRA. Some of the rights listed include:
- You have the right to receive entitlements and to pay no more and no less than what is required by law
You have the right to a formal review and a subsequent appeal
You have the right to expect the CRA to publish their service standards and report annually
To see the full list, you should refer to the Government of Canada website.
Interacting with Auditors
When you’re facing a lot of stress from an unanticipated situation like an audit, it can be easy to forget that all interactions with the auditors should be professional and polite.
Make sure that you’re as calm and collected as possible when interacting with an auditor. You should also be compliant and willing to give over the information that they request. You don’t owe them extra information but it’s important to make sure that they are receiving everything that they need to do their investigation properly.
The Outcome
Finally, your audit is completed and you’re curious about what the outcome is. At the conclusion of the audit, you’ll receive another letter with the auditor’s findings. Usually, the end result is one of the following:
- no adjustments will be made to your previous assessment
- an adjustment resulting in more tax owing will be made, you will have to pay the balance owing
- an adjustment resulting in less tax owing will be made, you will be entitled to a refund
If your outcome results in more tax owed, the auditor will give you an estimate of the amount you will have to pay before the CRA gives you an official notice. This estimate will allow you to avoid any interest charges by paying what you owe immediately rather than waiting for the CRA’s official notice.
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In conclusion, Canada’s income tax system is based on self-reporting, and audits are conducted regularly by the CRA to ensure compliance. If you receive a letter notifying you of an audit, it’s important to seek professional advice and prepare for the process immediately. Overall, it’s important to stay organized throughout the year to reduce your stress if you’re chosen for an audit.
Are you looking for more information on the CRA’s audit process? Have you received a letter informing you of an audit? Contact us here to explore working with us. We are here to help!