Canada Revenue Agency (CRA) Review & Audit

Income Tax and Tax Return

Clients frequently inquire about the Canada revenue agency (CRA) and how they choose to audit and why the agency audits. There are two main methods of selection for a CRA audit. The first is through a random selection and use of a statistical tool to select you for an audit based on probability. The second approach is via a target selection procedure that considers numerous factors such as:

  • Who is the owner of a business? What is their income tax return history?
  • What type of industry does a business operate in?
  • What size is a business employer relative to its industry competition businesses, i.e., how many employees or what revenues?
  • Has a taxpayer been filing returns and/or remitting taxes on time from records in previous years?
  • Is the taxpayer’s T2 return accurate for the type of business that is being examined?
  • Do their bank accounts match their tax returns?

Obviously, this is not a comprehensive list and as you can imagine, the CRA does not publish its selection criteria. However, it’s probably safe to assume that there are certain “flags” that may act as some of the CRA’s key indicators for selecting taxpayers for audit:

  • Falling behind on filing past returns or remitting tax (non-compliance)
  • High reported income relative to the industry norm (this may need a review or a reassessment)
  • High level of deductions relative to his or her industry competition
  • T2 returns are inaccurate
  • Large cash transactions and missing information in previous tax returns

The other main reason for selecting a taxpayer is due to a concern with how a business activity is being conducted. Usually the CRA may be concerned that you are reporting less income than you should be, or that you are not offsetting personal expenses with business revenue. You can take a look at your return to see if the CRA has identified any specific issues it would like for you to address in your response letter. CRA auditors will request taxpayer compliance during your period of review/reassessment and it’s also a good practice to have your personal tax documents on hand.

On the other hand, if you are in good standing with the CRA and don’t have any cause for concern in your tax documents then it’s likely that you’ll be considered for the random selection audit. However, if you run a small group practice and your family members are your only employees, then it might suggest that this is not a random selection as those types of firms tend to employ larger numbers of people. Remember though that this list is not exhaustive and there are many other factors that may lead to an audit.

The most difficult part of an audit is often associated with the CRA’s collection of information notice. The amount of information requested by the CRA may exceed what you’ve previously provided on your T2 return. For example, if the CRA has concerns about your reported deductions, it may request documentation of your books and records to support those claimed expenses. If this happens, make sure that you use proper documentation to substantiate your financial claims as best as possible otherwise you may find yourself in a “he said she said” argument that could risk what you are claiming. Keep in mind that the auditor will likely look at not only your records but also those belonging to key employees or others involved in your business activities.

If there are minor errors noted during the course of the audit such as:

  • A concern with how a business activity is being conducted
  • An inconsistency between the tax return and tax credits or benefits claimed
  • Many self-employment deductions relative to your tax return income

Then the auditor may suggest a change in CRA tax owed, but not necessitate an immediate payment. Once the audit assessment is completed and you’ve received the results, it’s highly recommended that you review them thoroughly and either agree with the changes or disagree and prepare formal documentation in support of your disagreement. If there are differences between what you think should be noted on your tax return and what the tax auditors have indicated then make sure these differences are explained in full detail if they cannot be resolved. If you do agree to all adjustments (or most of them) made by the CRA audit, make sure you get a copy of this agreement from them in writing.

As with all tax related matters, you may want to prepare for the tax audit by consulting a tax professional such as a Chartered Accountant (CA). A tax professional will offer the expertise and experience necessary to deal with file and records issues on your behalf if it’s beneficial to do so. An experienced tax practitioner would have a working knowledge of how tax audits are conducted for different taxpayers and can also help you draft a letter if needed in response to the information request from CRA. In addition, a tax professional has a better understanding of tax law and its interpretation relative to individual circumstances. For example, if there is an inaccuracy on a T2 form that is being missed by CRA auditors then this may be due to misinformation or lack of awareness about tax provisions. If tax professionals are not familiar with the tax law in question then they can research tax issues and help you determine an appropriate course of action going forward, which could also include a filed formal complaint against CRA for review by the tax court.

How do I keep my books and records?

Tax accounting services are offered by auditor firms to help organizations and the self employed meet their tax obligations. Accountants can be hired to do bookkeeping, file income taxes and pay employment insurance premiums and in general help you during CRA tax season. Investigations are also available at accounting agencies for internal investigations or fraud detection within companies. This is because auditor firms have the training, tools and resources to find evidence of financial malfeasance in an organization. Accounting services offer value to companies by reducing costs associated with audits which require external expenses, managing cash flow needs through early detection of accounting discrepancies and improving overall control over the business’s finances.

Small businesses that don’t have much in terms of assets or personnel benefit greatly from hiring a professional accountant firm for their back-office duties. An added advantage is that audit firms offer discounted packages for bookkeeping services depending on the size of business.

Hiring auditor firms can be advantageous to the self employed taxpayer, but also opens up various risks due to the confidential nature of their work. Businesses must take care in selecting auditor firms that are trustworthy and dependable with their information by performing due-diligence before hiring them. For instance, many auditor agencies require non-disclosure agreements which prevent all employees from sharing any private client information. It’s important to ensure that everything they claim their team can do is actually true, otherwise you run the risk of more than just a reassessment for income tax, you could be subject to a search or audited more frequently than regular taxpayers due to their negligence regarding the law system.

Accounting is an important function within organizations of any size because it ensures the efficient allocation of company funds throughout operations. Auditing, accounting investigations and bookkeeping services are valuable tools accounting firms provide for companies large or small looking to grow their profits.

Tax Accounting Firm Toronto

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TY Tax Accounting is the leading tax accounting company in Toronto. We take care of your taxes so you can focus on what matters most to you. TY Tax Accounting has over 20 years of experience advising businesses and individuals on how to maximize their financial potential, starting with a strategic analysis of their finances. This includes customizing budgets and setting financial goals that will lead them towards success now and into the future.

How accounting agencies can help

Hiring a tax accountant agency is a great way to lower the amount you have to pay for taxes. In certain situations it can save you from paying any taxes at all. The best part about it is, tax accountant agencies know what they are doing and having them do your taxes doesn’t cost too much money. Hiring a tax accountant agency also has other benefits, such as allowing you to focus on your work while the experts handle your finances.

However, not every person who needs a tax accountant should hire one right away. There may be people that don’t need them and those that should use an independent public accountant instead of a specialized company. Knowing who should hire which type of accounting service has its advantages so knowing when to hire an accountant is important as well as what you can expect from a complete assessment.

The reason you need a tax accountant agency when doing your taxes may vary depending on how complicated your own financial situation. If everything that has to do with money in your life is in order, there are no major mistakes you have made and it’s not necessary for you to file in more than one place then you would only need to hire a tax accountant agency if the process is too difficult or time-consuming for you. However, if you have had problems in the past with the CRA, then hiring someone would be beneficial since they can help get these issues under control before they affect your current financial situation. For example, if bankruptcy was part of your history then having someone like a tax accountant agency handle your taxes is necessary to be sure that this information doesn’t affect you in the current year.

Tax accountant agencies are experts; they know how the system works and what most tax payers need to do in order to avoid penalties or additional fees. This saves you time and money since you don’t have to worry about any mistakes when your records get audited. A simple mistake can lead to more problems, like an audit or paying extra fees; this means having someone else do it is very beneficial since they make fewer errors than most people would.

Depending on your files, what CRA investigations or CRA audits you’re under, you may want to consider hiring an accounting agency to help you sort out your documents and be your contact throughout the process. For the most part, you have nothing to fear! Hopefully this article helped you prepare for any future CRA audits or investigations you as a taxpayer may face, and serve as a reminder to make sure your records are complete!

Ready to find who you should contact in preparation of your next CRA tax audit? TY Tax Accounting Agency is one of the best personal Canadian agencies with charted professional accountants, as well as a number of tax specialists at our disposal.