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TAX TIP Small and medium business audits: What you need to know

Thursday, 10 March 2022 10:22.AM

Most taxpayers comply with the tax laws in Canada, but some don't. That's why audits are an important part of the Canada Revenue Agency's (CRA) range of activities that are in place to make the tax system fair for everyone.

The CRA recognizes the economic challenges that have resulted from the COVID-19 pandemic and the effect that the audit process can have on businesses. For this reason, we continue to proceed carefully to protect businesses and the broader economy that remains vulnerable due to the pandemic.

The CRA has information to help answer your questions about the audit process. The information below also applies to audits of COVID-19 subsidies.

The audit process at a glance

1. Should you be selected for an audit, a CRA auditor will contact you to start the audit process by mail or phone, or both, and will inform you of the time period(s) being audited and how to send the required documentation.
2. Currently, audits are being done virtually. You will be required to send your documents electronically, where possible, to the auditor using the instructions they have given you. The auditor will then review the documentation.
3. The auditor will review the submitted documentation and determine whether or not adjustments are required. If so, a proposal letter will be issued, giving you the opportunity to review the proposed adjustments and provide representations within 30 days, before the audit is finalized. If you do not agree with the adjustments proposed by a CRA auditor, you are encouraged to contact the auditor to try and resolve any disagreements.
4. After the audit, a final letter will be sent by mail or electronically (via My Business Account or Represent a Client) to notify you that one of the following will occur:
• No adjustments will be made to your previous assessment and/or subsidy claim(s).
• An adjustment will be made, resulting in more tax owing (reassessment), and you will have to pay the balance owing. If the audit was done on your subsidy claim(s), a notice of (re)determination will be issued outlining the adjustments made to your claim(s).
• An adjustment resulting in less tax owing will be made (reassessment), and you may be entitled to a refund.
How files are chosen for an audit

The CRA's risk-assessment systems identify tax returns and subsidy claims that are considered as high risks for non–compliance. The systems review factors such as the likelihood or frequency of errors in tax returns, or indications of potential non-compliance with tax obligations. CRA officers use various sources to determine whether an audit is required to address the risks identified.

Keep in mind

• Auditors can make copies of your records
During the audit, the auditor may ask for copies of your electronic records.
• You can send documents online
Your auditor will provide guidance on how to send documents online using the CRA's secure services. For more information, visit Submit documents online - Canada.ca

What does a CRA auditor examine during an audit?

A CRA auditor will examine books and records, documents, and information (collectively referred to as records). These include the following:

• business records (for example, ledgers, journals, payroll records, invoices, receipts, contracts, and bank statements)
• personal records of the business owner(s) (for example, bank statements for personal accounts, mortgage documents, and credit card statements)
• personal or business records of other individuals or entities related to the business owner(s) (for example, a spouse, family members, corporations, partnerships, or a trust)

What if you don't agree with the assessment?

If there are changes to your taxable income or taxes payable and you disagree with the CRA's assessment or reassessment, you have the right to object. In the case of an objection, you will generally not have to pay the additional taxes owed until your objection has been resolved. You can file an objection using this CRA web page: File an objection.

You also have the right to file a complaint if you are not satisfied with the service you received from the CRA. For more information, visit Service feedback, objections, appeals, disputes and relief measures.

To find out more about your rights and what you can expect when you deal with the CRA, see Guide RC17, Taxpayer Bill of Rights Guide: Understanding your rights as a taxpaye.

SOURCE: Canada Revenue Agency

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