Taxpayers have an obligation to provide the information the CRA needs when the agency needs it.The Canadian Press
Being the subject of a Canada Revenue Agency (CRA) audit can prompt a range of emotions, from panic to frustration to feeling defensive or adversarial.
However, one of the best ways to minimize the impact of an audit is to tamp down negative emotions, recognize auditors are professionals simply carrying out their work, and accept the tax agency’s broad authority to request information, say experts who’ve guided people through the process.
The goal is to keep the tone respectful and co-operative while providing the required details – no more, no less – by the stated deadline. If you need extra time, talk to the auditor, explain why, and negotiate an extension.
Answering the call
The CRA may notify taxpayers of an audit in a couple of different ways. If the agency reaches out by telephone, Amanda Doucette, tax partner with Stevenson Hood Thornton Beaubier LLP in Saskatoon, recommends guarding against the possibility of scams by asking for the caller’s agent identification number and calling the CRA back at its publicly listed number.
If the CRA sends a letter or a notification through its online portal, Ms. Doucette says to read the contents very carefully, note the deadline to respond and contact the CRA for any clarification.
Then, it’s up to the taxpayer to gather the requested information. The Taxpayer Bill of Rights outlines 16 rights for individuals and five commitments to small businesses, while the taxpayer’s responsibilities are codified in Section 230 (1) of the Income Tax Act. But the bottom line is that refusing to provide details the CRA asked for is not usually acceptable.
The records the CRA wants to see are frequently quite general, which makes it difficult to determine the reason for the audit, says Sophie Virji, partner with Bennett Jones LLP in Calgary. Nevertheless, within Canada’s self-assessing tax system, which is effectively an honour system, she says taxpayers have an obligation to provide the information the CRA needs when requested.
“While the auditor–taxpayer relationship does have adversarial underpinnings, they want to co-operate with you as much as you need them to co-operate with you," Ms. Virji says. “Honing in on that relationship can be very beneficial to the swift completion of an audit.”
Approaching an audit in a spirit of co-operation means conversations can be calm and reasonable, which may allow the taxpayer to resolve certain issues to the auditor’s satisfaction and take them off the table.
“It’s essentially a negotiation, and it goes a long way to be civilized,” she adds.
Taxpayers should make a note of everything that’s shared with the CRA, along with the date, to address potential future complaints that certain information wasn’t provided. For businesses, if multiple people are fielding CRA calls or present for CRA visits, Ms. Doucette recommends designating a “point person” to ensure consistency.
Answer line by line
Natalie Worsfold, partner, tax litigation, at Counter Tax Litigators LLP in Toronto, says auditors typically send a list of questions in an audit query sheet. She recommends answering each question in the little space next to it and labelling any attachments clearly.
“The more organized you can make it, the less work the auditor needs to do, and so you’re more likely to get a favourable result,” Ms. Worsfold says.
Auditors often struggle to get the requested documents, she says, so those who respond quickly set a better tone for the rest of the relationship.
Taxpayers should bear in mind that the auditor writes up notes after every interaction, Ms. Worsfold says. “Those notes are permanent. They stay with the CRA forever.”
Understanding the audit process
As the audit proceeds, there’s often some back-and-forth before the auditor sends a completion letter or a proposal letter.
A completion letter finds the previous assessment was correct. A proposal letter explains why the CRA has decided to reassess, and it’s at this point that the reason for the audit may become clear and the tone shifts from fact-finding to building a case. As this happens, the space available for negotiation narrows, but dialogue with the auditor may continue.
A final letter concludes the audit, and the auditor is released to other projects. At that point, Ms. Worsfold requests a copy of the audit report.
“Once the auditor is not assigned to the file anymore, they’ll refuse to give you the report,” she says. “But if you get it right when you get that letter … you can get more insights into what the auditor actually wrote down during the audit, which makes it much easier to then know whether to file an objection and know what to argue in your objection.”
Following the final letter, the CRA sends a notice of reassessment. Objections to the reassessment go to the CRA’s appeals division, which may agree with the taxpayer, with the auditor, or agree partially with both.
If a taxpayer still isn’t satisfied, the next step is an appeal to the Tax Court of Canada, where the case becomes a formal legal process.
Ms. Worsfold recommends having a lawyer, an accountant or some expert “behind the scenes from the beginning,” even if they’re not communicating directly with the CRA.
“Somebody with experience will see what the auditor’s questions are leading to before you will. … That gives you the opportunity to control the narrative," she says.