Advisors don’t often consider the amount of time an audit takes away from earning income.champpixs/iStockPhoto / Getty Images
Facing an audit or inquiry from the Canada Revenue Agency (CRA) can be a stressful experience for clients. But sometimes, advisors themselves face the same ordeal.
David Christianson, who retired this year after working for four decades as an advisor in Winnipeg, received an inquiry last fall about his 2024 business expenses.
It wasn’t the first time. When he was audited 12 years ago, Mr. Christianson managed the process independently. After all, he had decades of experience preparing and filing taxes for clients.
But last year, he enlisted the services of an accountant. He had received the letter late because of the Canada Post strike, giving him just six days to gather all the documents to meet the CRA’s deadline. His accountant requested a 30-day extension, which the CRA granted.
Kevin Burkett, partner at Burkett & Co. Chartered Professional Accountants in Victoria, says the CRA will be reasonable with extensions if the taxpayer can lay out specific and reasonable justifications for requesting an extension.
“Delays in access to your records, a health issue, or extended travel are common examples of cases where an extension can be requested and will likely be permitted,” he says.
Mr. Christianson says advisors don’t often consider the amount of time an audit takes away from earning income. Even with an accountant, he says he spent 20 hours preparing the information.
Here are tips for how advisors can prepare for and even avoid an audit:
Watch for large variances in expenses
In strong income years, Mr. Christianson says his expenses tended to be below average. But in challenging years, he says, advisors may need to spend more money on advertising and entertaining clients and prospects to generate business. Anytime there’s a big discrepancy year over year with expenses, the CRA may flag it, he says.
That was the case for Barbara Stewart, a chartered financial analyst and leading researcher on women and finance in Toronto. When she started conducting international research on women’s issues while still working as a money manager, her expenses, especially travel, increased drastically. The CRA noticed and asked for more information about her business expenses as well.
Keep all receipts, no matter how small
In Mr. Christianson’s case, the CRA asked for paper receipts and invoices for all expenses, from meals and entertainment to utilities for working from home. Some receipts required more effort to gather.
For example, Mr. Christianson says his internet and cell phone suppliers only had 12 months of detailed invoices available online. As the CRA request came nine months into the next year, a manual request had to be made for the previous calendar year, the year in question for CRA, he adds.
“Take the time to save invoices and receipts as PDFs or print off paper copies,” Mr. Christianson says. “The fact that I didn’t have everything printed is on me. I believed I had electronic backup.”
With meals and entertainment receipts, Mr. Christianson says advisors need the itemized receipt that outlines the food and drinks consumed.
“A credit card statement is not good enough,” he says, adding the CRA also wants to know what specific business was discussed.
After going through multiple receipts, he had misplaced three. “If you can’t find your receipts, they will disallow the amount.”
Ms. Stewart had all her paper receipts, but some had become illegible and the CRA disallowed them, she says.
Mr. Burkett advises photocopying, scanning or taking pictures of receipts. Not having the receipt may also flag you for more inquiries in the future, he says. “You don’t want to get a track record of not being able to provide the evidence of those expenses.”
All receipts must also have the correct name on them. Ms. Stewart says some of her hotel receipts were in her husband’s name, as he was staying with her during her business trips. Those receipts were also disallowed.
Have a strong filing system
Mr. Christianson keeps a detailed spreadsheet of all expenses, updated monthly, which he says was invaluable in this process.
Ms. Stewart, on the other hand, has a different approach.
“I just throw everything into a big box,” she says. “It’s completely disorganized and then I spend a couple of weekends every year going through the whole thing.”
The system worked fine until she was audited. It took her four additional weekends to finish her response and provide documentation to the CRA, she says.