To ensure compliance with the Canadian tax legislation as to clamp down attempts at tax evasions, the CRA reviews businesses and individuals for risk assessments every year after the tax season. In most cases for business owners, the review is informal, assessing only parts of your business, such as HST, and requires you to submit certain documents online via the CRA My Business Account. In some cases, however, the CRA may require a formal audit on your entire business if the assessment finds you at higher risk. 

 

What may trigger an audit?

Many factors could put you on the CRA’s radar, ranging from unlikely deductions, the incongruity between earnings and spendings, to the comparison of returns filed by similar businesses in your industry code (SIC). In addition, the CRA also compares your returns from previous years. Major changes or big differences increase your risk for an audit. Meanwhile, excessive claims such as 100% of your vehicle expenses for business, or recurring losses from self-employment, may also flag you out. 

 

Besides these more obvious factors, the CRA also picks their subjects to screen at random, and you could fall into the pile by chance. 

 

Why does self-employment increase the risk of audit?

Simply put, because you are doing the numbers by yourself, and rather than to err on the side of caution, you are more likely to err in deductions and claims as per the CRA. That said, you can keep a well-organized, financial record of your business by utilizing online tools such as QuickBooks Online by Intuit. Arguably the most effective cloud accounting software, Quickbook helps small businesses implement feasible goals and keep track of the ins and outs of their money in real-time. That said, it would still require human inputs to achieve optimal performance. As Intuit’s certified partner, we offer systematic training to small businesses and self-employed individuals. Under the leadership of our chartered accountants, our team of qualified staff offers comprehensive training to businesses from setups to take-offs. With a clear record of your finance, you can sleep tight even if you are selected for risk assessment. 

 

How does an audit usually begin?

It usually starts with a call or an email from an auditor, informing you that you have been selected for screening. Once you confirm the time and location – usually take place on-site of your business or over Zoom during lockdown periods related to Covid-19 – you will need to provide a long list of documents demanded by the auditor as evidence for the finance of your business prior to the screening. On the day, the auditor will go through the documents you provide and check the records with the numbers you have filed in your tax return. If they match, you are off the hook. The experience may be nerve-wracking, but it doesn’t have to be so with Quickbook Online helps you keep a clear record at all times. 

 

However, if the auditor finds you at fault, you will be asked to make clarifications. Your claims may be denied while you are subjected to a penalty charge if your clarifications do not satisfy the auditor. 

 

Can I contest the finding?

Of course. But you will have to contest the finding within a limited time (90 days from the day the Notice of Assessment is issued) by providing additional support of evidence to the CRA. You can do so by logging into your CRA My Account, where you can find Register My Formal Dispute Option. Alternatively, you may complete form T400A and mail it in. If the CRA is satisfied with the additional information you provide, it will issue a Notice of Reassessment to have its previous decision annulled. 

That said, there is a chance that the CRA will object to your dispute, leaving you to two options. First, you can pay the tax owed to the CRA before you receive the reassessment to reduce the interest accrued to penalties. Two, you can appeal to the Tax Court of Canada and contest your grievance.