As a small business owner, you may be less than thrilled if you learn that the Canada Revenue Agency (CRA) plans to audit you. But there’s no need to panic. The CRA can audit any Canadian business. They typically do so if they have reason to believe the business has been underpaying or overpaying its taxes. An audit is meant to find errors that could impact the amount of taxes paid, whether these errors are intentional or unintentional. CRA audits provide some assurance that Canadian businesses are fairly paying their share of taxes. If you’re faced with an audit, you just need to know the facts and organize your own documentation.
What Happens at an Audit?
During an audit, the auditor reviews the financial records of the business. These records may include bank records, contracts, ledgers, invoices, and receipts. The auditor may request assistance from your staff to obtain certain information, or they may request clarification of specific documents, expenses, or payments. Depending on the results of the audit, the auditor may propose reassessments or adjustments to the tax return of your company.
Some of the common areas that auditors pay attention to include unusual expenses, revenue discrepancies, and understated income. As a business owner, you should keep clear records to provide an audit trail that avoids any financial confusion. This clear trail provides evidence that you’ve handled your tax liability in an appropriate manner.
CRA Selection for Audits
The CRA uses its own risk assessment system in determining what businesses to audit. Its risk assessment system is designed to assess the chance that a business has been paying its taxes improperly and looks at numerous factors, including the potential for errors in tax returns or indications of noncompliance with tax rules. The CRA may also compare the tax returns of similar companies and other audits to determine if a company’s tax payments are in line with those of its competitors.
What Happens to a Business Selected for an Audit?
A CRA auditor contacts your business by mail or telephone if your company has been selected for an audit. The auditor indicates where the audit is to take place. The preferred location is at your business’ primary place of operation because that gives the auditor the best access to the information and documents needed to complete the audit. It saves the hassle of you contacting your accounting department for additional information and waiting for the documents to arrive. The other option is for the audit to be conducted at a CRA office. In this case, the auditor usually requests that you bring or send in all the required documents ahead of the audit date.
To determine if your business has been paying the appropriate amount of taxes, the auditor examines documentation including business records and other documents, previously filed taxes, credit bureau searches, and even the personal records of those involved in the business. The auditor has the right to request personal records not only from the business owner but also from people close to your business, including family members, partners, and trusts. The auditor isn’t only looking into you have been paying taxes properly based on the amount of profit, but whether the business fairly implemented tax breaks, write-offs, etc. The auditor also tries to determine if your company is doing some of its business “off the books” and thereby paying less tax than required for the amount of revenue it has actually been earning.
If the auditor finds that previous tax filings are correct, then the audit is closed with no further action required. If the auditor finds that more taxes need to be paid or a tax refund is warranted, your business receives a letter detailing the findings. As a small business owner, you have the right to appeal the auditor’s findings within 30 days. In a case where the auditor finds that you owe more taxes, the auditor can provide an estimate of the amount owed before the CRA issues its notice.
It’s essential that your company pays all the taxes it owes, but you need to ensure that you’re taking all available deductions. QuickBooks Online can help you maximize your tax deductions. Keep more of what you earn today.