It’s a gloomy winter night. It’s 7:01 pm and all is dark. The mysterious and devious bogeyman is wandering about, snatching up children who are awake past their bedtime. Just like this mythical creature from folklore, the Canada Revenue Agency (CRA) or Revenu Québec (RQ) can appear without warning; not to snatch children but to check that the information you provided in your latest tax return is accurate and can be backed up. These audits are typically triggered when the CRA or RQ finds something unusual in a return. Should you worry about being audited by the CRA or RQ? Here’s what you need to know.
The bogeyman has his favourites
Although the revenue agencies perform some checks randomly, most of the time they will concentrate on certain kinds of taxpayers, such as self-employed workers and businesses. Some types of companies are monitored more commonly by the auditors: construction companies, retail operations, as well as providers of hospitality and food services. Individual taxpayers who use a home office for business purposes are also often targeted by the auditors. And if you’ve been audited in the past, you’re more likely to be audited again. Lastly, certain deductions attract the auditors’ attention more than others, such as medical expenses, charitable donations, tuition fees, and foreign income that’s eligible for a tax credit.
Seven o’clock curfew
Filing your return late raises a red flag with the CRA/RQ as well, as does filing too early, as you may omit important slips. Best practices suggest filing your returns on time and to avoid skipping a year. The tax authorities can audit your returns up to three years after the date of your tax year assessment, and even further back in the case of fraud, or if exceptional circumstances require further scrutiny. Make sure you don’t ignore requests for additional information. If you don’t provide the requested information within a reasonable period of time, the CRA/RQ may refuse certain deductions or income and you may be reassessed.
Don’t attract attention and don’t be an easy prey
Major changes in income or deductions from one year to another also flag taxpayers for auditing. Consistency in your returns is what keeps the auditors away. Businesses and self-employed taxpayers would do well to remain within industry standards. The same rule applies to residents of the same neighbourhood. If your neighbours are all high income earners, lower reported incomes may trigger suspicion. You should also be wary of social media and of informants. An angry former spouse can alert the tax auditors; photos or comments on social media that show a lifestyle that conflicts with your declared income can also trigger an audit. If you make charitable donations, you should choose your charities with care, because if an organization is considered suspect by the tax authorities, all donors may be audited. For the same reasons, you should choose your business partners wisely. Finally, a company or rental property may report a loss for the first few years, but eventually it will have to generate an income. After four consecutive years of losses, the CRA/RQ often becomes suspicious.
Pretend you’re asleep
Hire a specialist or use tax software to produce your tax returns. Mathematical errors and disregarding a recent change in tax legislation can alert the auditors. Deductions you claim for expenses must be reasonable and in line with your income. They should always be backed up by receipts. And keep in mind that an audit may lead to a new notice of assessment (and an amount plus interest to be paid), a fine and even prison.
Here comes the bogeyman!
When you’re being audited, stay calm and be polite to the auditor. Being rude or cavalier to a CRA/RQ representative will do nothing to help your case. Every taxpayer has a legal obligation to cooperate, but this doesn’t mean that you have to volunteer every single detail. Don’t talk too much and only answer specific questions. Get your papers organized and keep all backup documents handy. If you give the auditors a jumble of tax slips, they’ll probably want to dig a little deeper. And if you want to limit stress, spend less time being audited and possibly reduce your tax bill, you may want to call a professional.
So should we be afraid of the bogeyman?
There’s no need to be afraid, just make sure you’re prepared!
Artist: Michel Duguay http://www.mduguay.net/
These articles are for general informational purposes only. Please obtain professional advice before taking any action based on this information. No endorsement or approval of any third parties or their advice, information, products or services should be implied by any references to third parties contained in any article. Trademarks cited in these articles are the respective properties of their owners.