Most of your clients will have filed their 2016 tax returns by now — although self-employed taxpayers and their spouses or partners have until June 15 to do so. Once returns have been filed, clients will likely receive their Notices of Assessment within a few weeks, which, for most people, will mark the end of their interaction with tax man until next year's tax-filing season.
But each year, the Canada Revenue Agency (CRA) selects certain tax returns to audit based on a risk assessment that considers several factors, such as the likelihood or frequency of errors in tax returns or whether there are indications of non-compliance. The CRA may also compare the information it has on file for a taxpayer with information from similar files or consider information from other audits or investigations it has undertaken.
During an audit, the CRA will examine a taxpayer's books and records to confirm that the income, deductions and credits claimed on his or her return are accurate and can be supported by the appropriate documentation.
If your client has been selected for an audit, a CRA auditor will either send a letter or make a phone call (or both) to the client to begin the audit process and inform him or her of the date, time and location of the audit. For the most part, on-site audits take place at the client's personal residence, place of business or, if appropriate, at the client's accountant's office.
Alternatively, the audit may take place at a CRA office that may be outside a client's geographic region. This means the taxpayer may be asked to send in copies of his or her records either by mail or through electronic document submission using the CRA's secure online services.
An auditor can ask for a taxpayer's personal records as well as the records of family members. This information can include information available to the CRA, such as tax returns previously filed, credit bureau searches, or property database information. The CRA can also request business records — such as ledgers, journals, invoices, receipts, contracts, rental records and bank statements — along with personal records, including bank statements, mortgage documents and credit card statements. This could also include personal or business records of other individuals or entities not being audited, such as a spouse, family members, corporations, partnerships, or a trust.
As advisors, we can often play an important role in helping to provide clients under audit with any missing information about their investment tax reporting. This could include assisting with the collection of any missing tax slips for investment income, such as T3s or T5s, as well as providing statements confirming any tax-deductible interest paid on money borrowed for investing. It may also include helping clients obtain historical adjusted cost base (ACB) information to ensure accurate reporting of any 2016 securities' dispositions.
Once the auditor is done examining the records, he or she will either conclude that the previously issued assessment was correct, in which case the taxpayer will receive a completion letter and the audit will be closed; or, if the auditor finds that the tax return has to be reassessed, the client will receive a proposal letter explaining the reason for the reassessment. The taxpayer then has 30 days to agree or disagree with the proposal.
Should clients disagree, they may wish to contact the auditor to explain why they disagree as well as provide any additional documents that support their positions. However, if there are issues that remain unresolved, clients can contact the auditor's team leader to discuss the matter further. If, ultimately, your client still disagrees with the reassessment, he or she can appeal it formally to the CRA and, ultimately, to the Tax Court of Canada.