Audit Activity in Canada

The Canada Revenue Agency (CRA) is responsible for administering tax laws for the Canadian government, including most provinces and territories. During a recent Canadian Tax Foundation’s Ontario Tax Conference in Toronto, the CRA reported that it had identified $1.185 million from audits of small and medium-sized businesses for fiscal year 2018-2019. The agency found $625 million from audits of small businesses and another $560 million of audit of medium-sized businesses. This amounted to an average of $137,000 per small business audit and $338,000 per medium-sized business audits. In part due to the success of these endeavors, the CRA is ramping up audits again. The 2021 federal budget devoted $304.1 million to the CRA to help combat tax evasion and aggressive tax avoidance, which it expects to translate into the recovery of $810 million in revenues over five years. Jeremy Scott Law provides information about the recent increase in CRA audits and how you can prepare. If you need assistance with the audit process or targeted legal advice based on your unique situation, you might consider contacting Jeremy Scott Law at 902-403-7201.

CRA Audit Process: What to Expect and How to Prepare

CRA audits are an important part of the agency’s duties because they help ensure the tax system is fair for everyone and protect tax revenues for the government. When the CRA audits a taxpayer, its representatives carefully examine the taxpayer’s records and books to determine if they are fulfilling their tax obligations and following tax laws. According to the Canadian government, the CRA selects which taxpayers to audit based on a risk assessment that considers such factors as:

• Information the CRA has on file for a particular taxpayer
• Information the CRA has for similar taxpayers
• Results of previous investigations or audits
• The likelihood of error in tax returns
• The frequency of errors in tax return
• Whether there are indications of non-compliance with tax obligations

By focusing its resources on the highest risk files, the CRA can make the biggest fiscal impact. Fiscal impacts consist of the following:

• Gross assessed federal and provincial taxes
• Reduction of tax refunds
• Interest and penalties
• The present value of future federal tax assessments arising from compliance actions

Consequences of Tax Evasion

If the CRA determines that tax errors rise to the level of tax evasion, the taxpayer can face significant consequences imposed by the government, which may include:

• Up to five years imprisonment
• The requirement to pay the full amount of taxes owed
• Interest and civil penalties
• Fines up to 200% of the taxes evaded
• A criminal record that can negatively impact the taxpayer for years to come

Taxpayers who are facing accusations of tax evasion should consider reaching out to Jeremy Scott Law to protect their legal rights and evaluate their options.

Areas Where CRA Is Ramping Up Audits

While the CRA can audit any taxpayer, the following tax issues may increase the likelihood of a CRA audit:

CEWS Applications

As of March 25, 2021, the CRA had processed and approved Canada Emergency Wage Subsidies (CEWS) valued at more than $71 billion in payments. Now, the CRA is cracking down on taxpayers it suspects of deliberate non-compliance. If CEWS funds were misused, taxpayers can be required to repay the subsidy, along with an additional 25% penalty.

GST/HST Refund and Rebate Claims

The CRA is actively increasing its audits of large businesses with a high risk of non-compliance and in specific industries that it considers high-risk, such real estate development. It is looking for fraudulent or unwarranted GST/HST refund and rebate claims, such as the New Housing Rebate.

Small Businesses

Business tax returns are carefully scrutinized by the CRA. Small businesses are particularly vulnerable to being audited by the CRA when they do not have a department dedicated to taxes and compliance. Small businesses may be more likely to be audited if they:

• Have revenue discrepancies, such as one number on a specific tax form and a different number on another tax form or different information reported by a financial institution than what the taxpayer reported
• Have revenue much higher or lower than what is typical in the industry
• Claim the home office deduction
• Are run as a cash-intensive business
• Have large business deductions for items such as meals and entertainment, travel, advertising, marketing, and interest
• Claim 100% business use of a vehicle when no other vehicle is available for personal use
• Have significant changes in shareholder loans and large balances
• Have recurring losses
• List family members on the payroll
• Make large charitable deductions

Self-Employment

Taxpayers who receive their income through self-employment are also more likely to be audited. Self-employed individuals must maintain accurate and organized records in case they are ever audited and need to substantiate their revenue or expenses.

Trusts

The CRA is becoming increasingly aware of various ways taxpayers use to avoid taxes, including the use of trusts. Expect greater scrutiny if trust transactions include cross-border activities, low/nil tax counties, or non-arm’s length transactions.

Shareholder Benefits

The CRA is also paying more attention to officers and employees using corporate assets for personal use, such as private jets or yachts.  

Cryptocurrency Transactions

If gains or income are made from cryptocurrency transactions, the CRA may carefully follow these transactions to ensure that the proper amount of taxes have been paid. Generally, these transactions are treated a business income or capital gains.

Transfer Pricing Transactions

The CRA is also increasing scrutiny into tax files involving the purchase or sale of goods or services with another entity within the same multinational group. These types of transactions must comply with specific requirements and be supported by relevant records. 

Contact a Tax Lawyer for Help with Your CRA Audit

Now that CRA is ramping up audits, you might be considering getting legal assistance. A tax lawyer from Jeremy Scott Law can give you ongoing tax advice to hopefully avoid such audits or represent you during the audit process if you have been informed of an audit. Consider contacting the firm at contacting Jeremy Scott Law at 902-403-7201 for help with your CRA audit.

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The Disclaimer:

Please note the content above and throughout this website is provided for general information purposes only and does not constitute legal or other professional advice or an opinion of any kind.  I urge you to seek specific legal advice by contacting me (or your current legal counsel) regarding any legal issues you may face.  I do not warrant or guarantee the quality, accuracy or completeness of any information found on this website and will not be held liable for anything contained in this document or any use you make of it. Finally, accessing the information on my website does not create a lawyer-client relationship.