Are You Ready For a Tax Audit?

Are you at risk? The Canada Revenue Agency (CRA) continues to audit the following key areas, as these areas seem to be the ones of greatest error or non-compliance by small and medium sized businesses:

Denied expenses – CRA denies unsupported and non-deductible expenses. It is important to have proper and adequate documentation to support the expenditures.
Taxable benefits – CRA scrutinizes automobile benefits and other expenses such as travel expenses and phone and internet usage to ensure taxable benefits are attributed properly to employees.
Shareholder benefits – CRA continues to seek out personal expenses paid for and deducted by the business that should be denied or taxed to the shareholder. Taxpayers should carefully document the business purpose of all expenses and have practices in place to closely monitor shareholder accounts and credit cards to avoid these reassessments.
International compliance / cross-border transactions – Many business are unaware of the tax and reporting implications of conducting business outside of their country and engaging in certain financing transactions outside of Canada, including sales taxes, payroll and employee withholdings, and corporate tax reporting implications. For Canada and the US, there is information sharing and new processes at boarder security to more closely scrutinize cross-border business travel.
Sales & commodity taxes (or Indirect taxes) – There have been a lot of changes in the sales tax rules in Canada over the last few years, with significant changes affecting large businesses, cross-border transactions, pensions, and financial institutions. Many businesses are unaware of how these changes affect them. The CRA also continues to find and disallow ITC claims for expenditures with inadequate or improper documentation.
Non-arm’s length transactions – Whether domestic or international, if there is insufficient proof/documentation for the validity of the transaction between non-arm’s length parties (such as management or administration fees), the expense can be denied (but yet, the income still taxed in to the other party – resulting in double taxation).
Aggressive tax planning/schemes – Aggressive tax planning and abusive tax avoidance schemes are a global concern. The CRA has invested millions in its program to reduce aggressive tax planning or abusive tax avoidance schemes that contravene specific anti-avoidance provisions of the law. The CRA now has the tools to detect, correct and deter the non-compliance of taxpayers using aggressive tax plans, and there will likely be more audit activity in this area.
As part of this scrutiny, the CRA has recently sent notice that it will be increasing its audits of individuals who have claimed business or property losses. If you do receive an audit request letter or request for information, don’t sit on it or stick it in a drawer somewhere hoping it will go away or take care of itself (yes, people do this). Take the letter immediately to your accountant or tax advisor to assist you in dealing with it.

Not dealing with the CRA requests in timely manner can cost you hundreds or thousands or even more in additional taxes, interest and penalties, which can cripple a small business. But CRA auditors are people too – just doing their job, serving you, the taxpayer, as their client. You may have done everything correctly, or you may have made honest mistakes (CRA audits can be a great opportunity to learn and boost your tax management controls and practices). But be prepared. Talk to your accountant and ask them what your risks are and how you can reduce them.

[author] [author_image timthumb=’on’][/author_image] [author_info]Linda Spencer is a CPA, CA, Canadian Tax Specialist and Money, Marketing & Soul business coach. Her mission is to eliminate stress and anxiety around money and taxes, by empowering heart-centered small business owners with the tools, knowledge, strategies and mindsets to put them in the driver seat of their financial success and wellness.[/author_info] [/author]