As the federal government has begun rolling out new programs and rebates, they have also given the CRA a revised mandate on how to audit businesses and what to investigate. Although the agency has not published any official guidance, its audit practices have changed over the past few years.
Why is my business being selected for an audit?
The CRA has indicated that they use an internal screening computer program that provides recommendations for returns to be audited. This program reviews returns and sorts them using a risk scale on whether they believe there is non-compliance or potential tax loss. There is however a small percentage of returns selected for audit that are fully random (i.e. may not show any risk factors) as required by public policy.
The CRA may select a company for an audit for several reasons, the most common include:
- Complex transactions: Significant or unusual transactions completed during the year, such as corporate reorganization.
- Large refunds or claims: Substantial refunds resulting from rebates, tax credits or other government programs, including claims involving significant investments in property, plant and equipment.
- Inconsistent filings: Differences between amounts reported on various returns, such as discrepancies between GST/HST and corporate income tax filings.
- Higher-risk expenses: Large claims for expenses that may receive greater scrutiny, including meals, travel and vehicle costs.
Why does the CRA conduct in-person visits?
One of the changes with how the CRA is conducting their audits is the utilization of in-person interviews, which are normally done at corporate headquarters. Their intention with using interviews is twofold:
- Observe the business firsthand: The assigned agents may tour the workplace and review its assets to determine whether their observations are consistent with the amounts previously reported.
- Expedite the audit process: In-person discussions allow agents to obtain answers more quickly and efficiently.
Questions for the in-person interview are normally not provided in advance of the meeting and can run from 30 minutes to 2 hours depending on the size of the entity, responses provided and other relevant factors.
What are common audit types?
Listed below are some types of newer audits that the CRA has begun conducting:
- Employer compliance – increased focus placed on verifying
- Payroll records
- Employee benefits with the intention of confirming all are reported on the T4s
- The business use for high-risk expenses & company assets
- Books & records – increased focus placed on verifying
- Financial & corporate minute books (including legal resolutions)
- Bank deposits with the intention of confirming that all revenues are reported
- The business use for high-risk expenses & company assets
- Any other abnormal & complex transactions
- Rebates – increased focus placed on verifying
- Eligibility for any significant rebates that have been recently claimed
What are some things to consider for a CRA audit?
Some recommendations to follow in the event of an audit are as follows:
1. Clarify any requests that aren’t clear.
The CRA will always send a written letter with the items that they require as part of the audit. If any of the requests are unclear, a quick phone call with the case agent should clear up any confusion. It is important that only essential information is provided (as opposed to oversharing) to avoid increasing the company’s tax exposure.
2. It is ok to hold off on answering some of the in-person interview questions.
Interviews are not always required to be attended but we still recommend doing so and answering questions to the best of your capabilities. This usually goes a long way with the case agent and aids in having the business being viewed as uncooperative. However, you do not have to answer every question that is asked and “I’ll confirm and get back to you” is an acceptable response especially if you believe a potential answer might have certain tax consequences. Following the interview, the CRA will allow you to respond to any unanswered questions via written submission.
3. Ensure that company records are updated on a regular basis.
Common examples include:
- Posting journal entries into the company’s books
- Having legal counsel prepare required legal forms to support corporate transactions such as dividends
Without proper documentation, the CRA has the right to conclude that certain transactions are deemed not to have not occurred and may reverse them.
4. Review the company’s process for calculating & reporting taxable benefits
The CRA has noted that as a general trend, companies are not always properly calculating or including taxable benefits on their employees T4s. Below are examples of items that, if paid by a company, would qualify as a taxable benefit:
- Loans provided with below market interest rates
- Personal usage of corporate vehicles (ex. letting employees bring vehicles home after work & on weekends)
- Gym memberships
- Parking & transit
The CRA has also begun looking through certain expense accounts (meals, entertainment, travel, vehicle, etc.) for personal items. Having a screening process to keep personal expenses out of the business records is important to avoid potential penalties for expensing non-business items.
Understanding the CRA’s evolving audit practices, as well as keeping complete, accurate records, can help businesses respond efficiently, reduce unnecessary tax exposure and approach an audit with greater confidence.
Welch can offer your corporation a wide variety of services ranging from assistance in responding to a corporate audit to reviewing your books and identifying guidance on potential areas where your company might be at risk to an audit. We also offer Audit Shield coverage, which is an annual one-time fee and would cover any Welch time responding to audits on behalf of your business.
If you have any questions about any of the above, please contact your Welch representative.
