What are the common tax audit triggers or risks?

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Grant  Gilmour

Grant Gilmour

 

 

Facts:
Canada Revenue Agency (CRA) pursues audits of taxpayers based on risk assessment and random audits. CRA audits can be time consuming and costly. Taxpayers often ask why they were chosen for a particular audit and some feel that they have been targeted.

Discussion:
In a recent article on their website by Stevan Noveselac & John Sorensen of Gowlings Law (www.gowlings.com), they have prepared a list of Top Ten CRA Audit Flags to be aware of as follows:
1. Inconsistencies between third party information and taxpayer’s filing position: CRA’s “matching program” compares information from third parties such as T4 slips from employers and T5 slips from banks and compares it to taxpayer’s filings.
2. Employer compliance: CRA aggressively pursues a range of issues pertaining to employer compliance, such as timely remittance of source deductions, independent contractors vs. employees, and taxable benefits.
3. Not complying with CRA requests for information: This is not only damaging to taxpayer’s position for a year being audited, it also flags the taxpayer for future audit enquiries. Supplying information to CRA should be carefully managed to ensure CRA requirements without over-disclosing information.
4. Requests to amend income tax or GST/HST returns: While amendments to returns may be necessary or desirable to correct previously filed returns, they can attract audit scrutiny.
5. Unusual or notable changes in deductions or credits: CRA compiles information about deductions and credits claimed by taxpayers over multiple years and significant changes may attract CRA enquiries.
6. Participating in aggressive or high risk tax strategies: CRA has dedicated audit resources to detecting and reassessing a number of issues such as offshore investment accounts or charity scams.
7. Discrepancies between tax filing position and filing positions for similarly situated taxpayers or private corporations: CRA may compare corporate tax returns and the relationship of purchases, sales, and GST/HST remitted to other businesses in the same industry to ensure reasonability.
8. Reported income low compared to residents in same neighbourhood: This suggests that an individual may have unreported income, which may trigger an audit. CRA may initiate a “net worth” or arbitrary assessment, whereby various tools are used to allocate income to the taxpayer.
9. Not using fair market value for residential real estate rentals: Where rental units yield no income or losses, CRA may suspect that property is being rented for less than market-value rent to related persons.
10.Referrals: CRA may commence an audit based on information obtained during the audit of a third party (such as a supplier or customer) or referral from another CRA department, other government organizations or informants.

Recommendation:
If you would like more information on CRA audit flags or would like us to help you with defending your audit, please contact us at Gilmour Knotts Chartered Accountants.

 

Grant Gilmour B.SC. MBA, CPA, CA is the International Tax Partner of Gilmour Knotts Chartered Accountant. To connect with Grant visit: www.gilmour.ca