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CRA GST & INCOME TAX AUDITS

UNDERSTANDING A CRA AUDITOR'S POWERS & METHODS

As most people understand, “Audits” are the Canada Revenue Agency’s (CRA) primary tool for verifying voluntary compliance with Canada’s taxing legislation, including the Excise Tax Act (ETA) for GST purposes, and the Income Tax Act (ITA) for income tax obligations.

Less well known is the scope of the CRA’s powers when it comes to demanding answers to its questions and reviewing business records.  In this Tax Audits Series Report, we examine these broad powers, and what taxpayers can expect when audited.

CRA’s Basic Audit Powers

Sections 288 of the ETA and 231.1 of the ITA give the CRA broad powers to investigate taxpayers to determine their compliance with virtually all tax obligations and duties.  Specifically, those sections allow the CRA to “at all reasonable times, for any purpose related to the administration or enforcement” of those Acts, examine any document, examine any property, enter any premises and, finally, COMPEL a taxpayer or “any other person” to answer any “proper” question, and provide all “reasonable” assistance. 

Additional Audit Powers

Other sections complement the above basic Audit powers.  Sections 289 of the ETA and 231.2 of the ITA , respectively, empower the CRA to make what are commonly known as Requests for Information (“RFI”).  These RFIs are broader than requiring the target of the Audit to make their documents available to the Auditor.  Rather, they can be directed at third parties, and can compel parties to gather and produce new documents that furnish the CRA with the information it seeks.  Sections 292 of the ETA and 231.6 of the ITA, respectively, allow the CRA to request information or documents from foreign sources connected to the target of their audit. 

Finally, sections 289.1 of the ETA and 231.7 of the ITA essentially allow the CRA, when met with taxpayers who push back on Audit requests or RFIs, to run to a judge and get a court order for compliance – rendering further noncompliance a criminal offence.

How Audits Work in Practice

Audits take many forms.  They range from straightforward desk reviews of CRA files to intensive, on-site examinations of books, records, and underlying business activities.  They can involve informal (i.e., an Auditor’s email inquiry) or formal processes (registered letters that are technical Requests for Information).

As to why certain people get audited: it varies.  Audits can occur because of discrepancies on individual returns, or they can occur at random.  More often, the CRA identifies high-risk sectors of the economy, from which they select high-risk files to audit.  Finally, in recent years the CRA has begun to rely more on “tips”.  Disgruntled past employees, scorned exes, and nosy neighbours might call in an anonymous tip if they know something.

Takeaways

Understanding how the CRA conducts its Audits and what its Auditors are legally empowered to do or demand is essential to effectively reducing potential exposure.  Experienced Tax Counsel have that expertise.

Whether under Audit or concerned about compliance, the sooner businesses get Experienced Tax Counsel involved, the sooner they maximize chances of early resolution and damage control.

For help with tax Audit matters, please click here.

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