A Quick Look at Some of the Reasons That You May be Audited

Share Button

A tax audit enacted by the CRA is quite a common occurrence and sooner or later, the majority of individuals will experience this confusing and even unsavory process. Although there are times that the Canada Revenue Agency will choose who it will audit at random; there are a number of conditions that may precede action being taken. For your information and protection, it is a good idea to take a look at some of the primary reasons why an audit may be warranted.

Requests for Additional Information
One of the most common reasons that the CRA will require an audit is simply their need to be supplied with a more robust level of information. This is to allow them to more transparently assess your taxable income. Indeed, a few of the most frequent enquiries can include such conditions as moving expenses, child care expenditures, medical expenses, donations, investment losses and the occasion when a foreign income tax has been concurrently paid (a business who has interests in both the United States and Canada, for example).

Full-Blown Audits
There are also times when an audit may be requested from a high-net worth individual. There has actually been an increase on the focus that the CRA is placing upon those with reasonably high income (for transparency reasons). Those who may have become involved in tax shelters may also fall under the radar although it will mainly be the tax shelter itself that will be scrutinized. Those who are self-employed or earn a considerable amount of commissions will also be looked at. Finally, automobile costs are examined; often times due to the fact that a clear log book and expenditure account is not created.

The Reasons Behind Auditing a Corporation
The General Indexed Financial Information (GIFI) form is one of the main reasons that the CRA may decide to audit a corporation. This is mainly due to the fact that the CRA will be able to compare balance sheets between different years; thus this information is a valuable tool to detect inconsistencies over time. They will also observe normative data from specific industries to compare it with the business in question.

There may be cases when a certain industry will be closely examined during a specific year. These audits will tend to focus on sectors that involve a high amount of cash exchanges (construction or labor, for example). This process will also be determined by the success or failure of past audits. Should any such transaction be deemed “unusual”, an audit may be warranted.

Finally, an audit may occur as a result of statistical randomization. This is to ensure quality control across the entire Canadian populace. Also, this approach ensures a rather unbiased approach as opposed to seemingly “targeting” a specific sector or type of business. Regardless of the reasons, it is always best to consult with a qualified financial professional in the case that you or your enterprise suddenly discovers that you have been audited.

Eric La CaraEric La CaraManaging Partner and Tax Practice manager for Capital Tax in Vancouver and Tokyo. Eric is a U.S. and Japan Personal & Corporate tax specialist with more than 15 years of experience in the area of cross-border structuring and taxation. Eric is charged with developing Capital Tax overall operations and strategic direction using the business and technical skills he has acquired during his professional career in Asia.