What to do if your business is audited by the CRA

What to do if your business is audited by the CRA

Originally published in the  Mississauga Business Times.

No one loves filing taxes, but everyone dreads the prospect of an audit by the Canada Revenue Agency. If you’re a business owner or self-employed individual, here are some tips to help you manage through an audit. 

1. Stay calm: The knee-jerk reaction is to panic, but while audits are often based on red flags, they can be triggered randomly. It may be a special project for specific industries (often cash-based) with higher instances of non-compliance, errors on your tax return, or even your business’ performance compared to industry standard. Take a breath and understand whether they merely want copies of specific documents to support a deduction claimed, or a full audit of the business or specific section, such as payroll or GST/HST.
2. Ask for clarity: Get the auditor’s questions and requirements in writing, if no letter was provided, so that you only prepare what is needed and they cannot expand their search without being accountable. This will give you time to prepare, reflect on the questions and avoid spontaneous answers. Estimate the amount of time you’ll need to compile the documents and if you can’t meet the deadline, ask for an extension. Give a reason and the date you expect to comply; missing due dates could trigger arbitrary assessments.
3. Get advice: Alert your accountant about the audit and get their advice on how to proceed. Other than you, he/she is closest to your financials and will be able to guide you through the process, run through the numbers and gather the necessary documents. Consider having him/her present during the auditor’s visit to act as a buffer and ensure they stick to only the items previously requested.
4. Be pleasant: Everyone likes to be treated respectfully and with courtesy, so having a pleasant environment and demeanour is more likely to generate goodwill. An auditor who is treated well may repay the kindness if they find small or trivial items.
5. Don’t overdeliver: While it’s important to be courteous, don’t volunteer information. Even casual conversations may uncover issues the auditor would not have otherwise found. Have the requested documents and basic financial items such as the balance sheet, income statement and trial balance readily available. If requested, accompany the auditor on a tour and briefly describe the business activities, but avoid interactions with non-authorized staff.

The key throughout the year is taking a ‘prove it’ mentality to all business dealings. A good accountant, organization and diligence with receipts will help make the process less daunting.