My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant and a partner with a National Accounting Firm in Toronto. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. The views and opinions expressed in this blog are written solely in my personal capacity and cannot be attributed to the accounting firm with which I am affiliated. My posts are blunt, opinionated and even have a twist of humor/sarcasm. You've been warned. Please note the blog posts are time sensitive and subject to changes in legislation or law.

Monday, July 21, 2014

CRA Audit- Will I Be Selected?

This summer I am posting the "best of" The Blunt Bean Counter while I work on my golf game (after this weekend's 2 birdie, 5 par and 3 triple bogey performance, I still need lots of work on my consistency). Today, I am re-posting a February, 2011 blog on your chances of being selected for audit. This is my third most read post of all-time and has over 150 comments; I wonder why :)

CRA Audit- Will I Be Selected?


I am often asked how the Canada Revenue Agency (“CRA”) selects its audit victims; oops, I meant to say taxpayers subject to audit. Through experience I know certain taxpayers, certain claims and certain industries seem to trigger audits. With that in mind, I will list below what I have seen and how I believe the CRA selects certain individuals and businesses for audit.

Reasons for Individuals and Corporations

 

I would suggest there is nothing worse than a scorned lover, a business partner you have had a falling out with or a dismissed employee to trigger a CRA audit. These individuals know your little secrets; a cash deal here, an offshore account there and a conference you expensed that was really a vacation. These people are also vindictive and in some cases, they make statements and claims that are not factual in nature; however, the claims are enough to bring the CRA to your door.

Update: The CRA has introduced the "snitch line" which offers a reward for tipsters who inform on taxpayers hiding money offshore, as per this National Post Article.

CRA also loves net worth audits. These are audits undertaken because you live in a 3,000 square foot home, have a Porsche and kids in private school, and yet show minimal income on your tax return. Typically the CRA either stumbles upon these situations, or information from one of the individuals noted in the preceding paragraph provides a lead.

Reasons Specific to Individuals


We see far more desk audits (information requests in regard to certain deductions claimed) than full blown audits for individuals. You can expect an inquiry if you claim any of the following:
  • a significant interest expense,
  • an allowable business investment loss (usually if you held shares in a bankrupt private Canadian company),
  • tuition from a university outside Canada (typically the child and parent are tied together as most children transfer $5,000 of their tuition claim to their parents),
  • a child care claim for a nanny; even if you have filed a T4 for the nanny with CRA. Why CRA cannot crosscheck their records is baffling and befuddling.
In all the above cases you are just providing back-up information, these are not audits.

In past years individuals who purchased any tax shelter other than an oil & gas or mineral flow through have been audited. However, in most cases the CRA is auditing the tax shelter itself and the individual investors just get reassessed personally.

Full blown audits seem to occur with regularity in regard to individuals who earn commission income or self employment income and claim expenses against that income. In those cases, CRA gravitates to auto expense claims, requesting logs books they know one in 100 people actually keep, and advertising and promotion expenses they consider personal in nature.

Reasons Specific to Corporations


Corporations seem to be selected for three distinct reasons.

They carry on a business that is CRA’s flavour of the year; some prior flavours have been pharmacies, contractors and the real estate industry and any other industry CRA feels is a “cash is king” industry.

Corporations file General Indexed Financial Information known as GIFI. This information provides a comparative year to year summary of income and expenses. It is suspected by many accountants that CRA uses this information to review year to year expense and income variances of the filing corporation and to also compare corporations within a similar industry sector to identify those outside the standard ratios, but we don't know that for certain.

The final reason is that it is just your turn. I have no knowledge of this, but it seems like CRA just runs down a list and if you don’t get caught in regard to #1 or #2, your turn just eventually comes up.

In all cases it is imperative you keep your source documents to provide to the auditor; CRA more then ever wants source documents. It is also vitally important if you and not your accountant are meeting with the auditor, that you try and keep your cool. In the end, the auditor is just doing his or her job and if you treat them badly, you are not doing yourself any favours.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

4 comments:

  1. We've never been audited, but we've twice had random requests from the CRA for proof of our filings. One time they wanted to see our personal reciepts for daycare expenses, and just this year they wanted to see receipts for one of our expense accounts in our corp.

    Because our documentation is solid, both inquiries were resolved without any issue. We simply copied the daycare receipts that totalled to the penny what we'd claimed and sent that to them. And then we pulled all the receipts for the expense account they wanted to see (again, matched to the penny what we'd claimed).

    For the corporate expense account request, they also demanded proof that we'd paid the invoices, so we had to go back and dig out bank statements and line those all up with the invoices. My wife/bookkeeper was stressed for a couple of weeks getting it all together and lined up.

    I think for the personal request, CRA was probably generally fishing for inflated daycare expenses. For the corporate request, I wondered if they weren't fishing to see if one of our suppliers was doing something, as we do use some independent contractors.

    Even if you're not doing anything wrong you still have to keep your paperwork in order. And if your paperwork is in order, then the worst CRA is likely to do is waste some of your time.

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    1. Hey Glenn:

      The daycare is a typical request for anyone who claims childcare expenses and consider yourself lucky that all you have been audited for is confirmation of expenses paid. Keep your fingers crossed and yes, keep your paperwork in order, it makes any audit a little more tolerable.

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  2. I am trying to standardize our office's basic NTR template in Caseware with the GIFI codes, etc. If the GIFI code used on the prior year T2 differs from the code we will be using in our template, will this trigger an audit?? For example, code 9060 will be the code for wages in our template which will them be exported to our tax software, but on the prior year T2, the code used was 9066. Is this really a problem?? There are fears that this will definitely trigger an audit as the GIFI codes will no longer match.

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    1. Hi Anon

      No idea, accountants have been trying for years to determine what role GIFI plays in the audit process to no avail, at least to my knowledge.

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