The CRA’s 2016 Compliance Letter Campaign

Since 2010, the Canada Revenue Agency ("CRA") has been sending letters to specific Canadians to in their words “inform selected taxpayers about their tax obligations and to encourage them to correct any inaccuracies in their past income tax and benefit returns”. The 2016 campaign, for which the CRA estimates it will send approximately 30,000 letters, has already begun. Today I will discuss

A better caption would be "You Are Maybe Getting Audited"

these letters.

Favoured Taxpayers

The letters are sent to selected groups of individuals where the CRA feels the taxpayers may not fully grasp the technicalities regarding the deductibility of specific expenses. These groups tend to fall into the following three main categories:

1. Self-employed business owners

2. Commission employees

3. Rental property owners

Expenses That Catch the CRA's Eye

The letters tend to focus on the following type of expenses:

Self-employed and commission employees
 

• Advertising and promotion, specifically meals and entertainment

• Wages, often in relation to spouses and for commission employees, any deductions for assistants

• Auto expenses, especially the quantum of business related mileage

• Home office use

Rental property owners 

• Capital cost additions (cost of property)

• Repairs and maintenance

• Travel expenses

 

What the Letters Look Like

The typical compliance letter will say something like this:

“You have reported $XX of XX expenses in 2014 as business/employment expenses/rental expenses. The CRA is asking you to review this amount as taxpayers often make common errors with XX expenses”…….

The CRA includes an appendix with a detailed description of the expense they are reviewing and what the criteria are to qualify for deducting the expense at issue.

The letters clearly state that you are not being audited at this time, but that if changes are required you should make them within 45 days using a T1-Adjustment Form. The CRA also notes that later in the year they will be auditing taxpayers who earn a certain type of income and claim certain types of expenses. They then add that an audit may cover tax years or other items not noted in the compliance letter.

Since in cases other than misrepresentation, the CRA can audit you three years back from the date of your notice of assessment, you can be at risk for three years of audit review.

Obviously, the audit discussion scares the heck out of most people, even where they have properly claimed their expenses.

The Possibility of Being Audited

On its website, the CRA says the following regarding the possibility of an audit.

“Receiving this letter does not necessarily mean that you will be selected for an audit. We consider a number of risk factors before conducting audits.

We rely on risk-assessment systems and research to determine which taxpayers are most likely to misunderstand their tax obligations. We also randomly select tax returns and conduct reviews to verify that taxpayers are paying their taxes in full and on time. If our review indicates that certain activities are more at risk for non-compliance than others, we may conduct more audits of taxpayers reporting these types of activities”.

Should You Be Concerned if You Receive a Letter?

I would suggest, that in the vast majority of situations, taxpayers have claimed expenses that are within the rules of the Income Tax Act ("ITA") and adjustments will typically not be required. The ITA rules can be interpreted differently and while most people attempt to stay on the straight and narrow, some people push to the grey areas. If you are one of those people, you may want to consider a possible adjustment if your grey is hinging on black. In addition, some people do not keep the best of records to support their deductions and that could be a cause for concern.

If you have an accountant, you should speak to them once you receive the letter. They can review with you, if they perceive you to have any audit risk.

If you do not have an accountant, you will need to consider if you have been “aggressive” in claiming deductions or misinterpreted the rules. If so, filing the T1 adjustment may make sense.

You are probably wondering if filing a T1 adjustment will minimize the risk of an audit? Unfortunately, I cannot answer that question, as I have no access to the rates of follow-up audits on those who have filed T1-adjustments. If I had to guess, filing an adjustment would only minimally affect a future audit (you cleaned up your affairs, but are noting they were not clean to begin with), but again, I have no substantive proof one way or another and this is just my opinion.

If you feel you have filed your return accurately and correctly, you do not need to take any action. However, there is no guarantee you will not be audited and that the CRA will not reassess you on expenses claimed (since your interpretation of what is say a deductible advertising expense may be different than the CRA’s, even if you feel it clearly meets the criteria of the ITA).

So the long and short of this; if you have filed your returns accurately, you have no need to fear these letters. However, the letter may be indicative you have claimed expenses the CRA has found are often claimed incorrectly or aggressively and you may be audited in the future.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.