Tax Compliance: Heads Up, More Tax Audits are Coming
It’s safe to say that no business owner, no matter how diligent, welcomes an impending audit notification from the Canada Revenue Agency (CRA). But it’s become clear that a growing number of owner-managed companies in Canada will be faced with an audit in the foreseeable future as the government looks to boost revenues, increase compliance and limit aggressive tax avoidance.
The federal government in the past four years has boosted spending on audit activity, with a cumulative outlay of over $1 billion which is expected to generate about $6 billion in additional revenues. The measures proposed in the 2019 budget have upped the ante again, with an increased focus on areas such as offshore compliance, real estate, crypto-currency trading, TFSAs and the digital economy. The CRA has also invested in advanced information technology and analytics systems to better target potentially non-compliant businesses and individuals.
In my practice, I have seen a steady and noticeable increase in calls from business owners whose businesses have been selected for audits, often for the first time, or who are trying to proactively prepare for this changing landscape. Many are spooked and anxious, anticipating a process will be not only intrusive and time-consuming but one that will create a drag on profitability because senior management is preoccupied with the CRA processes.
Business owners and other taxpayers should seek out professional advice early on — even before an audit notification — as a core element of a risk management/identification strategy, especially given the CRA’s stepped up focus on auditing areas such as the tax treatment of foreign income and real estate transactions. Bottom line: don’t be afraid to ask for advice.
In my experience with clients, the best way of avoiding drawn-out audit disputes with CRA is to avoid getting into one in the first place. That means you need to maintain complete books and records, automate processes wherever possible, store documents in an accessible manner and retain certain important records more than the six-year window. I remind my clients to take steps to ensure, for example, that certain documentation (like vehicle logs or professional invoices) is meticulously maintained if those expenses have been claimed.
2019 Federal Budget Tax Compliance Measures
Budget 2019 proposed spending an additional $150.8 million over 5 years combating tax evasion and aggressive tax avoidance. The funds would be spent:
- Hiring additional auditors
- Conducting outreach
- Building technical expertise to target non-compliance associated with cryptocurrencies and the digital economy
- Creating a data-quality examination team to ensure proper withholding, remitting and reporting of income by non-residents
- Extending programs to combat offshore non-compliance
The federal government expects to reap $369 million over 5 years through this initiative.
Inevitably, sometimes documents will go astray and this is not discovered until we are looking for them. Clients facing an audit sometimes need assistance brainstorming how to track down lost invoices or expense documents. In some cases, clients feel overwhelmed by the audit information production process, either because they’re overworked or juggling issues in their private lives. In those cases, our team can help communicate with the CRA, help sort and order documents, and explain what to expect from the process.
Ultimately, as I tell my clients, CRA audits are process-driven exercises that generally follow a predictable script — there is no need to panic. Nor should taxpayers fear the process that ensues. A far better alternative is to seek out advice and information about what’s going to happen. As the old saying goes, knowledge is power. With adequate information, taxpayers can make informed decisions about their affairs — whether it be advice to pursue a reassessment through an objection and an appeal to the tax court or advice to consider a voluntary disclosure before the CRA is even involved.
Audits have become a routine part of doing business today. Indeed, when business owners recognize this shift and focus on pre-audit prevention strategies, they’ll find that the process will invariably become less disruptive. To stay up to date on the latest tax bulletins, CRA changes and other tax updates that could impact your business, subscribe to MNP’s Tax Alerts.
“CRA audits are process-driven exercises that generally follow a predictable script—there is no need to panic.”