Steps Small Business Owners Can Follow to Prepare for a CRA Audit

As a business owner, you would never want to receive a letter from the Canada Revenue Agency (CRA) for an audit. However, every business is susceptible to one. So, if you have received a notice from the CRA, do not panic. An audit doesn’t always mean a hefty penalty. It can sometimes be for a mismatch or wrong reporting. While an audit can be stressful, it will help you better understand and meet tax obligations.

Step-by-Step Guide to Handle CRA Audit

As a taxpayer, you cannot ignore the audit. However, you can make it less stressful by following some steps and preparing for it in an organized manner.

Step 1: Read the CRA Audit Notice

Firstly, you need to understand why you have received an audit notice. You can find the reason in the notice itself. The notice will specify the financial periods you are being audited for, the reason(s) for the audit and the documents required. Some common reasons the CRA may audit you include:

• If you show less income than the actual income earned
• If you claim higher expenses compared to last year

Step 2: Set up the Audit Date

The CRA auditor will contact you via Email, Call, or both to inform you of the date, time, and location for the audit. Most auditors prefer on-site audits, as they help to complete audits faster and with minimum delay. If an on-site audit is not possible, the auditor will conduct an audit at the CRA office. In this scenario, CRA will appoint an auditor from outside your region.

Step 3: Preparing Documents for the Audit

Once your audit date is set, you have to prepare the documents for the audit. You should read the notice carefully because it will mention the documents the auditor has requested. Apart from the documents requested, it is an excellent practice to be handy with the ledgers, invoices, receipts, contracts, rental records, and bank statements for the financial years in question and those a year before and after. Remember, the CRA auditor can ask you for documents of more than one financial year if he finds discrepancies.

You could seek the assistance of a professional accountant to prepare these documents. Accountants can help you prepare the statements and reconciliations an auditor needs in the desired format. The auditor may borrow documents during the audit for which they will provide a receipt. They will try to return the document as soon as possible.

Note that an auditor is not allowed to receive records by email as this is not a secure way. They should inform you about CRA’s secure services for sending online documents.

Step 4: Consult a Professional Tax Advisor

Once you collect all relevant documents related to the notice, talk to a professional tax advisor. Tax advisors have a significant role in CRA audits because they specialize in them and know how to handle a difficult situation or a tricky question. They know how much information needs to be passed to the CRA auditor in the desired format. At the time of the CRA audit, the tax advisor can act as the spokesperson and represent your company. This will help you communicate effectively with the auditor.

Step 5: At The Time of Audit

Now, during the audit date, you must respond to the auditor promptly with the required data. You and your tax advisor should never miss the meeting with the auditor as it will help you finish the audit on time. A cooperative environment may lead to a more favourable interpretation of significant issues.

Step 6: After Audit

Once the audit is complete, the auditor will give you a letter with his findings and suggestions. The most common outcomes of the audit are:

Everything Is Fine: If the auditor finds your documents are accurate and comply with the tax laws, he/she will conclude the audit with no changes required. You will receive a completion letter.

Additional Tax Due: At the time of the audit, the auditor might find your tax liability higher and inform you to pay an extra tax before the CRA issues a notice for reassessment.

Refund: The auditor will also check whether you are eligible for a refund. If you qualify, he/she will arrange the refund from the CRA.

If you accept the response and follow the feedback provided by the auditor, your audit is complete. If you are unsatisfied with the audit outcome, consult a tax advisor for further steps.

Contact DNTW Toronto LLP to Help You with CRA Audits

Talk to a professional tax advisor to help you collect all the information needed to answer the notice received from the CRA. To learn more about how DNTW Toronto LLP can provide you with the best professional tax expertise, contact us online or by telephone at 416.924.4900.