Managing a Visit from
the Auditor
Have you ever been
audited? If so you'll know that the visit from the
Canada Revenue Agency, CRA generally is preceded by letter, requesting
specific information to justify figures on your tax return-such as moving,
medical or child care expenses. In addition, the "normal reassessment
period" for review of your files is three years: the current year
and two years back. So you can expect to retrieve files for more than
one year in most cases, when the tax auditor comes calling.
However, small business
owners must be prepared to dig deeper and give more subjective information.
Under our self-assessment system of taxation, you must meet the Onus or
Burden of Proof and show a Reasonable Expectation of Profit exists in
a commercially viable enterprise. This goes beyond the mere keeping of
receipts.
Fact: Expenses claimed
must be reasonable and incurred to earn income from a business that has
a reasonable expectation of cumulative profit over a "profitability
time period."
Do note this also
about the reporting of income: The tax department need not accept your
return as filed, and can make a "Net Worth Assessment" on its
own if you cannot explain the source of your income adequately. The Onus
of Proof, in that case, is on you to prove otherwise.
For these reasons,
and because the Income Tax Act requires it, you must remove any personal
living expenses from business deductions. The best way to do this is to
keep a log of business use compared to total use. Deposit income to separate
business bank accounts and have separate credit cards for business/personal
use.
When fraud is suspected
by CRA, records can be requested beyond the normal reassessment period
of three years. Know also that an authorized person employed by CRA may
at all reasonable times come to inspect your books or examine your inventory.
Under these rules,
CRA auditors are also authorized to enter into any
premises where any business is carried on, and in those circumstances,
you must provide reasonable assistance and answer all proper questions.
However, the taxpayer does have certain rights, which you should know
about and exercise.
Fact: Ask for it in
writing! You have the right to see a written request
for information and a list of issues to be answered. In addition, if the
property in which you run your business is a dwelling, the person authorized
by CRA may not enter it without your consent unless a search warrant is
produced.
The audit powers referred
to above cannot be used, if the inquiry is the
subject of a criminal investigation. It is also important to note that
third parties approached by CRA are not required to provide information
or documents related to other unnamed persons or third parties unless
authorization has been given by a judge to obtain this information.
During a tax audit,
you have the right to be present and to be represented by counsel throughout
the inquiry, unless it is ordered otherwise. CRA would have to show that
your presence would jeopardize the process. Likewise, those who act as
witnesses, providing evidence in an inquiry, may be represented by counsel.
Fact: Keep copies
of everything! The taxpayer also has the right to make copies of everything
that may be seized by CRA, including electronic backups, which is something
you should be sure to keep whenever you forward documentation to the CRA.
However, remember
something your mother may have told you years ago: Be nice! No taxpayer
is allowed to physically or otherwise interfere with, hinder or molest
an official of CRA.. .as codified in the Income Tax Act!
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