What a CRA Audit Really Looks Like
Hello All,
One of the biggest areas of anxiety, especially if you are self-employed or a small business owner, is that you will be audited by CRA and/or Revenue Quebec, even if you have done everything right.
Unfortunately, although the likelihood of audit is relatively low, I can't assure you that you won't be audited. What I can help with is understanding what an audit for small business or self employed owners actually entails, so that you can be mentally prepared and ideally feel less anxious.
It Usually Starts With a Letter
Many of us have an image of an agent, in a beige business suit with a calculator in hand, showing up at your door (admittedly this is mostly from movies where IRS agents are usually low key villains).
In practice, a CRA review almost always begins with a letter asking for documentation which might include receipts, bank statements, a vehicle logbook. This is called a desk review, and it's handled entirely by correspondence.
A full field audit (where someone actually meets with you) is far less common and reserved for more complex situations.
How Does CRA Pick You?
It's not random, and it's not personal. CRA often uses internal benchmarks by industry. For example, if your expenses look out of proportion to your revenue compared to similar businesses, your file gets flagged. Other common triggers include:
Losses reported multiple years in a row
Income that doesn't match T4As or other third-party slips
High expenses, home office or vehicle claims relative to revenue
Lifestyle Inconsistencies i.e. if your income seems too low to support your lifestyle
Operating in a cash-intensive industry
It's worth remembering that being selected doesn't mean you've done something wrong. It usually just means that a number looked unusual.
What Happens Next
Once you receive the letter, you would respond with the requested records and answers to their questions, as soon as possible (do not ignore this letter!). CRA then reviews them and if everything checks out, the file closes without any changes.
If they're not satisfied with the answers or documentation provided, they'll send a proposal letter suggesting adjustments and in that case, they may reassess your return, which could mean additional tax and interest owing. But you always have the right to respond and dispute before anything is finalized.
The Real Takeaway
If your records are organized and complete, then an audit is certainly a nuisance, but it can be dealt with relatively easily. If records are not in order, the pain and consequences are more significant.
This is why it is so essential to ensure that you have a system and build habits around your record keeping which includes keeping receipts, maintaining a logbook, and separating business and personal accounts. Then, if you are audited, you are ready for it.
Have you ever experienced an audit? I'd love to hear about it — you can simply reply to this email.
Ronika
