A tax audit is when the Canada Revenue Agency (CRA) examines your books and records to assess if you have paid all the taxes you owe. An audit is not the same as a review or request for information. Learn more now
An audit can last for a few hours or a few weeks. In most cases, the CRA audits tax returns within 4 years of the date of the original notice of assessment. But where they suspect fraud, they can re-assess at any time.
The CRA does not usually audit people who earn wages or salaries because:
- their taxes are collected through payroll deductions
- the CRA can check their incomes against the information their employers have filed.
Five things you can do to avoid a tax audit
- File your tax return on time. If you file past the April 30 deadline, you could increase your chances of being audited. And, you will have to pay interest on any late tax payments. If you file too early - before you have all your documents - CRA could review your return and make an adjustment.
- Report everything you are supposed to. Make sure you declare all of your income, especially if you are self-employed or paid in cash. It's not the amount that matters. It's whether you are accurate and complete. The CRA compares taxpayers in similar businesses to see if anything stands out. In addition, the CRA sometimes tests a certain groups of taxpayers, such as people who earn most of their income in cash. If you fall into this category, and your return stands out, you may be audited.
- Have documents to support any major changes. When choosing returns for audit, the CRA compares tax returns over a period of time and looks for unusual changes. This could be as simple as making a much larger contribution to your RRSP or to charities, or having greater medical and childcare costs than you usually do. By supplying the supporting documents at the review phase, you may avoid an audit.
- Get the math right. Double check your calculations if you do them with pen and paper. Or, use a software program. A good program will notify you of errors, keep you up to date on recent tax changes, and even point out deductions you may be missing. If you don't have a computer, hire a professional. Innaccuracies may cause CRA to flag your return.
- Stay away from buy-low-donate-high schemes. The CRA has issued several warnings about tax schemes that result in donation receipts worth three or four times the actual amount donated by the taxpayer. This type of claim is likely to be audited.
Remember: If you are audited, it is in your best interest to cooperate with the auditor, answer all questions respectfully and provide any information requested on a timely basis. You may also want to get advice from a tax professional, who can act as your representative. Content in this section is provided in partnership with the Investor Education Fund, a non-profit organization promoting financial literacy to Canadians. To find out more go to GetSmarterAboutMoney.ca.