While tax season may be in the rear-view mirror for most Canadians come summer, some may discover — by way of a letter from the Canada Revenue Agency — that the taxman isn't quite done with them yet.
The CRA electronically analyses the 25 million individual tax returns filed each year. Some are singled out for review because they raise red flags, while others are part of a random sample to make sure all taxpayers are playing by the rules, the CRA says on its website.
"They're very, very selective. They're looking at specific areas of compliance that they consider to be higher risk," says Jamie Golombek, managing director of tax and estate planning with the Canadian Imperial Bank of Commerce in Toronto.
For instance, the CRA tends to zero in on the self-employed, to make sure personal expenses aren't being deducted as business expenses.
"Do you really use 40 per cent of your home as your office, or is it really something like 20 per cent? The government scrutinizes that," said Cleo Hamel, a senior tax analyst with H&R Block.
"When you're claiming automobile expenses, for instance, they really want to see a log.... Those are key ones that get picked out."
The CRA also makes sure slips taxpayers get from third parties — like T4s from employers and T5s from banks — match copies it automatically receives. Credits for things like child care, medical expenses and donations can also be singled out for scrutiny.
Most often, the CRA will send letters to selected taxpayers, asking for a specific receipt or piece of documentation to support their claims.
Sometimes, though, the CRA will want to delve into much more detail through an audit.
"Unfortunately, for someone who doesn't keep really good records, that's where things get scary," Ms. Hamel said.
Ms. Hamel recommends taxpayers only claim deductions they can back up.
"If you don't have the receipt for the newspaper ad you put in, don't claim it. You're better off," she said.
If the CRA doesn't get the receipt it asks for, the taxpayer would have to pay back any refund they got from that credit, plus any interest that would have added up since the filing deadline, Ms. Hamel said. That could end up being pricey, since it could take months for this process to play out.
If a receipt turns up after they file, taxpayers can always submit it after the tax deadline and have their return adjusted accordingly, Ms. Hamel said.
There's another disadvantage to being overly "aggressive" in claiming expenses and having the CRA rolling them back, said John Bathurst, vice-president of wealth services at BMO Harris Private Banking.
"You probably have increased significantly the chances you'll get reviewed again in subsequent years," he said.
Mr. Bathurst adds taxpayers should hang on to receipts regardless of whether they're filing by snail-mail or electronically.
"If in doubt, throw it in a shoe box and then you know it's there," he said.
"For compliance, that's probably one of the best filing systems around. And it saves so many people's bacon."
Once the CRA receives whatever documentation it requested, it will either decide you're in the clear and leave you be, or recalculate your return.
The CRA has an appeals process where taxpayers can challenge any decision they deem unfair. Failing that, there's always tax court.
Ms. Hamel said you should always pay whatever amount the CRA is asking for immediately in order to avoid interest charges. In the event the tax payer successfully pleads his or her case, they can always recoup that amount later.
Taking the fight all the way to tax court isn't always the best strategy, said Mr. Golombek.
"You always have the right to have your proverbial day in court, but my general recommendation to clients is that if they've got this formal reassessment, it's best to try to resolve the matter informally, with discussions with the local tax services offices," he said.
Sometimes a taxpayer will use tax court to fight tax rules they think are unfair on principle. In that case, they're better off writing to their local member of Parliament than wasting time, energy and money in court, Mr. Golombek said.
"Even if they spent one hour of time with an informed tax lawyer or tax accountant to find out whether or not they have any chance at all, then they would save themselves a lot of grief and aggravation."