preparing taxes

How to Deal With a Personal CRA Tax Audit

The Canada Revenue Agency (CRA) sends out letters every year to people it is going to audit. According to sources around 30,000 such letters are sent out every year and can scare some of the taxpayers who receive this dreaded communication.

It can be alarming to know that you are going to be audited, but most tax experts say it is not something to be fearful of if you have filled your taxes accurately and have nothing to hide.

Responding to a tax audit letter is very important after which it is necessary to cooperate with the CRA during the auditing process.

Tax evasion is a crime, and the federal government is now ramping up its efforts to stop all types of tax evaders whether they are multinational companies, wealthy high-net-worth individuals with offshore accounts or a normal salaried or business owning taxpayer.

However, the auditing process is comparatively lesser for those paying personal income taxes compared with company auditing, and most salaried Canadians won’t face a personal tax audit. The CRA usually chooses filings that are not complete or those that raise questions.

CRA also reviews filings and sometimes requests for additional information and conducts in-depth scrutiny of finances.  According to an online source, an income tax file may be selected for review randomly, or for reasons such as a discrepancy between the figures you cited and those of a third-party, such as your employer. An unusual change in your activities, such as an increase in medical expenses or childcare-related expenses, may also trigger a closer look from the tax collector.

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Often the review ends when the taxpayer submits the information required. However, if a taxpayer doesn’t respond to the CRA, it can lead to fines and additional taxes based on the information the CRA has received.

A pre-assessment review can take place before a notice of assessment is given. In contrast, a processing review happens after the notice of assessment is issued, usually between August and December.

It is essential to save all receipts you have from your tax returns for at least six years and being prepared for any questions the CRA may have on your financial dealings.

Some information, such as documentation for property owned by the taxpayer will have to be saved for much longer and can come up anytime in a CRA review.

If you find yourself being a recipient of a letter from the CRA, remember these steps:

  1. Don’t panic. Read the letter carefully and understand what the CRA is looking for. You can resolve the issue only if you know what the problem is.
  2. Submit any information the CRA has requested for. If the CRA is not satisfied with your submission, they will send another letter and give you an additional 30 days processing time.
  3. If you don’t agree with the view of the CRA on your filing, it can be a good idea to clarify things out before the reassessment process begins. Otherwise, you will have to go to a different auditor in the appeals section.
  4. If your issue is not handled correctly or if you are convinced that you are correct, then you can even take the government to court on the matter by filing at the Tax Court of Canada.