What to expect if you are being audited
One day you might receive an unexpected phone call or a letter from CRA (formerly Revenue Canada). They will tell you that they want to meet with you and they want to see all your receipts for the current year, and possible the previous two years. Usually they like to audit at least two years to verify any major changes or discrepancies. They will suggest a date but if that date is not suitable for you they are usually quite accommodating.
When the day comes, one or two auditors might come to your house or office. They are usually very nice and polite. They will introduce themselves and will ask you many questions. Many questions may sound banal to you, but most questions have two meanings, the auditors are investigating your business without the appearance of doing so. Thus, it is important to have your accountant or tax preparer with you at that time, to interpret the meaning of those questions.
Then, they will ask you to see all your receipts, invoices and mileage records. Note that they need original documentation (i.e. canceled checks, receipts) to support the expenses. Credit card statements are not an acceptable form of verification. A list of all allowable expenses is available on this page. There several areas that they might want to investigate in detail:
Car use for business:
CRA wants you to keep a daily log of your car use for your business. This means that they want to see that each day you record the starting mileage, the name of the person(s) you visited and the relative mileage. If the use of the car is personal, you must so indicate in the car log. Then they want to see the total mileage for the year and the total mileage used for business for the year. These figures must agree with the mileage log. If you do not keep a mileage log book, they might agree on a percentage use of the car for business, but it will be much lower than you actual use. Thus, the first rule is to keep an up to date mileage log book. Keep all the original gasoline receipts. Credit cards statements are not acceptable.
Meals and entertainment:
CRA wants you to keep all receipts. On the back of each receipt you must write the name of the person(s) you invited out. You can also claim meal expenses that you occurred by yourself provided that you were at least 40 Km from home and that you can show that on that particular day you had to work out of town. Special rules apply for daycare providers.
Office in the house:
You must show that you an area of the house dedicated to meet clients and to perform your work. The area must be enclosed and must be furnished as an office. A room with a bed is not an office. You are allowed to write out a portion of the house use for business, a reasonable percentage is 10%. Special rules apply for daycare providers.
All other expenses:
The auditor will match your claims with all the receipts. If there is a discrepancy they will disallow the expense. Usually they will take all the receipts away for a few weeks and they will give you a receipt.
The outcome of the audit:
If you have kept all the required records and they match your claims on your tax return, you will receive a letter of thanks for your collaboration. If they do not match, you will receive a re-assessment with a bill. You will then have 20 days to pay or more interest will accumulate. Usually it is better to pay and then, if you think you have a case, to appeal.
The appeal process is very straight forward but there are specific steps to follow (see below). If the appeal procedure is not properly done, most likely you will lose the appeal.
The appeal process is very straightforward and if the letter of appeal is properly prepared and you have good grounds for the appeal then CRA will accept it. However, the letter of appeal must have a specific structure. If you do not follow the following procedure, most likely you will lose the appeal.
The letter must be addressed to the Chief of Appeals in your tax jurisdiction. If you live in Hamilton, Burlington, Oakville and surrounding areas you should use this address:
Chief of Appeals
CRA
PO BOX 2220
55 Bay Street North
Hamilton, Ontario
L8R 3P7
The letter must have three sections:
- Subject with your SIN number, this can be worded as: Re: Objection to your re-assessment of my 2017 tax returns SIN ???-???-??? following an audit.
- Facts. This is the most important part of the letter. You must state only the bare facts with no extra commentary. State only the necessary information that proves that you are correct. Keep this part of the letter short and to the point.
- Remedy: If you think that your original filing was correct, then write this section as follows: my tax return for the year 201? Should be assessed as filed.
- Sign the letter, add your address and phone number.
Fairness committee:
You might have to pay the due taxes after an audit but you might suffer hardship if in addition to the taxes you also have to pay a large amount in penalties and interest. In this case you can write to the Fairness Committee at you tax office proving hardship and asking them to remove the penalties and interest following the audit.
