CRA Letter Campaign and Audit Initiatives Update

Scott Park, CPA, CA

I recently attended a liaison meeting between the Canada Revenue Agency and the Chartered Professional Accountants of British Columbia. One matter of particular importance that was discussed was CRA’s letter campaign for 2016.  In 2010, CRA began a letter campaign to inform selected taxpayers about their tax obligations and to encourage them to correct any possible inaccuracies in their past returns that they filed. The CRA felt this was an appropriate approach to educate individuals in selected “activity groups” or industries where taxpayers are at a higher risk of misunderstanding their tax obligations. 2016 marks the seventh year of this campaign initiative and they will be sending approximately 30,000 letters to selected taxpayers in early 2016.
 
Here’s what you need to be aware of...

CRA Letters and Possibility of Audit

There are two types of educational letters that CRA might send to selected taxpayers. One to educate them about specific claims made in their returns and another to notify them that CRA may conduct an audit in their activity group.
 
CRA has indicated that their focus is on taxpayers carrying on rental, business, professional, or employment activities. This captures those taxpayers that have filed personal T1 returns that include forms T2125 Statement of Business Activities and form T776 Statement of Real Estate Rentals. Particular emphasis is on those taxpayers that have reported losses on the T2125 and T776. Their focus also covers businesses that file T2 corporate tax returns.

What to do if you Received a Letter

If you happen to receive an initial letter, do not panic.     

However, it would be prudent to review your income tax returns to make sure that your income and deductions have been reported properly. It is a good idea to also make your advisor or tax preparer aware of the situation. If the return was filed error-free and taxes were paid on time then no further action is required.
 
If errors are identified in your tax returns, the taxpayer can correct them by asking for an adjustment. The appropriate channels for adjustment would need to be followed such as filing a T1-ADJ, T1 Adjustment Request or an amended T2 corporate tax return depending on the situation.
 
As always, your trusted CPA can assist you with these sorts of matters.

Small and Medium Sized Business (“SME”) Audit Selection

For obvious reasons, CRA does not disclose how they select certain taxpayers for audit; however, they do acknowledge that audits for SME’s are selected by the CRA’s regional Business Intelligence (BI) functions. They use a risk assessment system. The BI functions are responsible for ensuring that the highest risk files are selected for audit and that audit file selection supports higher level CRA goals and objectives. Here are a number of factors they likely consider:

• Past Errors or non-compliance – includes a history of request to file letters from CRA, late filed, revised or amended returns as well as issues with GST filings
• Comparative information – a T2 corporate tax return requires financial information to be reported using General Indexed Financial Information. This is known as “GIFI”. This information provides comparative year over year summary of income and expenses. CRA can use this information to highlight significant variances compared to the previous year and also compare the results of a corporation against standard industry ratios to identify potential anomalies.
  
• Random selection – as the name suggests, you may get selected by fluke
• Underground economy – if you operate in an industry that has a high occurrence of cash based transactions then CRA will target and scrutinize that industry, regardless of whether you have your tax filings done properly and do not have a history of past errors or non-compliance. An example of a high risk industry is the construction industry.
• Non-compliance related to real estate transactions – this can take the form of not reporting capital gains when a real estate investment property is sold or even when there is improper reporting of income associated with real estate flips (e.g. a transaction involving the assignment of real estate contracts prior to the completion of a transaction).    
  

What to Expect if Audited and How to Minimize Your Risk 

​If a taxpayer is faced with undergoing a CRA audit then they will be expected to provide all relevant business records to support the income and deductions reported. However, taxpayers should also be aware that CRA will likely also request personal records from those related to the business. Typical documents would include personal bank statements, credit card statements, mortgage documents etc. From CRA’s perspective, they want to see this information because of the legal relationship of the individuals associated with the business being audited.
 
There are many ways to minimize your risk of being caught in CRA’s letter campaign and audit initiative. It starts with having a system for maintaining good records for business and personal affairs. It is also crucial to separate business and personal expenses. If you have a trusted business advisor this should be something that they tell you from the start. So if they do please follow their advice.
 
Having a clean record with CRA for not having past errors or non-compliance issues is beneficial.
 
Also, using a trusted professional tax preparer is recommended to ensure that the tax filings are done properly. However, please keep in mind that the tax preparer can only complete the returns based on the information that he or she is provided. Therefore, the taxpayer providing the information is ultimately responsible for ensuring that their tax return is complete, accurate, and fully reports all sources of income and the proper deductions.
 

Disclaimer: The blogs posted on Scott Park & Co Inc. website provide information of a general nature. These blog posts should not be considered specific advice since each person's personal financial situation is unique and fact specific. Please contact us prior to implementing or acting upon any of the information contained in one of our blogs.