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What every T1 taxpayer needs to know, to avoid, mitigate and survive a CRA audit which ends in PAIN!   (Part 1)

Consider this scenario! You check today’s delivered mail, and guess what? The envelope contains a letter in a brown envelope, with the Canada Revenue Agency logo top-left, and your name and address in the see-through window.  You open the, and there it is: a CRA letter to you!  A 4-page letter, or more printed front and back, with many formal words, a bunch of references, suggesting you check online what is required, a phone number, some large amounts mentioned, blunt instructions and deadlines!

Yes, you ARE being audited by the CRA! What to do? This applies to you,  the taxpayer, whether you have a corporation which owes taxes, or you file a T3 Trust Income tax return, you have a small business and report your income on a business statement, called a T2125, and you may owe income taxes on any of these. Canada Revenue agency also conducts audits of T4 slips issued to you by your company. Audits also fall upon non-filers, or self- employed individuals receiving a T4A from an employer. Audits occur when, for example, large medical costs are claimed, or education deductions are taken. Every line on an income tax form may be subjected to audit!Most of us will become emotional, experiencing worry, fear, stress, self-doubt, anger, resentment and similar concerns.  We experience these feelings naturally, but the exact reaction varies from one person to another, some are affected more or less, and perhaps, some, sooner or later! For many, just the mention that CRA is auditing makes us cringe, lose sleep, become nervous, and similar emotions! Indeed, and these feelings are only how the honest “taxpayers” feel, let alone the “other set”!

The reality is that with the rush-forward, growth of laptops, cellphones and like devices, and the speed with which we absorb data, CRA will, likewise, be equally better prepared to use its tools widely, and more effectively.

For many, the nature of a “CRA audit” puts the matter out-front in our minds. The wheels within our minds start to move us towards that ultimate annual deadline where the truth is known, documents get to the taxman, and his computers strain to locate faulty issues with your income tax return. Does the tax-man find your fault, or does he accept your information, for the year.

I set out some ideas which each of us might consider when facing an audit, as follows:

1.Are the item(s) being audited substantial enough in value, that your risk is elevated?

2.In preparing the data for the items in your tax return, were you substantially careful about the quantum, and is the support information organized with due care? Does the audited items rate the same care as the overall?

3.Before signing the income tax return, at the time, did you review clearly, and definitively, the tax return and the individual items with the CPA tax preparer?

4.Are there any “ghosts in the closet”? That is, are there any past errors or omissions of some consequence that you may have concealed or overlooked?

5. Do all the income items or deductions belong to you, as opposed to being reportable by a second party, such as your friend, child, husband, etc.?

6.Has there been open lines of communication with your CPA, by which time your CPA clearly is in the know, and as a result, you can be confident of the shared risk;

7.When the tax return was prepared, did the CPA adequately review the facts and the income tax return or submission (say, an adjustment) with you, before releasing the return to CRA.

 

 

What every taxpayer needs to know to avoid, mitigate and survive a CRA audit which ends in PAIN!   (Part 2)

 

It may be factual that many people never get audited, and there are reasons! Conversely, many people get audited “frequently”. The reasons for audit/no audit lies in the risk/reward equation for CRA. Many of us file a tax return based overwhelmingly on T-Slips, etc. CRA in this instance has the ability to confirm matters within its own computers, since the T-slip issuers also report  the same slip to CRA, in your case. The frequently audited individuals’ circumstances may be explained as follows:

 

  • There is no built-in duplicity of data on which to verify;

 

  • The tax return has one or more of “unique” items, absent from most individual’ tax returns;

 

  • Data is entered in a wrong field, or deductions are incorrectly claimed;

 

  • The taxpayer has a history of errors; or

 

  • On the tax return, a slip was missed.

All of the above reasons for audit presume a normal CRA priority in keeping the taxpayer “on- track”. However, in the event these situations arise, no small amount of time is needed to respond to CRA, and later, to receive CRA “clearance”. In most cases, CRA will bill you for taxes owed.

CRA has, in my opinion, a second type of low-level, but frequent, audit pursued, let’s say, randomly! Essentially, in these instances, the purpose is to test compliance with the tax law, and to remind taxpayers to be sufficiently careful in their tax filings. Some common examples of a random audit are as follows:

  • Medical expenses;

 

  • Tuition claimed by student, particularly in first year;

 

  • Interest on student loans;

 

  • Public Transit Amount;

 

  • Charitable donations;

 

  • Eligible dependent, and children deductions. This is very prevalent after marital breakdown, when there are completing claims for the same child;

 

  • Foreign Tax credit under section 20(11) and 20(12). These are respecting, say, US tax withheld on US source dividends;

 

  • Tuition amount of $5,000 claimed by parent, particularly in first year;

 

  • Child care expenses;

 

  • Income Splitting, Joint Election, filing form T1032;

 

  • Property taxes paid;

 

 

 

 

 

 

What every taxpayer needs to know to avoid, mitigate and survive a CRA audit which ends in PAIN!   (Part 3)

 

There are many deductions that will be sure-fire candidates for CRA audit, in my opinion. Some of CRA’s apparently mandatory audits are set out below:

  • Any foreign Tax credit, such as foreign tax credits claimed on foreign pension income. This deduction is denied if foreign payment of taxes cannot be proven;

 

  • Various claims at Line 232 of the T1, which includes RRSP/RIF losses after death, legal costs for support payments, and others;

 

  • A claim for employment expenses, particularly in the initial years of claim (Line 229);

 

  • Carrying charges of any substance, particularly in the initial years of claim. This includes marital support (Line 221) and investment expenses such as interest;

 

  • Certain claims on the business statement, T2125, such as vehicle costs;

 

  • Moving expenses;

 

  • Substantial charitable donations;

 

  • New tax shelters;

 

What every taxpayer needs to know to avoid, mitigate and survive a CRA audit which ends in PAIN!   (Part 4)

Some Do’s and Don’ts, going forward:

  • File your tax return only when you are very sure of its contents. A trusted accountant, such as a CPA, gives you solid support, however, your obligation to the CPA requires full disclosure;

 

  • Be prepared early enough, and avoid  that “last minute” filing in a rush, and omissions  are prevented;

 

  • Consider the reliability of some of your contacts, and the logic of what people are wanting to sell to you, when they suggest to you what you buy is tax-deductible. A few years ago, there was a deluge of fraudulent Donation slips, and tax shelters unapproved by the CRA. Ultimately, all the claims in these scenarios were denied;

 

  • However, there are likely new issues on the radar-screen as I write;

 

  • If you are audited, meet all CRA requests and deadlines;

 

  • In some cases, I recommend it would be wise for one to file an income tax return without the dubious deduction, and later file a T1 Adjustment setting out the item and asking for consideration. If CRA approve the deduction, it will refund you the tax!