Managing a Tax Audit

In the time it takes to read this article, the Canada Revenue Agency (CRA) will contact hundreds of taxpayers as a first step toward conducting an audit of their filings. This contact is normally made by letter informing the taxpayers they have been selected for tax audit. Hopefully you have already received today's mail and no such letter arrived.

This article will briefly describe what you or your business can expect in the event of an audit, and will provide recommendations regarding your management of the audit.

Purpose of the audit

The CRA describes the purpose of the tax audit as follows:

While there is, in Canada, a high standard of public compliance with the law, a self-assessment tax system can be maintained only through vigilant and continuous inspection of returns. The primary purpose of the tax audit is to monitor and maintain the self-assessment system. As such, it plays an important role in the achievement of the objectives of the Department which are to collect the taxes imposed by law through the encouragement of voluntary compliance and to maintain public confidence in the integrity of the tax system.

CRA Authority

All taxpayers are required to maintain books and records for the purposes of determining their tax liabilities and other obligations according to tax laws. The tax laws provide the following rights to the auditor:

• the right to inspect, audit or examine the books and records of the taxpayer and any document of the taxpayer or of any other person that relates or may relate to the information that is or should be in the books or records of the taxpayer;
• the right to enter into any premises or place where any business is carried on, any property is kept, or where anything is done in connection with the business or where any of the books and records are or should be kept; and
• the right to require the owner or manager of the business or property and any other persons on the premises or place to give the auditor all reasonable assistance and to answer all proper questions relating to the audit.

In addition to the above, the CRA has the authority to require any person to provide information (including oral representations) or documents for any purpose related to the administration and enforcement of the law. This allows the CRA to review documents that are not traditionally considered books and records, for example, correspondence (letters, reports, e-mails) between the taxpayer and his/her tax advisors.

The CRA may make (or cause to be made) a copy of any document (including a printout of an electronic document) to which it is entitled. Further, the taxpayer must co-operate with the auditor; "no person shall, physically or otherwise, interfere with, hinder, or molest"  the CRA auditor.

Taxpayers are often surprised to learn of the very broad administration and enforcement powers of the CRA.

Managing the Audit

The initial letter from the CRA will normally:

1. ask the taxpayer to make available for examination and inspection all books and records as well as other documentation as listed; and
2. inform the taxpayer to expect a call from the auditor to arrange a suitable date for an initial meeting/interview and the commencement of audit fieldwork.

I suggest the following approach to help manage the requirements of an audit:

1. Resist the urge to ignore or otherwise defer paying attention to CRA's request.  The CRA has been described as Canada's largest collection agency possessing significant powers of enforcement. Conduct yourself accordingly.
2. Review the CRA's request with your tax advisors to gain a solid understanding of any tax issues, to assess your exposure and the appropriateness of the CRA's request, and to determine the appropriate person to correspond with the auditor (the taxpayer, the financial controller, or the tax advisor).
3. Contact the CRA auditor to request sufficient time to gather/prepare the information requested and to seek any necessary clarification from the CRA.
4. Funnel the supply of information to the auditor through the appropriate person, and in some cases include that person in the initial meeting with the auditor.
5. Respond to all requests made by the auditor for documentation and information in an organized, co-operative and transparent manner. However, your obligation ends there; do not provide information not specifically requested by the auditor.
6. Limit the auditor's access to engage in casual conversations with persons in your organization.
7. Treat the auditor with professional respect.

At the end of the day, your records must support your tax filings. Good records and good advisors, combined with proper management of your tax audit, will help you avoid unnecessary exposure to tax reassessments.

Rob Rock is a Tax Partner in the Ottawa office of Collins Barrow.