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Tax Audits and Business – What to Expect in a Business Tax Audit

Many of our clients ask questions about their risk of a tax audit, and whether they need to be concerned. Our advice is straightforward. If you have maintained proper records, reported all of your income, and not claimed any illegitimate expenses, you should not have any worries. Unfortunately, errors may be found that could cost you some tax, but there will be no penalties in such cases, just arrears interest for late payment of the related taxes.

How should you react to tax auditors? The simple answer is “with respect”. Answer their questions and provide the information they are looking for. You have no requirement to provide information in addition to those answers or volunteer additional information that may inadvertently lead to further audit work. To expedite the audit, we recommend prompt responses, and when you receive tentative adjustments to be made, call us to review them with you. Auditors can misinterpret information and do make mistakes like the rest of us. If we can identify changes, it is best to do so prior to completion of processing by the Canada Revenue Agency.

An audit visit may be for a specific reason, such as review of vehicle usage, or for a general tax audit. You may have been selected randomly, as part of a particular group that they are targeting, or because of an unusual item on your tax return.

In a general audit, you can usually count on the following:

  • An examination of vehicle usage to determine personal benefits, and to disallow GST/HST on costs in excess of allowable thresholds for certain types of vehicles;
  • A review of your shareholder loan account to assess a taxable benefit on overdraft balances;
  • Examination of wages to family members to ensure they are reasonable;
  • A review of repairs and maintenance accounts to determine whether any items have long-term benefits and should be capitalized and depreciated in future years, instead of being immediately expensed;
  • A review of meals, promotion, insurance, office supplies and similar expenses to look for personal expenses that may be illegitimately charged to the company;
  • Comparison of your profit margins to industry averages for the year to ensure all sales have been reported;
  • A review of credit card payments to ensure all items are documented with invoices, without which the GST/HST and expense may be disallowed;
  • A review of payments to subcontractors to ensure they should not be classified as employees and to ensure that anyone in the construction industry files the appropriate reporting forms for all subcontractors;
  • A review of property, plant and equipment additions to ensure that they are business assets, that costs and sale proceeds have been allocated properly, and that they properly qualify for investment tax credits, if applicable;
  • Verification of business use of home expenses, including the fair allocation of space, if such are claimed;
  • For GST/HST issues, a review of transactions to ensure the tax was charged appropriately;
  • Consideration of whether the business owner’s wealth and lifestyle are consistent with his or her taxable income, to ensure all income has been reported; and
  • Investigation of other areas of concern that may be identified through discussions with owners and employees

Tax auditors are just doing their job, which is to ensure everyone pays their fair share of tax. They should be respectful to you, and not impede unnecessarily in your day to day business operations. If you experience problems in this respect, call the audit supervisor, or call us and we will speak to the appropriate authorities to help resolve any conflicts.

This article, originally published in 2005, has been produced to inform readers of current issues. It is neither a definitive analysis of the law nor a substitute for professional advice. Seek professional advice before acting on information in this article. Information may change as a result of legislation or regulations issued after this publication was printed.

Blair Corkum, CPA, CA, R.F.P., CFP, CFDS, CLU, CHS holds his Chartered Professional Accountant, Chartered Accountant, Registered Financial Planner, Chartered Financial Divorce Specialist as well as several other financial planning related designations. Blair offers hourly based fee-only personal financial planning, holds no investment or insurance licenses, and receives no commissions or referral fees. This publication should not be construed as legal or investment advice. It is neither a definitive analysis of the law nor a substitute for professional advice which you should obtain before acting on information in this article. Information may change as a result of legislation or regulations issued after this article was written.©Blair Corkum