Tax audits are very common in Canada and many wonder how they get triggered. Well, the CBC looked into it last year and reported some very interesting information.
According to Canada’s top auditor, Michael Ferguson, the CRA tends to investigate those files which have a higher probability of a return for the government (that is, tax recovery + interest + penalties). “In the two fiscal years the auditor general examined, the sleuthing of those 700 employees uncovered $2.8 billion in additional taxes, interest and penalties each year.” That’s an average of $4 million in tax revenue for each CRA auditor every year.
The CRA has a department with 700 auditors charged with the task of finding you, forcing you to file and then either forcing you to pay or go bankrupt. However, there is one thing this CBC article left out and that is that the Auditor General for Canada measures the CRA’s success based on files closed – not dollars collected. For the $2.8 billion in additional taxes the CRA collection team uncovered, probably close to as much was lost because of the CRA demanding payment in full on tax debts and deploying heavy handed tactics to get the money or force you into bankruptcy. Bad things happen to good people. Many taxpayers want to pay their tax debt and could honour a monthly repayment plan based on all or some of their tax debt – if the CRA would be fair. If you have a professional familiar with CRA negotiation tactics, policies and procedures working on your side, it becomes even easier. Sadly, your good intentions and naivety will likely get overrun by the CRA giant bureaucracy.
The tax audit chain re-action can occur if one of your suppliers or clients was audited. If the CRA sees something in their books that causes the CRA to question you or to follow the money trail through your company– they can decide to take a look at your company’s books next. The same is true if the CRA audits you and sees something in your books as it relates to another company that may not be tax compliant – the CRA may take a look at them.
The CBC article revealed that filing late and filing improperly can trigger a tax audit. A tax audit is a detailed investigation into your tax returns. If they find any discrepancies between your return and the information they review during the audit then can penalize you severely! Penalties for late filing for first time offenders is 5% of the amount of the tax debt, plus 1% per month for each month that the return remains unfiled to a maximum of 60%, plus daily compound interest. Penalties for failing to declare income or not being able to support expenses the way CRA likes (which generally occurs during a tax audit) will usually involve even larger penalties.
In addition, if a tax audit results in a tax debt that you don’t pay, the article re-iterates what we tell our clients all the time – there are consequences. Consequences of a tax debt can include:
- Criminal convictions for tax offences are posted online which can have devastating effects to your business and reputation.
- You can have your receivables garnisheed – again very embarrassing.
- You can have your bank account frozen which is extremely disruptive to cash flow and may cause your bank to panic.
- If successfully prosecuted for tax evasion you could face jail time. A tax audit can lead to a charge of tax evasion.
According to a Toronto law firm, during the 2008/2009 tax year, 164 cases were sent to the Public Prosecution Service of Canada and 58 GST audits to the Ministere de la Justice du Quebec for criminal prosecution. A total of 257 cases resulted in criminal convictions for tax evasion or tax fraud, as a result of previous years.
The smart approach to avoiding a CRA audit is, if you think that there is something wrong in your books or the CRA has started asking you questions or for information about a particular tax year – do not stick your head in the sand. Have a professional review of your books performed and tackle the problem head-on because with the CRA the best offence is a good defense.
For more information about tax audits, or if you think that you are about to be audited or have been notified of an upcoming tax audit, contact Tax Solutions Canada for help. Call 888-868-1400 or visit www.taxsolutionscanada.com.