CRA Wants to Audit
You filed your taxes and have received your notice of assessment. Canada Revenue Agency (CRA) has assessed your tax return as filed. Then another letter arrives, stating CRA is doing a limited audit of your moving expenses, or medical expenses, or employment expenses, or charitable donations etc. requesting you to submit all of the supporting receipts for your deduction within the next thirty days.
Your response to the CRA’s request should include a written narrative that answers the questions in the same order they were presented in the request letter. Some may not apply to your situation, so state that in the response. Prepare an adding machine tape or spreadsheet listing the supporting invoices, and attach the invoices in the same order that they appear on the list. If you cannot provide the information within the allotted time, call the CRA representative who sent the letter and request additional time.
The CRA representative will review your response and supporting documentation to determine if it meets their requirements to allow the deduction. If the support is sufficient they will send a letter stating no adjustment is required. If the information does not meet their requirements for reasons such as lack of required detail on invoices or they believe the expense is personal in nature they will send out a proposal letter. This letter states which items they accept, which items are denied, and why they are denied. Typically, you’ll have thirty days to provide additional information to address the deficiencies.
Your response should either state you accept their proposal or you need to include additional explanations and or supporting documents to address the identified deficiencies. The CRA representative will review your response and either accept or reject your additional information. They will then issue a notice of reassessment.
When you receive the notice of reassessment and you disagree you will have to decide whether to pay the reassessment and end the process, or you can file an objection within ninety days to take your disagreement to the next level. Once your objection is received your file will be sent to an appeals officer, who has access to all of the information that was previously sent for your audit plus you have the opportunity to provide additional information. The time you file your objection until an appeals officer is assigned often takes six to twelve months. Once the appeals officer is assigned they will send a letter requesting that you provide any additional information. They will review the information and issue a proposal letter with a request to respond within thirty days. Once again you have an opportunity to provide clarification or additional information. After reviewing your reply, the appeals officer will either confirm the previous assessment or issue a reassessment with the adjustments they’ve made.
You may accept or object to the assessment. If you accept, you pay the balance and if you object you must do so within ninety days.
Objecting means your file leaves CRA and goes to the Office of the Attorney General (AG) – you are now dealing with a lawyer and there are formal and informal routes. The formal route requires hiring a lawyer. The informal route means representing yourself. A court date will be assigned, and the lawyer assigned to your file may try to settle prior to the court date. If you do not settle you get to plead your case in front of a judge in the Tax Court of Canada.
At the Tax Court of Canada, you are sworn in and the AG lawyer presents their evidence and you present yours. You are sworn in and the AG lawyer questions you. As this is a court certain protocols must be followed. The judge will assist the taxpayer with protocols, and will then make the determination based on the law.
Often, but not always, at the end of the court day you will know whether you prevailed or if you owe the money. If you owe the money the judge may also award court costs increasing the amount you owe.
The entire process from when you receive the initial request from CRA to sitting in front of the judge can take years. Recently, a local taxpayer went through the process, taking four years and numerous hours documenting and explaining at each level why he thought his deduction was valid. He lost at the initial audit stage and the appeals stage but was vindicated when the Tax Court of Canada judge agreed with him that his deduction was lawful.
While it is possible for taxpayers to represent themselves through all of the above stages, they will increase their possibilities of success by engaging income tax professional to assist or prepare the documentation sent to CRA.
For more information please consult with your professional tax advisor.