“The Canadian income tax system is one of self-assessment. In it, every corporation, and every taxable individual, estate or trust, is required, by law, to file an annual return of income in prescribed form, as well as determine the taxes payable for the year.” The primary purpose of the tax audit is to monitor and maintain the self-assessment system.
CRA audits are risk-based, and focus on the information associated with certain risk factors. The following items are common situations signaling risks:
- Foreign Income/Foreign Tax
- Continuing business/rental loss
- Increasing of employment expenses claim
- Benefits related to rent payment (e.g. Ontario Trillium Benefit)
- Tuition claim/transfer
- Major charitable donations/Major medical expenses
The Income Tax Act requires taxpayers to keep these records and books of account, as required, to determine the taxes payable, authorizing the department to audit these for any purpose related to the enforcement or administration of the act.
Here are some tips for accountants and their clients that will help both the taxpayer and CRA in the course of an audit:
Motor Vehicle Expenses
It is very important to provide CRA with a logbook (or sheet) to show when there is a claim for motor vehicle expenses. Even if a taxpayer has receipts but no logs, the motor vehicle expenses are likely to be disallowed.
Provide a vehicle log sheet to the client ,and ask the client to record the mileage and other information on day-to-day basis.
Take photocopies of the gas receipts, or store them in an electronic format, because receipts are printed in thermal paper and, after a few months, the ink fades. CRA can deny the claim if the printed data is not clear and visible.
The client should retain the official tuition receipt document (T2202A) and, in case of a transfer to a parent or spouse, the required fields should be completed and signed by the transferor.
Donations, especially large amounts, are likely to be audited due to prevailing scams. Clients should ensure that each donation they make is for a registered charity. The list of registered charities can be found here.
A recent Supreme Court ruling will likely mean more penalties being imposed on tax preparers and advisors by CRA. Learn more here.
Foreign Income/Foreign Tax/Foreign Property Reporting
Make sure you have supporting documents for foreign taxes paid, such as a copy of your tax return that was filed in foreign country, or income tax slips. Do not forget to file T1135 if you have foreign property that’s worth more than 0,000.