Canada Revenue Agency Audit Methods

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Canada Revenue Agency Audit Methods

September 30, 2014

Tax Question:

What are the common tax audit methods used by the Canada Revenue Agency (CRA)?

Facts:

CRA pursues audits of taxpayers based on risk assessment and random audits. The audits can be time-consuming and costly. Taxpayers often ask why they were chosen for a particular audit and some feel that they have been targeted. CRA has internal processes in place to identify non-compliance for self-employed individuals and incorporated businesses.

Discussion:

CRA uses several different methods to identify non-compliance by a taxpayer such as:

Computer Assisted Audit Selection (CAAS) – CRA uses CAAS systems to identify potential audit issues and to estimate the amount of revenue loss because of these issues. They will assess risk based on taxpayer’s information such as individual accounts on filed tax returns or transcribed financial statements. CRA also reviews past audit history of a taxpayer to help them assess the risk level going forward.
Ratio Analysis – CRA review ratios calculated from taxpayers’ financial information. They can use ratios such as gross profit and inventory turnover to compare them year to year to identify any large variances. CRA also reviews GST collected over sales to determine if the correct amount of GST has been reported.
Industry Trends – CRA will review a taxpayer’s reported financial information and compare it to other information reported by other companies in the same industry. They have specific profiles for each type of industry and this helps them to identify any unusual discrepancies.
Consultations with Specialists – CRA has access to many specialists that have expertise in many different areas. For example, they use real estate appraisers to evaluate the fair market value of a property. If the appraiser calculates a different amount than the reported amount, then this can be an audit trigger.
Referrals – The audit of one taxpayer may result in the identification of potential non-compliance by other taxpayers. There can also be referrals from other departments within CRA or from other federal and provincial organizations such as Human Resources Development Canada (HRDC). In provinces like BC where the provincial sales tax (PST) is administered separately from the federal goods and services tax (GST), there can be a referral from either agency if the taxpayer is non-compliant.
Informants – CRA has an anonymous hotline available where anyone can phone in and provide information about someone that might be tax evading.

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Canadian and foreign tax laws are complex and have a tendency to change on a frequent basis. As such, the content published above is believed to be accurate as of the date of this post. Before implementing any tax planning, please seek professional advice from a qualified tax professional. Empire, Chartered Professional Accountants will not accept any liability for any tax ramifications that may result from acting based on the information contained above.