Every year, the Canada Revenue Agency (CRA) selects certain taxpayers (individuals, trusts, and corporations) for a full audit or a partial audit/review, such as a payroll audit, for one year or a couple of years. The chance of being selected for the audit has nothing to do with whether you file the return on paper, or electronically. However, if you are delinquent in your payroll account, the risk that you will be audited is much higher.
According to the CRA, there are four common ways in which they select files for audits:
1. Computer-generated lists (i.e., random).
2. Audit projects (i.e., specific group of persons; for example, self employed vs. employer of hygienists).
3. Leads (i.e., neighbors or ex-spouse tipping CRA).
4. Secondary files (i.e., resulting from another audit).
In addition to CRA’s four common ways of selecting files, your file could also be pulled for claiming unreasonable expenses.
The CRA has up to three years from the date of your Notice of Assessment to audit you and/or your corporation. After this time period, the CRA could audit you only if they believe you have committed some kind of fraud in filing the tax returns or you have signed a waiver letter (i.e., a letter allowing the CRA to audit you beyond the three year period).
If your tax returns are selected for an audit, the CRA auditor normally calls you or your representative (i.e., accountant) or sends a letter requesting certain information for specific taxation years. This letter usually tells you if it is a detailed audit or just a partial review. As a rule you have 30 days to reply or set up an appointment with the auditor. There is no point procrastinating – if you have a problem meeting the deadline, it is important to phone the CRA and ask for an extension. The CRA normally doesn’t have any problem granting an extension. One way to reduce your stress level during the audit is to inform your accountant of the audit immediately and have your accountant deal directly with the auditor. This way, you will ensure a smoother process and a better result.
To avoid any surprise adjustments, you should be aware of the common adjustments or areas in which CRA would likely review. The following are a few areas often reviewed:
If your corporation owns or leases a car and you are driving it for personal use as well as for business, you will have to include a taxable benefit amount on your personal tax return or T4. The percentage of personal use is always a contentious issue. Proper documentation (for example, keeping a log book) of all your travel is of utmost importance.
Individuals using a personal car for business purposes can either receive a tax-free car allowance based on business kilometers travelled from his/her own corporation or claim car expenses if you are self employed. All kilometers travelled must be reasonable and properly documented by a log book. Receipts for all car expenses must be kept if you are claiming car expenses. Proper planning of your daily trips would increase your business kilometers, for example, stops at a supplier or visits to your accountant before or after work can make the whole trip deductible. Driving directly from your home to your office and vice versa are not considered business kilometers.
Meals and travel:
Always keep your meal vouchers and document who you dine with, and for what purpose. Staple your credit card receipt with the meal voucher. If you own a dental office, you are entitled to deduct the full costs of up to six meals if you invite all staff to these meals. All other meals are subjected to a 50 per cent expense limitation. If possible separate personal and business travel expenses. If personal and business expenses cannot be distinguished, CRA is likely to consider the entire amount as personal and deny the deduction. Always document the purpose of the travel.
Business use of home:
If you do not use your home office to meet/call patients, it is highly likely that CRA will not accept it as a deductible expense. Again, the percentage use must be reasonable.
Salaries and Wages to family members:
Consider only paying reasonable salaries to family members for work they do for your practice. Pay them on the same frequency as you would a stranger (i.e., if your staff is paid every two weeks then pay your family members every two weeks). Ensure your family member deposits their salaries into their own bank account, preferably one in which you have no signing authority. If CRA determines that the amount is unreasonable, they will deny you the deduction and STILL tax your family member on the amount you paid them (i.e., double taxation). Also, prepare job descriptions for all staff including family members.
What is reasonable?
Oftentimes clients will ask, “What is reasonable?” It helps to work with professionals who know your industry, as well as you know dentistry. These professionals can benchmark your expenditures against other dental clients. This knowledge may assist you in planning and maintaining reasonable expenses.