How files are selected for audit

A presentation on this subject was given at a seminar organized by the Canada Revenue Agency (CRA) for the Greater Toronto West tax practitioners. Most files are selected using a Risk Assessment System. CRA selects audit areas on the basis of costs and returns from audits.  Typical audit areas are: Expectation of Profit, Capital Vs Current Expenses, Personal Vs Business Expenses, Other Expenses, and Capital Cost Allowance Creating Loss.

Tax payors who claim business or rental losses over several years are deemed to have no Expectation of Profit and hence most of their expenses may be disallowed generating large tax bills for them.

Expenses for procuring fixed assets of business, e.g. buying a computer or installing a new roof on your rental operation used partially or fully for rental income, can’t be claimed in full in the current year. These are claimed over many years as depreciation, called Capital Cost Allowance (CCA) when computed for tax purposes. For rental operations, if you already have a net loss before claiming CCA, you can’t claim it.

Many expenses, e.g. for automobile, constitute a part for personal use. These expenses must be split between business and personal portions using prescribed rules. Similarly, if you have an office at home, appropriate portions of total home expenses may be claimed for business.

Some bookkeepers can’t fit some expenses into standard CRA expense categories; hence they claim them as Other or Miscellaneous expenses. The very fact that an expense is hard to fit makes it a target of suspicion.

Other than the Risk Assessment System, files for audit are also selected based on internal Revenue Agency leads, referrals from other government departments and external leads. Files for audit are also selected based on complexity and size of corporation. Small files are audited infrequently. The largest files can be audited annually.

What are tax saving plans (TSP). How are these identified?

To save big taxes, we first identify the pertinent tax saving plans (TSPs) for you. Then we implement these plans. To implement we may require more papers from you. You may take some time to find these papers or to procure these from the issuing organizations. We may have to find and read some material on those TSPs from certain tax publications. We may also have to prepare certain schedules. All this takes time. Therefore weeks before preparing your Personal Tax Return (PTR), we start thinking of TSPs for you. 

TSPs are identified from reviewing your and your family’s previous year’s returns. You should look at your copies and we will look at ours. TSPs are also identified from reviewing the family’s previous year’s Notices of Assessment (NOAs) and 2009 papers, including the tax slips. Some TSPs are identified only when we synthesize all pertinent information. Therefore please provide soon all the 2009 papers and 2008 NOAs. If the books of your business are still not prepared, provide its papers also. If you have not received all the (PTR and business) papers, provide us what you have; meantime we will work on the identification and implementation (I&I) process. Unidentified TSPs erode your tax savings. 

Some clients prefer bringing us all papers at the time of preparing PTRs, the last stage of I&I. This stage also takes some time especially if we must present your plans properly. These clients do not give us enough time even for the last stage, let alone previous ones. Doing so, you may lose much potential saving.

Getting your bookkeeping done properly

Here are some suggestions on taking papers to the accountant for your business accounting. The advice is based on our experience. Some of our customers are delivering us papers not quite in the way we advise. Sorting papers before delivering can improve the quality of your accounting and reduce your costs. Here are some tasks that may help most, if not all, of our customers.

Firstly, you should sort all bills by payees. For example, make separate stacks for bills from Esso, Canadian Tire, Consumers Gas, etc. You need not sort bills by account (e.g. automobile maintenance, rent, etc.). There is also no need to sort bills by month, as long as all months are in the same fiscal period/year.

Secondly, you should sequence all canceled checks in the order in which they appear on the corresponding bank statement.

All charges on the statement that are not supported by canceled checks, should be identified (e.g. with \'x\' marks). For better understanding of above suggestions, please look at one of our audit trails reports.

Thirdly, each deposit on the bank statement that are your own funds but not receipts from your customers, should be marked with a code C for capital. Fourthly, you should separate all government/compliance papers (e.g. for RST, HST, WSIB and payroll, etc.) in a separate stack. This way we can get to your compliance work as soon as you deliver the papers. Compliance work is urgent, because delays are subject to penalties.

Fifthly, mark on each bill a code for method of payment, e.g. Ch, Cr or Ca for check, credit card and cash respectively. Any payment not made by check or credit card exclusively used for business be deemed paid cash, e.g. payment by personal check or credit card of another family member. Preferably mark all codes in red. You may start by using only some of the 5 suggestions we have made.

Interest rates for the first calendar quarter – January 1, 2013 to March 31, 2013

The interest rates on overdue and overpaid remittances are as follows:

Tax and Duty	Overdue remittances	Overpaid remittances
		Corporate taxpayers	Non corporate taxpayers
Goods and Services Tax (GST)	5%	1%	3%
Harmonized Sales Tax	5%	1%	3%
Air Travellers Security Charge	5%	1%	3%
Excise Tax (non GST)	5%	1%	3%
Excise Duty (except Brewer Licensees)	5%	1%	3%
Excise Duty (Brewer Licensees)	3%	N/A	N/A
Softwood Lumber Products Export Charge

Has Canada Revenue Agency treated you unfairly?

If you believe so, do not be discouraged.  It happens generally in 2 types of circumstances. Firstly, it may happen if you did not have the documents to support your deduction, but you do know the deduction is legal.  Perhaps you showed documents considered unsatisfactory by Canada Revenue Agency (CRA).  Secondly, your perception of a situation may be different than CRA’s.  For example, they may treat your capital gains as business income or treat your business loss as a capital loss to procure more taxes from you. Discuss the situation with us.
We can help you identify and make additional documents to complement your substantiation.  We may also be able to support your perception by court cases.  If your auditor is still not convinced, we would take your case to appeals division.  And if they are not convinced but we still believe you have a case, we will take it to the Tax Court.  At that level, we may need the support of a lawyer in bigger cases.
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