Published: March 17, 2020
Last Updated: October 21, 2022
6 Expert Secrets to Winning a CRA Tax Audit
Every successful, or unsuccessful, owner of a small- or medium-sized enterprise (SME) will at some point face a call from a Canada Revenue Agency (CRA) tax auditor. Nothing creates as much fear and confusion as a tax audit. No matter how successful you are as a business owner and in business-building, the tax man can take it all away. The key to surviving a tax audit is the right tax professionals. We are a specialized Canadian tax law firm with 30 years of experience and have seen it all, from business owners who contact us less than one week before a scheduled income tax trial to entrepreneurs who relied on their accountants who did not respond to CRA and ended up with assessments for hundreds of thousand of dollars. We also know professional accountants who call us at the first sign of a CRA audit and retain our tax help from the start.
We are a small boutique firm of specialized Canadian income tax lawyers. Why choose us? One advantage is that we are both tax accountants and income tax lawyers so we understand the law and the numbers. We can set up your business the right way from the first day. And we can also help when you’re going to be audited, have been sent an incorrect CRA Notice of Assessment, or when you have any tax dispute with CRA. We have 30 years of experience, with the knowledge and expertise that brings and that a lawyer who has only been in practice for a few years cannot hope to master. We are small and focused so you don’t get lost in large firm labyrinth and you get an immediate response form us. We handle both tax planning and tax disputes so we know how to structure a tax deal and how to defend it if challenged by CRA. If you need to retain a Toronto tax lawyer, consider our qualifications and evaluate the competitors to see how they measure up.
Now here are the 6 key tips to winning your income tax or GST/HST dispute with CRA:
Retain a chartered professional accountant (CPA) before you open your doors
Yes the first tip applies even before you have been audited, but it is key. Not all professional accountants are the same. As with any other profession, some accountants are great and some are terrible. We see numerous income tax problems that are caused by negligent or completely incompetent accountants. Make sure that the accountant you are thinking of hiring has a CPA designation. Ask for a referral from another professional or another SME owner or a Canadian tax lawyer. We frequently refer our new clients to new accountants. A good professional accountant will ensure that your tax returns are filed on time and are completely accurate, but will deduct every expense you are entitled to. A good accountant will respond to tax enquiries on a timely basis and will not miss the deadline. A bad accountant will miss deadlines and will be the cause of a CRA tax audit by not filing a tax return on time or by filing inaccurate or incorrect tax returns. This may then be exacerbated by ignoring CRA correspondence. The next thing you know the SME is into a major tax fight with CRA caused entirely by a bad accountant.
Unfortunately, we see these tax problems very often. Many business (and personal) clients come to us when their existing accountant has mishandled their tax affairs, compounding their tax problems. We take charge of the situation, start dealing with CRA immediately, and suggest a change of accountant forthwith.
Hire a professional tax advisor as soon as CRA contacts you
The tax rules in Canada are convoluted and complex. CRA tax auditors are tasked with looking at tax files from the point of view that taxpayers owe tax. They may be wrong about tax law, but they may sound convincing to a layman. Furthermore any information you tell or give a tax auditor will be used against you, even if you make an innocent mistake. The auditor may also misunderstand what is being said, but will have written notes.
A taxpayer who has responded to a CRA auditor on their own is often the first problem in a file that our Calgary tax lawyers take over. Never respond in person to a CRA auditor. In many cases, your professional accountant has the details and can respond to the initial auditor letter.
If the audit is complicated or involves income tax law interpretation rather than basic audit evidence to support tax deduction claims, a Canadian tax lawyer should be retained at an early stage. The detailed responses to the auditor will be drafted by the tax lawyers with input from the accountant. This will ensure that the taxpayer’s audit file is properly set up from inception of the audit in the event that it goes to CRA Objection (appeals) or to the Tax Court of Canada.
Ensure that your tax case is good
While an obvious point, it is critical. Ask your tax representative what are the merits of your tax case? If CRA is correct with the audit, then the sooner your tax advisor responds and settles, the lower your professional fees will be. You will have to pay the taxes eventually There is no point in pursuing a bad tax dispute. All you will do is incur interest on the taxes owing and additional professional fees.
Also watch out for an accountant who has made an error telling you that the tax dispute has merit so as not to admit the mistake and responsibility. Ask for a second opinion from a Canadian tax lawyer to make sure that it’s worth continuing with the tax fight.
Respond to CRA on a timely basis
Your tax professional cannot be effective without timely responses from you as the SME owner. The business owner (or in some cases employees) have the knowledge, information and documents necessary to support the tax audit. No one else has this info. If the owner doesn’t take the time necessary to assemble the information and documents and explain, them when requested, the hands of the tax advisor are tied.
The CRA tax dispute cannot be won without documentary evidence and explanations to support the claim. Make sure all information is provided it as soon as requested. Often half of our battle is obtaining the tax documents from our client.
Keep informed about your tax dispute
Your tax professional should be reporting to you about your tax case. If you are not being updated on the status of the tax dispute and copied with correspondence, follow up. Although you’ve retained a tax professional to handle the case so you don’t have to, you also need to be aware of what’s happening. While it’s not uncommon for CRA to take months to respond, you want to make sure that CRA is the cause of the delay, not your tax representative.
Your tax advisor may be too busy to deal with your tax dispute on a timely basis, or may not be effective at dealing with tax disputes even if they are a good general accountant. Remember, it’s your tax case and your dollars if you lose the tax dispute and have to pay CRA. Our Canadian tax law firm keeps our clients updated on the status of their file on an ongoing basis.
Appeal the tax case if you have good facts and if cost justified
Unfortunately tax auditors often decide cases against taxpayers, even if the taxpayer is correct. As tax lawyers we find this very frustrating and unfair, and of course taxpayers have to pay for these CRA mistakes. There may also be honest disputes about tax interpretation that the CRA auditor will decide, of course, in favour of the tax man. The fact that you have an adverse tax audit decision does not mean that you should give up.
Your Canadian tax advisor should explain the merits of the case to you and that you have a good chance of success (if that is the case). Then provided that the amount of taxes in dispute (plus interest and penalties) justify spending additional amounts for professional fees, have your Canadian tax lawyer file a Notice of Objection with CRA. This appeal should generally be handled by a tax lawyer and not an accountant. If an accountant has dealt with the tax audit then it’s time to retain a Canadian tax lawyer. Notices of Objection are handled by our Toronto tax law firm all of the time. Contact us for a discussion about your tax case and compare us to other tax lawyers. You will be pleased with the results.
"This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer."