Top Ten CRA Audit Flags
Taxpayers often ask why the CRA commenced an audit or whether taking a particular step might target them for a future audit. These are reasonable concerns, since the CRA's approach to audit selection is generally not random, but rather based on risk assessment.
Research comparing the effectiveness of random versus targeted audits was conducted under the CRA's Small and Medium Enterprises Research Audit Program (formerly the Core Audit Program), which utilized random auditing.1 According to the 2010-2011 CRA Report, in that year random auditing detected significant non-compliance in only 12.2% of audits, while targeted auditing based on risk assessment detected significant non-compliance in 46.7% of cases. Therefore, targeted auditing based on risk assessment has become the CRA's preferred approach. In the 2012-13 year, the CRA commenced fewer audits than in the prior year, in part because of a strategic decision to focus resources on auditing high-risk taxpayers.2 This resulted in the CRA exceeding two of its important performance indicators, adjusting a higher percentage of tax returns audited (79%, well above the CRA's target of 75%) and generating a higher fiscal impact per auditor ($423,000 per full-time equivalent, well above the CRA's target of $350,000).3
Going forward the CRA may pursue audits even more aggressively: Budget 2013 stated that the CRA would make significant changes to its compliance programs to target high-risk areas of tax non-compliance, with the objective of raising additional revenues of up to $550 million per year by 2014-15.4
Here is a summary of ten common audit triggers or risks for getting or staying on the CRA's "radar".
Inconsistencies between third party information and taxpayer's filing position: The CRA's "matching" program compares information from third parties, employers, financial institutions and other sources with taxpayer's filing positions to confirm filing accuracy. The CRA's ability to match this information has significantly improved in recent years, enhancing this type of risk assessment. Employer compliance: The CRA continues to aggressively pursue a range of issues pertaining to employer compliance, including the timely remittance of source deductions, the status of workers as either independent contractors or employees, taxable benefits and relocation costs. Enquiries often arise when an independent contractor seeks employment insurance benefits, triggering a CRA ruling on the worker's...
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