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Tax Return by CRA

Receiving a letter from the Canada Revenue Agency (CRA) requesting more information about your tax return can be alarming, but it doesn’t necessarily mean you should be concerned. By educating yourself on the process and ensuring you have all the necessary records on hand, you can make the process smoother and less stressful.

Here’s what you need to know:

Understanding How Tax Returns are Selected for Review by CRA

Taxpayers may be curious about how the Canada Revenue Agency (CRA) selects returns for review. Although individuals are generally less likely to be reviewed than businesses due to the smaller amounts involved, the CRA has a system of accountability to maintain public confidence in voluntary disclosure.

Returns are selected at random, but a sophisticated system is also used to identify returns with the highest potential for misstatement. It’s important to note that being reviewed once doesn’t mean you won’t be reviewed again, and the types of returns selected depend on compliance history and the types of claims made.

During a review, the CRA will examine income and expenses more closely for self-employed workers, and certain deductions or credits such as donations and medical expenses may also be reviewed. Taxpayers who claim large donations or medical expenses may be asked to provide supporting documentation to verify their claims.

Here are some other things that the CRA may review for accuracy during a review:

Tax Return by CRA

Common CRA Review Items

When the Canada Revenue Agency (CRA) selects a tax return for review, they may scrutinize a variety of items. These items could include:

  • Capital gains on property dispositions for those who flip real estate.
  • Consistent losses from self-employment income to determine if there is a reasonable expectation of profit in the future for those who report losses year after year
  • Vehicle expenses for business purposes for those who claim 100 percent of their expenses to ensure that their numbers are accurate
  • Reasonability of salaries for those who have family members as employees under an income-splitting system to ensure that expenses are fair and reasonable compared to the workload and other employees.
  • Proof of foreign tax credits when claimed.

How do tax reviews and audits differ from each other?

Tax reviews and audits are two different processes conducted by the Canada Revenue Agency (CRA) to ensure taxpayers are reporting their income and expenses accurately. Reviews are generally simple and fast, whereas audits are more in-depth and can take months or even years to complete.

During a review, the CRA sends a letter to the taxpayer requesting certain information, such as receipts or supporting documents, to verify the accuracy of the tax return. Reviews are often completed in a few weeks and are initiated to spot-check the deduction or credit claims.

On the other hand, audits are triggered when something comes to the CRA’s attention, such as a significant error, omission, or suspicion of fraud. Auditors will thoroughly examine the taxpayer’s financial records and may request access to all their bank accounts and those of their family members. This process can be stressful and time-consuming for the taxpayer.

One red flag that may trigger an audit is a discrepancy between a taxpayer’s reported income and their lifestyle. If an audit does occur, it is important to communicate with the auditor and provide all requested information to ensure the process moves forward as smoothly as possible.

Also read: Essential Information on Payment Dates and Benefits

How to prepare for a CRA review?

To prepare for a CRA review, it is important to keep a digital record of everything, especially a justification of every single deposit in your personal bank account. The CRA has up to three years (sometimes up to four years) from the date of the original notice of assessment to carry out a review. However, in the case of suspected fraud or misrepresentation, there is no limitation period.

Without proof, a harmless transaction can become complicated and difficult to trace and justify years later. It is essential to keep all receipts and supporting documents related to tax returns and to ensure they are accurate and up to date. Reviewing the returns and double-checking for any errors can also be helpful. Additionally, it is recommended to consult with a tax professional to ensure compliance with all tax laws and regulations.

Tax Return by CRA

How will the pandemic impact CRA audits?

As the pandemic has changed the way many taxpayers work, it will also pose unique challenges for CRA auditors this year. Instead of conducting comprehensive audits on-site, the CRA is promoting virtual meetings, with in-person meetings reserved for exceptional circumstances. The CRA will still likely send letters for reviews.

Additionally, as several new programs were introduced this year, it remains to be seen how CRA auditors will handle issues such as home office expenses. It’s unclear how thorough their verification process will be to ensure that those who claimed the expense were entitled to it. As these questions cannot be answered at this time, it’s best to take a wait-and-see approach.

In the meantime, it’s advisable to review your records and backup to prepare for any potential questions that may arise.