No one wants to get called by the Canada Revenue Agency (CRA) and be told that your business is being audited, but this is part of the government process. This is CRA’s way of ensuring businesses are paying their taxes and you will help keep this system running. Apart from a call, CRA may send a letter beforehand so that you are aware.
So how do your prepare your business for a CRA audit?
CRA is auditing your records because of any of these three reasons:
- Dig up Six-Year-Old Documents
As a rule, you should have stored business records of the last six years. However, CRA auditors are not going to go through all of them and they will ask for business records for the last two years.
- Original Documents
You need to present original documents and not copies. This includes receipts and other financial documents. Not even your credit card statements qualify.
- Which Documents
This is specifically if you use your business to reimburse your employees and your personal accounts for things like transport, food and entertainment.
- Car: CRA will want a detailed log of your car used for business and this includes a record of the starting mileage, the name of the persons you visited and the relative mileage. If the use of the car is personal, then it must be indicated in the log. The CRA auditors will want to see the recorded mileage for personal and business use. If you haven’t kept a mileage log book, then they might agree on a percentage use of the car for the business, though it will be lower than what you actually use.
Ideally, you should have a mileage book and original fuel receipts (as credit cards statements are not accepted).
- Other Expenses: For other expenses that you claim reimbursement like meals and entertainment, you should have receipts.
At the Office
CRA auditors will visit you at your office. If you have a home office, they will visit that. You need to make sure that your home office is not your bedroom, but an actual place that you conduct business and meet clients.
Cooperate and Know your Records
CRA auditors won’t interrogate you, but they will thoroughly ask you questions. You will be asked many questions and some may even sound unrelated, but you need to answer. Don’t delay your answers, don’t answer "smartly", don’t try to give the wrong answer on purpose. You need to know the finances of your business so that you give the right answer.
Be upfront with the auditors. If you’re aggressive, they’ll be aggressive.
Have a Tax Expert with You
You don’t have to do this alone, you can do it with your tax expert, preferably your own accountant.An accountant can help by providing support, guidance, advice and be present in office with the CRA auditors. That way, if you don’t know the answer, the professional who handles your financial paperwork does.
Even if you have some accounting experience, it is best to get an accountant because there is a chance that things may become heated and tensed, and do you won't be able to give proper replies. Apart from knowing the ins and outs of your business's tax, an accountant can act a bridge between you and the auditors.
An audit from the CRA is not a walk in the park, but neither is it something to fret about. If you keep your books well and have not avoided paying taxes on purpose, you and your business will come out on top. For more information, check out what CRA says about business audits.