Responding to a Tax Audit Notice

How To File A Notice Of Objection | Preventative Bookkeeping 

By L.Kenway BComm CPB Retired

Edited May 3, 2024 | Revised April 23, 2024  |  Originally Published onBookkeeping-Essentials.com in October 2009

WHAT'S IN THIS ARTICLE
7 Steps To Responding | How To Ease The Pain | Audit vs Investigation | How To File A Notice Of Objection | 6 Misconceptions | Requirement of Law | Preventative Bookkeeping | Wrap-up

NEXT IN SERIES >> Taxpayer Bill of Rights: Insight Into Small Business Rights


YOU have just received a Canada Revenue Agency (CRA) notice saying you're going to be audited. What is the proper procedure to responding to a tax audit notice? Flying by the seat of your pants is not recommended in this instance.

Responding To A Tax Audit Notice - 7 Steps to Follow

This is over simplifying it but the basic steps if you receive a tax audit notice are:

Just Breathe. You've Got This!It is imperative to respond to a tax audit notice by the deadline provided in the notice.

Step 1. I get it. It's stressful so ... just take a moment and breathe. 

Just breathe. Sip on a cool glass of water, or a hot cup of green tea, or a satisfying chocolate cherry smoothie to give yourself a moment to gather your thoughts and calm your nerves before figuring out what the procedures are for responding to a tax audit notice. It's important to get this right.


Step 2. Read the notice carefully and take note of the time deadline.

Alright now, take a look at the notice. Notice the deadline? You have to respond before the tax man comes knocking. Ask for an extension if, once you get started, you need more time to gather the supporting documents.

You can have a professional bookkeeper, accountant, or lawyer represent you. Remember, you can deduct their fees. You don't have to do this on your own.

Read the notice to get an understanding of the scope of the audit. It helps to know what they are interested in and why.


Step 3. Gather your supporting documents.

Next up, it's all about gathering your supporting documents. Organize them and number them. If you have decided to do this without representation, put together a letter to the auditor which (1) summarizes what you are submitting cross-referenced to your supporting documents numbering system, (2) what is missing, and (3) any adjustments you filed.

Preventive action: It doesn’t hurt to have a certified professional bookkeeper handle your books. You don’t want to end up wishing you had one when it’s too late!

AUDIT READY

Submit copies only (not originals) to CRA. Keep the originals or copies of everything you are submitting to CRA. Why? Just in case CRA loses your documents, you will still have records supporting your claims. Hey it does happen and it's not a good outcome for you if you didn't have your own copy of your records to resubmit.

I repeat, just in case you missed it. Do not provide CRA with original documents and make sure you have a copy of everything you send to CRA. 

AUDIT ALERT

Under no circumstances should you allow the CRA to remove your original books of records or original supporting documents from your premises. This could happen if, for example, the auditor decides s/he wants to finish their work at their office instead of your place of business. Offer to provide copies instead. Contact a tax lawyer immediately to intervene if the CRA auditor insists. If you can't stop it, at the very least, have the CRA auditor sign a document stating what records have been taken off premises.

- - - Sidebar - - -

Auditors May Inspect, But Not Seize or Copy, Documents

"Note that subsection 231.1(1) only authorizes auditors to inspect documents, not to seize or copy them. The power to copy inspected documents is separately authorized by subsection 231.5(1) of the ITA. The power to seize documents without consent is an extraordinary power that can be exercised only if preauthorized by a warrant. Auditors will routinely ask the taxpayer’s permission to borrow their records, which the taxpayer may grant at their discretion. If you choose to allow an auditor to retain the taxpayer’s original documents, you must obtain a receipt from the auditor and ensure you have made copies of these documents in case the CRA loses the originals." (Mr. Peter Aprile May 22, 2022 CRA Auditor's Powers to Obtain Information)

- - - End Sidebar - - -

It's at times like this that you realize how important it is to have organized tax records. No-one I know has ever said, "I shouldn't have organized my business receipts. It was a waste of time." 

Developing the habit of handling your receipts during the day by using an app; or handling them at the end of each or the start of the next day makes a difference. Organized receipts remove an invisible "bags of bricks" you were carrying and didn't know it. Organized receipts let you exhale instead of unconsciously holding your breath.

This is the perfect moment to value the art of organizing. You don't clean up for one day and expect a spotless house for life, right?  Skipping a couple of days of house cleaning makes little difference in the grand scheme of things. But if you consistently don't get around to cleaning the house, it amplifies your choice over time often with negative consequences.

It's the same deal with your receipts and tax stuff - little actions every day make a huge difference. Not keeping up with organizing your receipts one day makes little difference in the grand scheme of things. But if you were to choose to consistently organize your receipts every day, it amplifies your choice over time. Pulling your supporting documents together for an audit would be a piece of cake.


Step 4. Get the information to the auditor on time.

Now, it's time to send the info to the auditor - on time, of course; then wait for their assessment. Nowadays, CRA lets you submit documents online. It's the easiest way to make your submission. If it isn't an option, or you just refuse to utilize today's technology to make your business life easier, take your tax audit package to the location CRA has provided in the notice.

If mailing your package is an option provided, make sure you send it registered mail and require a signature at the other end.

AUDIT TIP

Audit delays happen. They can be caused by you or your auditor. Maintain an event timeline. Postponements could result in higher interest fees being assessed. Having proof of the delays could aid in having the interest charges dismissed under the taxpayer relief regulations if the delays occurred due to the CRA auditor. 

At times, tax auditors ask business owners to sign a waiver to keep a series of tax periods open so they do not become statute barred. Do not sign any waivers a CRA auditor requests without first seeking the advice of a lawyer or tax accountant. This is important and no time to penny pinch. The waiver should not be open-ended allowing them to go on a fishing expedition for years. It should list the tax year(s) being audited, what they are interested in and why. Your expert advisor will ensure any waiver delineates the issues and the time span.


Step 5. Attend any interviews requested by the auditor.

If the CRA lets you know they want an in-person chit-chat at their office or your place of business, be sure to show up. If you are uncomfortable attending any interview requested by the auditor alone, ask your representative to come along.

If you are wondering, "What should I say?", here's your starting point:

AUDIT INTERVIEW RULES

  • Don't fly by the seat of your pants when talking with a CRA auditor. Figure out your answers ahead of the interview. You can even ask the auditor for their questions and requests in writing prior to the interview to help you prepare.
  • Always be open and honest. Never consider lying; it can lead to criminal prosecution.
  • Just answer the questions being asked concisely, or provide only what is being asked for. Explain how something works where appropriate. 
  • Do not volunteer irrelevant or additional information. There is no need to tell a story. This is where people get into trouble. Simply answer the question then stop.
  • LISTEN to the auditor's questions and answer them honestly without expanding or embellishing.
  • Ask for any additional requests by the auditor to be placed in writing.
  • Do not volunteer irrelevant or additional information superfluous to the audit. It's worth repeating.


Reference: Linkedin August 12, 2014 Ken Davidson Going Through a CRA Audit? Don’t Do This

Step 6. Actively listen to what the auditor is saying.

Use your active listening skills to hear what the auditor is saying. Then respond; just give accurate, honest, factual answers.

Do NOT volunteer additional information. (I thought I'd repeat that just in case you missed it the first time.) 

I'm telling you it's easy to say, harder to execute so psyche yourself up for this one prior to the interview. You don't want to provide the auditor with another line of investigation by something you arbitrarily said during the interview.

I know I've just said not to provide additional information, but sometimes, it will help the audit go more smoothly. If you are comfortable and only if you or your accountant feel it would be beneficial to your situation:

  • Educate the tax auditor about your business by giving them a tour of your operations; or explaining how your business works if it is virtual.
  • Explain any complex business transactions; your accountant hopefully explained to you his/her position on how the tax law applies in your situation. You may need your accountant to weigh in if necessary.
  • Review the tax auditor's version of facts and technical arguments; correct any factual errors.


Reference: Financial Post Feb 21, 2012 Ease the pain and expense of a CRA Audit

Step 7. While waiting for the re-assessment ...

Right before you submit the package or while your are waiting for the re-assessment, do a tax calculation of the expected outcome of the audit. When the tax assessment notice rolls in, you will have a feel for what you are expecting it to say.

No idea how to do this? No problem! Use the free tax calculator at tax tips.ca.


How To Ease The Pain Of A CRA Audit

In 2012, Paul Lynch of KPMG and a former CRA official, provided tips on how to streamline information ahead of time that will be required if you are audited, or pre-audited (asked to respond to a generic questionnaire prior to an audit).

Mr. Lynch asserts "it’s helpful to document the reasons for transactions while they’re happening. [my emphasis] Having evidence on hand to show how transactions achieve your company’s objectives can lift some of the perceived “taint” from those the CRA may view as solely tax motivated. Document the purpose and tax implications of your transactions in succinct, individual records that include executive summaries."

Responding To A Tax Audit Notice

The Difference Between an Audit and an Investigation

Mr. Peter Aprile explains in CRA Auditor's Powers to Obtain Information (May 22, 2022) the difference between an audit and an investigation. Different procedures are required for criminal investigations vs. civil audits.

The article discusses the powers of CRA auditors to obtain taxpayers' information. "The regulatory powers [ITA subsection 231.1(1)] on which auditors rely in the ordinary performance of their duties fall into two categories: 

  1. the power to inspect taxpayer’s books and records, and 
  2. the power to demand documents and information."

Auditors have broad powers such as inspecting taxpayers' books & records, demanding documents, and obtaining warrants to seize documents. During audits, taxpayers have limited rights to refuse the provision of information.

Auditors have two categories of powers: (1) regulatory powers, exercised in normal duties, as discussed above, and (2) extraordinary powers, used in serious cases of non-compliance and tax evasion.

The difference between an audit and an investigation lies in the purpose. The CRA uses audit powers to determine the correct amount of tax, whereas investigations are used to establish penal liability. Regulatory audit powers allow auditors to inspect and demand documents, but consent is required to enter a taxpayer's home. However, auditors are not permitted to seize or copy documents under normal circumstances.

During an audit, a taxpayer's business records may reveal information about other individuals. The article advises that if you suspect information provided in an audit could impact related parties, verify that all related parties have filed accurate and up-to-date returns with the CRA.

Auditors can also question any person involved in the taxpayer's business. To manage the audit efficiently, it's advised that the taxpayer appoints a single point of contact to interact with the auditor.

Different rules apply in cases of serious non-compliance and suspected tax evasion. Here, the CRA exercises extraordinary powers, including search and seizure, third-party information demands, and public inquiries. In these cases, search warrants can be obtained to enter the taxpayer's home without their consent, and seizure and inspection of documents is possible.

MORE >> Is It Tax Avoidance, Tax Evasion Or Effective Tax Planning?

Mr. Aprile's article concluded by recommending that taxpayers seek legal advice if they receive a requirement to provide information or suspect the information is being collected for a criminal investigation.

If you are going to be responding to a tax audit notice, I highly recommend reading Mr. Aprile's article in it's entirety as I have only provided a high level summary of the article.


Responding To A Tax Audit Notice

How To File A Notice Of Objection

You got your formal Notice of Assessment (NOA) after responding to a tax audit notice and don't agree with the assessment. Or perhaps CRA did not accept your tax return as you filed it (that's why it's important to always take the time to retrieve your NOA and read it); perhaps they disallowed your home office expenses. What options are available to you?

Tips If You Disagree With a Tax Assessment

  • Review the Assessment Thoroughly: Double-check all numbers and compare them with your records.
  • Act Quickly: Time is of the essence when dealing with tax objections, so start the process as soon as you receive your assessment. By waiting until closer to the deadline, too many things can go wrong - ranging from personal issues / errors to technology difficulties - increasing the possibility of missing your deadline.
  • Gather Your Documentation: Have all relevant documentation organized and ready to support your claim.
  • Consult a Professional: Consider if your situation requires expert advice. This is not the time to fly by the seat of your pants. Tax professionals can provide crucial advice and help navigate the complex objection process.

Disagreeing with a tax assessment from the Canada Revenue Agency (CRA) can be a stressful situation. It's crucial you understand how to correctly file a Notice of Objection. Failing to follow the correct procedures may result in you losing your right to dispute the assessment.

Here's what you need to know:

Step 1: Understand the Deadline

The deadline for filing a Notice of Objection is strict and immovable: you have 90 days from the date that the CRA mailed the Notice of Assessment. This date is clearly printed on the assessment notice. Missing this deadline even by one day can limit your options for contesting the assessment.

More >> Little Known Compliance Deadlines You Should Be Aware Of

TIP

CRA deems the received date to be the date the Appeal Intake Centre receives the notice. They date stamp it when it arrives. The exception to this is if you send it by first class mail or its equivalent; then the received date is the date it was mailed.


Step 2: How to File the Notice

To file a Notice of Objection, you have two options:

(i) The easiest method to submit your application is to use the CRA's online service through My Account, My Business Account, or Represent a Client. Select "File my formal dispute" from the menu.

(ii) Alternatively, you can send a written letter or objection using Form T400A Objection - Income Tax Act to the Chief of Appeals at the Appeal Intake Centre in Sudbury, Ontario.

If it is a GST HST NOA, use Form GST159 Notice of Objection (GST/HST).

The application should include your name, address, business number (or social insurance number), the tax year involved, and a detailed reason for your objection along with all relevant documents. It is helpful to attach a copy of your disputed NOA ... and you do want to be helpful!

If you don't include your reason for the dispute or supporting documentation or the CRA requires more information, they will contact you in writing requesting the missing information from your Notice Of Objection Application. You then have 60 days to respond. Information received by this due date will be considered to have been provided in your original Notice of Objection Application.

More >> CRA's Objections and Appeals

TIP

You cannot file a notice of objection on a nil return which includes if you are in a loss position for the year. Tyler Berg of Thorsteinssons LLP explains in his article Income Tax Notices of Objections: Tips and Traps ...

"In that circumstance, however, the taxpayer can request that the Minister issue a Notice of Determination of the taxpayer’s loss for the year, pursuant to subsection 152(1.1) of the ITA. The Minister is required to issue the Notice of Determination if and when requested. The taxpayer can then object to the Notice of Determination as if it were a Notice of Reassessment, pursuant to subsection 152(1.2). Alternatively, the taxpayer can claim the loss in a different year and, if the CRA rejects that claim (in whole or in part), file an objection to the (re)assessment of that other year (provided it is not also a nil assessment)."



Step 3. Extension of the Deadline

If you miss the 90-day deadline, you can apply for an extension of up to one additional year from the original deadline (thus totalling one year and 90 days from the Notice of Assessment date). You must explain why you did not object within the standard time frame and show that:

  • You intend to object,
  • It is justifiable to extend the deadline,
  • You applied as soon as circumstances permitted.

It's important to note that approval of extension requests is not guaranteed, and the CRA's decision can depend heavily on the reasons provided for the delay. Following is from the CRA website. It lists the conditions that must be met to have an extension granted.

CRA Notice of Objection deadline extension conditionsCRA conditions that must be met to have an Notice of Objection extension granted

Reference: CRA Objections and Appeals> Extension of time limit to object (or make a request)


Step 4. Online Progress Tracking

It's been a tough slog. After responding to a tax audit notice, you ended up filing your Notice of Objection on time following all the conditions that must be met when doing so. Now what?

You can track the Notice of Objection Application status online through the CRA's My Account, My Business Account, or Represent a Client portals using their Progress Tracker feature. This feature allows you to follow the progress of your objection and view any updates or requests for additional information.

TIP

Check to make sure CRA has your correct email address. This is where they send e-notices. Then set a filter in your email account to flag any emails from CRA as important so they never go to the junk file. Make sure you follow through and actually read the online mail from CRA. You don't want to miss any important deadlines or payments due notices.


Step 5. Recent Court Case

In understanding the critical nature of these deadlines, consider a recent case: 'Adams v. The King, 2023 TCC 86'. This case highlights the importance of adhering to all obligations and notice of objection requirements even if the CRA incorrectly advises otherwise. 

In Mr. Berg's article (see above), he notes that if you have file a notice of objection on an NOA and that NOA is reassessed, your first Notice of Objection becomes null and void. You have to start the process over.


Wrap-Up of How To File A Notice of Objection

After responding to a tax audit notice, you receive a Notice of Assessment you disagree with. Strictly complying with procedures for filing a Notice of Objection is key if you want a win.

Understanding the steps outlined above along with the immovable requirements can help ensure that your disagreement with the CRA is handled effectively, potentially saving your business significant amounts of money and avoiding legal complications.

KEY TAKEAWAY

Always aim to act within the prescribed deadlines and seek professional advice when needed.



Responding To A Tax Audit Notice

6 Common Misconceptions About Tax Audits

Understanding the audit process can go a long way to reducing your anxiety. Let's bust some myths about tax audits. I'll toss in some proactive actions you can take to make sure any tax audits or tax reviews go smoothly.

  1. Misconception: All tax audits are conducted in-person.

    Many tax "audits" are not really audits at all. They are actually correspondence tax reviews and are done by mail. Often times the tax review is an area the CRA has chosen this year to educate taxpayers about while verifying their income reported.

    Proactive Action: Ensure your contact information is accurate and up-to-date so you don't miss any correspondence from the CRA. If you signed up for email correspondence from CRA, they will send you emails letting you know "you have mail!". All you need to do to retrieve the mail is sign into My Business Account.
    
    More >> Difference Between A Tax Review and A Tax Audit

  2. Misconception: Getting audited means you've done something wrong.

    An audit can simply mean your return has been chosen for a more detailed review. It doesn't mean you are a bad guy (gal). It just means they are taking a closer look at your return.

    Proactive Action: Ensure all your tax information is well documented in case the CRA requires you to provide more details. Consistently organizing your receipts every day amplifies your daily good habit over time. Pulling your supporting documents together for an audit would be simple to accomplish.

  3. Misconception: Auditors are out to get you.

    Auditors aren't the enemy. They are just doing their job to ensure your tax return is accurate. If you want to make things difficult for them (you don't), then you will find out how difficult they can make things for you and your business.

    The CRA auditor is only asking questions to see if you are following the rules. If you have kept a good set of books and have been following the rules, tax audits are more of a nuisance than a worry. 

    Proactive Action: Treat them with courtesy and promptly respond to their requests to help the audit go smoothly. This is not a person you want to p**s off. Reach out for professional representation if you are too overwhelmed to cope with responding to the tax notice or attending an interview with a tax auditor.

  4. Misconception: An audit always results in owing money.

    An audit many times results in no changes, minimal changes, or even a refund. It is an opportunity for the CRA to educate you and have you correct mistakes which can be in your favour too.

  5. Misconception: Avoiding deductions and credits reduces the chance of an audit.

    Legitimate deductions and credits should be claimed as they can lower your tax liability.

    Proactive Action: Always keep proper records substantiating your claims. You are obligated by law  to pay only your fair share of tax, why would you want to pay more?

  6. Misconception: Only wealthy people get audited.

    The CRA can audit anyone, not only those swimming in dough! Audits are not solely triggered by high income; mistakes, non-filed returns, or specific triggering deductions can also cause audits. An annual CRA project could trigger an audit.

    Proactive Action: Ensure all information is accurate, honest and has supporting documentation when filing taxes and you should have nothing to worry about. Responding to a tax audit notice becomes an administrative exercise of checks and balances if you implemented and developed goods habits around the record keeping for your business.


Requirement of Law

By law, every business owner must keep a complete and organized set of books and records. 

A good bookkeeping practice to start your set of books is to keep your business expenses separate from your personal expenses.

It’s a financial catastrophe in a tax audit if you have inadequate supporting documentation. Don't even consider latching onto the bad habit of not filing your return every year. It's the best way to set you and your business up for failure.

For those of you who are interested in the why and how come ... you might like to know that good bookkeeping follows generally accepted accounting principles (GAAP). In Canada GAAP is now Accounting Standards for Private Enterprises or ASPE.

As a business owner, you are also legally required to collect and remit payroll sources deductions and GST/HST collected (or any sales tax). These funds do not belong to the owner and/or the corporation and should not be used to finance your business or your personal lifestyle.

LEARN MORE >> Funds Collect In Trust

LEARN MORE >> Director's Liability For Unpaid Compliance Taxes


Responding To A Tax Audit Notice

Audit Ready "Preventative" Bookkeeping

CRA audit considerationsBe proactive in your business to mitigate risk as you never know when you will be responding to a tax audit notice.

Here are some tips if you want to be proactive in your business and mitigate the risk of an audit. Doing so will not only make the auditing process easier but also help prevent any unexpected surprises.

1. Regularly Update Financial Records: Keeping your financial records up-to-date is crucial. This includes all business transactions such as income, expenses, payroll records, sales tax calculations, bank and credit card statements, and other relevant financial details.

2. Organize Documentation: All the tax deductions you claim need to have corresponding documentation as supporting evidence. Critical paperwork like invoices, receipts, payroll data, and bank and credit card statements should be preserved and well organized.

MORE >> Guidance on Business Record Retention

3. Separate Business and Personal Expenses: Keeping personal and business expenditures separate is vital for clarity during auditing. Use distinct accounts for each to avoid confusion.

MORE >> CRA Audit Trails

4. Maintain Accuracy: Verify the accuracy of your financial information regularly. This is achieved by reconciling your balance sheet accounts. Any errors in your financial records can lead to complications during an audit.

MORE >> Learn How To Read Your Financial Statements

5. Use Professional Accounting Services: An accountant or a certified professional bookkeeper can help keep your records in line with existing tax laws and regulations. They can ensure your financial records are accurately maintained and can guide you through an audit.

6. Follow Regulations: Familiarize yourself with tax laws pertinent to your business. Compliance to these laws is essential to avoid unnecessary scrutiny during an audit. Hopefully this website helps you with this.

7. Regular Internal Audits: As your business grows, you should consider conducting internal audits to help identify and rectify areas of improvement or discrepancies before an actual tax audit takes place. The time to find out you are doing things incorrectly is not just before an audit.

8. Use Reliable Accounting Software: Good accounting software can simplify record keeping, automate compliance, reduce human error, and provide quick access to all necessary financial data. I personally prefer QuickBooks Online Canada but there are other products such as Sage, Xero, Zoho Books, Freshbooks. 

Undertaking these preventative procedures will go along way to making responding to a tax audit notice less stressful.


Responding To A Tax Audit Notice

Wrap-Up

If you have a professional assist you with responding to a tax audit notice, they will look at prior year's returns for possible errors or omissions. They will determine your strengths and weaknesses and devise a strategy of how to approach the audit to your best advantage.

You may want to take some time and read Understanding Tax Audits in Canada. I find when you understand the process, it is less scary. That said, keep in mind, CRA does convict for tax avoidance and tax fraud. They actually publish their convictions on their website. 

Remember in the Canadian tax system, you are guilty until proven innocent. Canadian lawyer Thomas Fellhauer says it best in "Income Tax: Guilty Until Proven Innocent?", [during a tax audit ] "There in no presumption of innocence in tax law unless you are accused of a criminal act such as tax evasion.". Your best defense is proving due diligence through accurate and honest bookkeeping. 

On the bright side, there are processes in place to protect you such as appealing to the Tax Court. However, the cost and psychological impact on small business owners when an audit goes sideways can be devastating and life changing.

It would be simpler if you engaged in "preventative" bookkeeping by developing the daily habit to keep up with your books. If you feel too overwhelmed by all the rules, regulations, and deadlines, hire a certified professional bookkeeper to manage your books.

So when responding to a tax audit notice, don't ignore the deadline date. Respond by the deadline given and get professional representation if necessary. You've got this!


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