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Managing a Visit from the Auditor

By Evelyn Jacks

Have you ever been audited? If so you'll know that the visit from the
Canada Revenue Agency, CRA generally is preceded by letter, requesting specific information to justify figures on your tax return-such as moving, medical or child care expenses. In addition, the "normal reassessment period" for review of your files is three years: the current year and two years back. So you can expect to retrieve files for more than one year in most cases, when the tax auditor comes calling.

However, small business owners must be prepared to dig deeper and give more subjective information. Under our self-assessment system of taxation, you must meet the Onus or Burden of Proof and show a Reasonable Expectation of Profit exists in a commercially viable enterprise. This goes beyond the mere keeping of receipts.

Fact: Expenses claimed must be reasonable and incurred to earn income from a business that has a reasonable expectation of cumulative profit over a "profitability time period."

Do note this also about the reporting of income: The tax department need not accept your return as filed, and can make a "Net Worth Assessment" on its own if you cannot explain the source of your income adequately. The Onus of Proof, in that case, is on you to prove otherwise.

For these reasons, and because the Income Tax Act requires it, you must remove any personal living expenses from business deductions. The best way to do this is to keep a log of business use compared to total use. Deposit income to separate business bank accounts and have separate credit cards for business/personal use.

When fraud is suspected by CRA, records can be requested beyond the normal reassessment period of three years. Know also that an authorized person employed by CRA may at all reasonable times come to inspect your books or examine your inventory.

Under these rules, CRA auditors are also authorized to enter into any
premises where any business is carried on, and in those circumstances, you must provide reasonable assistance and answer all proper questions. However, the taxpayer does have certain rights, which you should know about and exercise.

Fact: Ask for it in writing! You have the right to see a written request
for information and a list of issues to be answered. In addition, if the
property in which you run your business is a dwelling, the person authorized by CRA may not enter it without your consent unless a search warrant is produced.

The audit powers referred to above cannot be used, if the inquiry is the
subject of a criminal investigation. It is also important to note that third parties approached by CRA are not required to provide information or documents related to other unnamed persons or third parties unless authorization has been given by a judge to obtain this information.

During a tax audit, you have the right to be present and to be represented by counsel throughout the inquiry, unless it is ordered otherwise. CRA would have to show that your presence would jeopardize the process. Likewise, those who act as witnesses, providing evidence in an inquiry, may be represented by counsel.

Fact: Keep copies of everything! The taxpayer also has the right to make copies of everything that may be seized by CRA, including electronic backups, which is something you should be sure to keep whenever you forward documentation to the CRA.

However, remember something your mother may have told you years ago: Be nice! No taxpayer is allowed to physically or otherwise interfere with, hinder or molest an official of CRA.. .as codified in the Income Tax Act!

 

Free trial issue of SOHO Business Report magazine, the source for small business / home based business solutions. Whether your target market is retail, warehouse, manufacturing, import / export, service, hospitality, restaurant or transportation, we can give you the strategic advantage you need to succeed.

PHSP Information; Find out how small business and home based business can get health benefits and extended coverage (including dental) while saving money by paying for these benefits with pre tax corporate income.

 

 

 


Copyright 2006 SOHO Business Report
a Dream Launchers Partner






SOHO Business report magazine, a Dream Launchers project publication, helps Small Office / Home Office Entrepreneurs succeed. We help home-based business and small business with free articles, multimedia (audio, video & interactive), tools and tips. Topics for home business and small business include business planning (e.g. business plan and marketing templates), strategy, guerrilla marketing, Internet marketing, publicity, project management, importing, exporting, taxes, finance, trade shows, technology, negotiation, consulting, sales techniques and tactics, work life balance, growth management, profit optimization, team work, leadership, human resources (recruiting, hiring, training & firing) and network marketing (referrals and contact building). SBR can help you start your home business or small business and give you the management tools and resources to succeed by making a business plan or marketing plan with expert input. All of that without getting an MBA, going through training or school. Start increasing your profits, improving your cash flow and building the business your entrepreneurial aspirations demand.