Financial advisors have a large role to play in helping businesses stay on track with audits, as they often have a broad view of the business owner's finances.Thanakorn Lappattaranan/iStockPhoto / Getty Images
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If the Canada Revenue Agency (CRA) sends a business a letter asking for more information or informs it that the agency will be auditing the company’s books, it’s best to act quickly – even if the process is likely to take a while.
“The first thing is, definitely don’t ignore it and don’t put it on the back burner,” says Mitchell Shields, wealth advisor, senior financial planner and insurance advisor with Langsford Wealth Counsel at Canaccord Genuity Wealth Management in Oakville, Ont., who works with business owners.
The second step businesses should take is to contact financial advisors, accountants and potentially a tax lawyer rather than handling the queries on their own, he says. “Before reaching out directly to the CRA, I would make sure that all of the professionals who are involved in advising you and your business are aware this is happening and that there are clear, actionable steps of how this is going to be handled.”
Mr. Shields advises his clients it could take up to a year to go through the audit process with the CRA.
Data tabled in Parliament show that between April 1, 2015 and March 31, 2016 it took an average of 171 days for the CRA to complete an audit of a small or medium-sized business. But between April 1, 2021 and March 31, 2022 that more than doubled to an average of 348 days as the agency performed fewer audits because of the pandemic. The audit time was reduced to about 295 days between April 1, 2022 and March 31, 2023, a spokesperson for the CRA said in an e-mail.
The length of time it takes to complete an audit depends on the specifics of the case, the state of a company’s books and records, the need to consult with other tax specialists, and the level of co-operation provided by the taxpayer, the spokesperson said. The CRA continues to work to reduce the length of audits and has introduced “new tools to facilitate remote interactions and communications with taxpayers and the transmission of documentation.”
A lengthy audit adds “a lot of stress,” says Corinne Pohlmann, executive vice-president of advocacy for the Canadian Federation of Independent Business (CFIB). “You feel like you’re under the gun with a lot of uncertainty as to what the outcome is going to be.”
After reading the CRA letter carefully and understanding what’s required and by when, Ms. Pohlmann says business owners should make a list of the documents to gather – and ask for an extension if it’s a large volume of information.
While the CRA may take a year or more to complete an audit, that doesn’t mean businesses get a longer time to gather information, says John Mendis, partner at accounting firm McGovern Hurley LLP in Toronto, at which he leads the tax advisory group. Often, businesses have 30 days to respond and then must wait for the CRA to respond after sending in the information.
“It’s better to put all the documents you have together and respond in a comprehensive manner,” he says, or it will just delay the process as the CRA will likely ask for more information if what you send is incomplete.
In 2022, about 51 per cent of CFIB’s members were contacted by the CRA for more information, but only about 4 per cent were audited in person, down from 10 to 15 per cent prior to the pandemic, Ms. Pohlmann says.
Some potential triggers to an audit, she says, are “dramatic changes in your income from one year to the next,” claiming unreasonable expenses, excluding tax slips, and having a family member as an employee. In addition, the CRA occasionally targets a particular industry for a general review.
Ms. Pohlmann also advises businesses to “pay your taxes on time,” and, if they can’t, to talk to the CRA and try to work out an arrangement.
Other triggers include material changes in a business, revising tax returns after they’ve been filed, claiming foreign tax credits, and large refunds on GST/HST returns, Mr. Mendis says.
Business owners also need to be wary of tax schemes that seem risky or unusual as they’re more likely to trigger an audit, Mr. Shields says, which is why it’s important to have good professionals helping with your business.
He says he’s seen audits based on a business’s capital dividend account, the treatment of income as capital gains versus business income, and discrepancies between filings from a buyer or seller of a business. “It’s hard to know for sure” what might trigger an audit.
Business owners need to keep their financial books in order – and ensure someone at the business has that responsibility – so it’s not too challenging to track down the right information, Ms. Pohlmann says.
That means warehousing all records digitally – even those from long ago – so that the business can access them easily if required, Mr Shields says.
Companies should update accounting processes as they grow, he says. The accountant you hired when you were a one-person shop may not be the right person to manage a much larger and more complicated business.
Small and medium-sized businesses often don’t have dedicated accounting staff to respond to CRA requests, so they have to reallocate resources, hire staff or incur additional accounting or legal fees, Mr. Mendis says. As a result, they might be wary of spending on their business while they wait for the outcome of the audit in case they’re required to pay more taxes.
Financial advisors have a large role to play in helping businesses stay on track, Mr. Shields says. As advisors have detailed knowledge of the client’s and the business’s financial status and goals, they can liaise and collaborate with the client and other professionals.
“Of all the professionals, we’re the ones who tend to have the most holistic view,” Mr. Shield says, adding that accountants and lawyers often advise on a narrower set of issues.
“The financial planner is in a unique position to provide that additional support to the other professionals,” he adds.
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