A mere mention of the word “audit” can strike fear into the heart of the most honest taxpayer. The Canadian tax system is based on self-assessment—you are expected to accurately report income, deductions and tax credits. After you’ve filed your tax return, the Canada Revenue Agency (CRA) can check up on your filings and accept them, ask for more information, or change your calculations—often several years later. And if you are tapped for an audit, the burden of proof is on you.
The best defence against an audit is to stay out of the CRA’s crosshairs by filing an audit-proof tax return. As the 2018 tax filing deadline approaches, here are six tips you can use to make sure your return can withstand CRA scrutiny. (And if you’ve already filed your 2018 return, bookmark this page for reference in future years.)
1. File your taxes on time.
The tax filing deadline is midnight, April 30 for most folks; for proprietors and their spouses, that deadline is extended to June 15 (or the following Monday after if either of these dates falls on a weekend). However, if you owe money as of April 30, the interest clock starts ticking May 1, so it’s always best to meet the first deadline, regardless of which camp you fall into.
The good news is that most of Canada’s 29.7 million tax filers are already doing this. According to the CRA’s Report on Plans and Priorities 2016, fully 92% of us file a tax return and pay our taxes on time without further intervention from CRA. This compliant filing behaviour can really come in handy down the line, if you are found to owe penalties and interest: Under certain “taxpayer relief” and “voluntary disclosure” provisions, CRA will look more favourably on your requests for leniency when it comes to payment, if you’ve shown yourself to be a model tax-filing citizen.
2. Keep good records.
The more organized you can be with receipts and other documentation relating to your return, the better off you’ll be if you are selected for an audit. Be prepared to produce them quickly when CRA asks to see them, and keep in mind that members of your family may be asked to offer up their own documentation as well. And don’t jump the gun on decluttering: You must keep your tax documentation for six years after the end of the year in which your return was filed at your residence or place of business in Canada. And there are many instances when you have to keep those records longer, especially if you have acquired or disposed of any business property.
3. Report all your income.
Willfully understating your income is tax evasion. There are big penalties for this including potential jail time, on top of the late-filing penalties, repeated failure penalties, gross negligence penalties and of course, interest, calculated at the prescribed rate (currently 2%) plus 4% more.
4. Don’t overstate tax deductions or credits.
This no-no reaps the same results as under-reporting income—big penalties and interest. Don’t forget that the more discretionary deductions or credits you claim, the more likely you’ll be asked for back-up documents. That includes claims like child care, moving expenses, and medical or charity credits. It’s also important to report your marital status properly, as there are many income-tested refundable tax credits based on combined net income. Especially if you are living common law, or recently separated, be sure you know the rules.
5. When you can’t pay, be proactive.
Don’t wait for the collections department to garnishee wages or seize assets, which they have the power to do. Be proactive and negotiate a payment plan. (You’ll pay a high interest rate, so it may be best to borrow elsewhere to pay what you owe the CRA upfront.)
6. Adjust and appeal.
The CRA isn‘t perfect. They can be wrong in their assessments and reassessments, and you have appeal rights that you should use with the help of a qualified and experienced tax specialist who can represent your case without emotion and ensure your rights are upheld by the CRA. It can take a long time for CRA to straighten things out, but a professional can be persistent on your behalf. In fact, you may wish to have your tax professional review your rights with you this tax season, when you have your annual visit, together with typical fees charged for audit defence.
Bonus tip: When you receive your tax refund, don’t spend it all. Tuck some away, because CRA may call you in the future and ask for some of it back. As insurance against future tax risk, deposit funds into a Tax-Freee Savings Account, if you have the room.
Evelyn Jacks is founder and president of Knowledge Bureau, a financial education institute as well as the author of 54 books. She tweets @evelynjacks.
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