Current CRA Business Expense Audit – An Update

In a previous blog, I discussed how CRA recently sent out a slew of letters asking incorporated businesses to provide detailed documentation on various business expense deducted such as travel, auto or advertising.  Last year, CRA also went on a similar expedition but on a smaller scale.   Normally, by this time, which is a year later, taxpayers whose business expenses have been reviewed would have the preliminary decision from the CRA as to the amount of the expenses accepted as deductible and an explanation of rejected amounts.

CRA Audits

Since I have not heard anything from my clients, I decided to follow up.

Client 1 informed me that CRA sent a letter acknowledging that all the detailed documentations and explanations provided have been received by the CRA.  In the same letter, CRA acknowledges that they are uncertain when they will have the time to review the information provided.  Essentially, my client incurred time and financial resources to provide the financial information requested.  The answer is CRA does not have the resource to give the taxpayer affirmative answer for the time being. 

Client 2 also provided documentations as requested by the CRA.  The letter he received from the CRA asks the corporate taxpayer if it wishes to adjust the deduction made on the tax return.  There was no evidence that the CRA reviewed in detail the information provided in order to decide if a reassessment is necessary.  CRA is putting the onus on the taxpayer to adjust the deduction.

My Thoughts On The CRA Audit Review Process

The two examples above tell me that CRA is in disarray.  Our tax system is an honor system and CRA review process is to ensure the honor system works.  Reassessments resulting from a CRA audit normally comes with interest and penalties.  This is part of the system to remind taxpayers that mistakes, intentional or not, result in financial punishment. 

There are times CRA audits result in more clarity for the tax advisor with respect to understanding specific tax laws that are not being enforced as expected.  Also, in exchanging communication with tax auditors, advisors develop a better understanding of procedures and documentation that will assist the taxpayer.  Unfortunately, I have not had one of these experiences since the Covid lockdown.

CRA’s New Game Plan?

I can’t help but wonder if CRA’s game plan with these current audits is to hope that the taxpayer does not have the human resource to engage (just like the CRA).  This will result in an automatic denial of the entire deduction.

Something is very wrong at the CRA.