Many mature businesses have endured this at least once during their life time – a CRA tax audit. Most businesses survive an audit with no issue. This happens when the business has an adequate set of financial records that is easy for the CRA auditor to examine. So what makes up an adequate set of financial records.
First of all, the CRA audit has changed from twenty years ago. In the past, an actual person came to the business premise to examine the books and records. Hence if the business has a spare room or desk for the auditor, the audit was carried out on premise. The business owner had to make available financial records for the auditor and avail themselves to answer questions from the auditor.
Today, the auditor can be in the Winnepeg tax office while auditing a Vancouver business. This is because CRA has shifted the logistical burdens of audits solely onto the taxpayers. The taxpayer will receive a letter from the CRA informing the taxpayer of the period and the matter being audited. It is up to the taxpayer to provide all the financial information necessary to the CRA through electronic or paper format.
This lack of face to face meeting between the auditor and the taxpayer creates opportunities for miscommunication. CRA could conceivably not receive the information it is seeking despite availability because the taxpayer and the auditor are not in the same room to go over the information.
Why General Ledgers Are Important For Small Businesses
Most small businesses, particularly successful ones, keep a general ledger. A general ledger is a well sorted set of financial data that is very user friendly for accountants. It is like a logically organized garage where similar items are in the same place and can be readily counted or audited in our case.
When a real general ledger report exists, it allows the users, (taxpayer and the CRA) to examine records efficiently through sampling and various other selection criteria. It allows user to sort financial records so that they can quickly determine tax status of various types of receipts and expenses. After all, the auditor is an employee with a work load just like any other employee. If the taxpayer cannot provide information in a timely manner during the audit, the auditor is given no choice but to reassess the taxpayer unfavorably. The auditor is here to examine the contents of the garage. He does not HAVE THE TIME to look for the item and wait for the count.
This is the exact recent experience of a taxpayer who was busy running a very profitable business and did not attend to keeping a proper general ledger. Although a very clean Excel bank synoptic existed, this did not provide the information the auditor was looking for. The auditor was handed over a file of source documents and receipts instead. The taxpayer also did not seek the assistance of a professional tax advisor to work with the CRA during the audit process.
The initial reassessment from the audit was the worse case scenario outcome for the taxpayer. Basically, the taxpayer will pay the price for not investing in a system that was easy to audit. If you want to stay out of trouble with the CRA, invest in an accounting system that is easy for the auditor to examine.