The Canada Revenue Agency conducts audits to make sure individuals and businesses comply with tax rules. The agency also performs these to ensure taxpayers give accurate tax filing information. However, only a few companies get audited each year.
A CBC report reveals that only 3,479 businesses were audited by the CRA for 2022/23. These figures only cover April 1 to June 21, 2022. Nonetheless, the possibility of auditors showing up to ask about your returns from years ago can be daunting.
Understanding the scope and duration of CRA’s authority to conduct audits is essential for tax compliance. It also helps you navigate the process with confidence. That’s why here, we’ll explore the limitations of CRA when auditing and reassessing your business tax returns.
Understanding the Statutory Time Limit for CRA Audits
In most cases, the CRA can only conduct audits on an individual or business’s tax returns for a limited period. The CRA audit time limit is generally up to three years after filing the tax return. This period extends to four years for non-CCPCs or Canadian-controlled private corporations.
This limitation confines CRA’s ability to audit your business to that period. The timeframe is referred to as the standard reassessment period. It starts at the end of the tax year when you file your tax returns.
Suppose you file your 2021 returns in April 2022 and receive your notice of assessment in June 2022. In that case, the CRA can audit that return until June 2025. But it’s not always a clear-cut situation. Like many CRA rules, there are instances where the statutory limit doesn’t apply.
Common Situations Extending the CRA Audit Periods
Although the CRA adheres to a specific timeframe, it has the authority to extend the period during which it can audit a Canadian taxpayer.
Such situations typically arise when the agency detects certain red flags or indicators of non-compliance. Knowing them can help you effectively handle your tax obligations within the specified timeline.
Under Section 152 of the Income Tax Act, the CRA may extend the initial three-year period. It may audit your business any year you made any misrepresentation due to carelessness, neglect, or willful default. Typical examples of this include:
- Making false statements or omissions on tax returns
- Inconsistencies between reported data and third-party information
- Financial statements show different information from year to year
- Claiming deductions much higher than what’s usual in the industry
The CRA can extend the three years if you sign a waiver, allowing them to audit beyond that timeframe. In every circumstance, the CRA’s extended audit rights highlight the importance of keeping precise records and complying with tax laws.
Get Your Business Ready for a CRA Audit
Proper tax practices can help minimize your business’s risks in facing a CRA audit. Still, there’s a chance that the CRA’s computer system will randomly pick you for an audit. That usually happens when there’s a sudden increase in your business’s income and expenses.
Considering the CRA’s broad conditions for audit selection, it’s wise to prepare your business for the process at all times. Maintaining complete and organized records of your finances is the first step to achieving that. Equally crucial is seeking guidance from an experienced tax professional.
