One of the most common mistakes we see taxpayers make during a Canada Revenue Agency (“CRA”) audit is that they do not record what documents were requested by the auditor, what documents were provided to the auditor, and when those documents were provided to the auditor.  What is common is that documents are requested by the CRA auditor and the taxpayer is so nervous and anxious about the audit that they run around providing everything that is asked without making a list.  The taxpayer wants the audit to happen so quickly (so the auditor will leave) that they do not take time to think about how best to protect themselves.  What could go wrong during an audit?

We have seen cases where the CRA auditor forgets that they did not ask for something, but says it was never provided.  Accusations are easily made against a taxpayer and are sometimes used to justify an arbitrary assessment.  When you have a list, you have evidence that the CRA auditor did not ask for the document or was provided the document.  If you diligently make the list, the CRA auditor may have to think twice about how you should be treated – you are acting professionally and diligently.

We have seen many things happen during CRA audits over the years.  We have seen cases where the CRA auditor asks for documents and loses the documents.  This has happened in too many files. The worst case I remember happened many years ago during an Ontario provincial sales tax audit.  A Ministry of Finance auditor asked a taxpayer for a USB key with all the companies bookkeeping records and was provided with all of the taxpayer’s books and records.  After a few months had passed, the auditor admitted to the taxpayer that he had lost the USB key and had no idea where it could be.  The auditor had to ask for the information again and the taxpayer was uncomfortable providing another USB key for obvious reasons.  The auditor had to admit his error because the taxpayer had a list and he had initialed that he had received the USB key.

Recently, a CRA GST/HST appeals officer informed us that no documents provided during the audit had been uploaded in the system and he could not get the auditor’s files.  He took the position that our client had not provided the documents. We were asked to provided all the documents again (which amounted to a number of boxes). Luckily, we had the list and we kept copies of all documents that had been provided in audit binders.  When each document was provided, three copies were made.  One copy was made for the CRA auditor, one copy was made for the audit binder and one copy was made for the scanned electronic record.  All documents were stamped confidential before being copied. We were able to provide the list and all the documents within 48 hours.

In another file, the CRA GST/HST auditor started an input tax credit audit and spend months looking through invoices and purchase documents.  The audit changed courses after many months and many requests for documents. An arbitrary assessment was issued because a limitation period was about to expire. We had been preparing the list and keeping copies of the documents.  When we performed the same audit on the same documents, the assessment was almost zero.  We filed a notice of objection and eventually the appeals officer received our analysis.  The objection was successful because we were able to show that we had a list of documents provided and what the correct analysis of those documents showed.

We have developed a template Audit List for taxpayers to use during audits.  This is the same template that we give our clients who ask us to help them during the audit process.

For more information, please contact Cyndee Todgham Cherniak at 416-307-4168 or at cyndee@lexsage.com.  We have many useful articles about tax audits under Free Information – Sales Tax, Harmonized Sales Tax (HST) and Goods and Services Tax (GST) Articles.