Canada’s income tax system is based on the self-assessment model; every taxpayer must report their own income by completing and filing a tax return. If any taxes are owing then the taxpayer must remit the required payment to the Canada Revenue Agency. Because the system depends on the taxpayers to report their own income, Canada Revenue Agency (CRA), the department responsible for the administration of the Income Tax Act and the collection of taxes, sends auditors out into the field to review the books and records of taxpayers to ensure that they are in proper compliance.

If you are contacted by an auditor, do not panic. CRA will likely initiate contact with you by a form letter or a telephone call. When contacted in writing or by a phone message, be sure to call the auditor promptly to acknowledge the contact. 

If the tax auditor requests to review the books and records of your business, be sure to clarify that point and determine the years that are under review. Also, you may ask what specifically the auditor is looking for and if there is a specific transaction or branch of the business that is the subject matter of the review.

Do not become defensive or argumentative or complain about being singled out for the review. This will only put the auditor off and make the process more difficult. Your goal should be to make the auditor’s job go smoothly, not to put up obstacles. Remember, the auditor is merely doing his or her job. 

If you use professionals, such as accountants, to assist you with the preparation of your books and records and filing of tax returns, then upon receiving a request for information or being contacted about a prospective audit, you should immediately seek the assistance of your professional advisor. Your professional advisor should be instructed to deal directly with the auditor. You should remain in the background - your advisor should be the sole contact person from that point forward. 

There are cases where both lawyers and accountants should be involved, but in most cases your accountant will be the best person to initially assist you with a tax audit. He or she has all of your financial information and records that an auditor may be looking for and is best equipped to handle the auditor’s factual enquiries.

There are times in the audit process when a legal issue may arise. At this point, it may be beneficial to consult with a tax lawyer. While individual styles vary, it is our experience and preference that during the audit process it is advisable for the lawyer to assist the accountant by being an additional resource person working in the background. If the auditor learns that the taxpayer has requested the assistance of a tax lawyer during the process, the auditor may become suspicious that there must be something looming in the files and will often feel compelled to do extra investigative work.

Remember that the role of the auditor is to audit the taxpayer’s books and records so as to find more income to tax, whenever possible. Therefore, if the auditor determines that there should be an assessment of additional tax, it is sometimes difficult to dissuade him/her from this view no matter how loud or forceful the representations of the taxpayer’s representatives may be. Often times, at this stage of the audit, (that is, when the auditor presents the taxpayer with the proposal letter) it may be appropriate for the tax lawyer to become an active participant in the process. The lawyer can make legal and factual submissions to challenge the validity of the auditor’s proposed actions. In other cases, it may be advisable to have the auditor complete the audit as quickly as possible so that the tax assessment can be issued and an appeal can be taken to the next level by the filing of a Notice of Objection with the Canada Revenue Agency. 

In our experience, being co-operative and providing the auditor with all of the information which is requested - and nothing more - works the best. Obviously, there may be differences of opinion on the tax treatment of various items, but these can often be resolved. In some circumstances, the parties may agree to disagree. In others, small items that are in dispute are resolved or a compromise is reached. All exchanges of information and answers to the auditor’s questions should be done in writing. 

Remember, the auditor is simply doing his or her job – don’t take the audit personally. By co-operating and making all of the information available as soon as possible, you will assist the auditor in completing the job as quickly as possible and moving on.

Lengthy delays and stonewalling are not good ideas. The auditor has all the time in the world and will not go away. Furthermore, delaying the process may only encourage the auditor to dig deeper on the assumption that income is being hidden. Lastly, it is important to remember that the auditor does not have the last word, is not a tax expert, and often times makes mistakes both as to the facts and the interpretation of the Income Tax Act.

Always seek professional assistance to ensure that your audit will go as smoothly as possible. Remember the adage, “He who acts for himself has a fool for a client”. The less you say personally to the auditor, the better.

This guide was authored by the Tax Group at Clark Wilson LLP. You are welcome to contact William Ruskin, Tax Group Chair with any questions or comments.