With the increase in the number of tax payers filing electronically, CRA now has incredible data analytic capabilities. Anomalies in relationships between financial numbers will often trigger an audit or, at the very least, an information request.
In addition to data analytics, CRA is also looking to third parties for information that might indicate an audit is necessary.
On March 30, 2017 Square Canada informed its users they are complying with a Federal Court Order to disclose information to the CRA about sellers who processed greater than 20,000 in any of calendar 2012, 2013, 2014, and 2015.
Similar requests have been made of other companies – Rona, for example, received a request to provide information on contractors.
These companies are required by law to comply with such federal orders.
Once you have been selected for audit, you should be aware that CRA is increasingly relying on indirect verification of income (IVI) as an audit technique. The CRA audit manual lays out various tests that can be used by an auditor if they suspect that the books and records of the company are incomplete. At a very minimum, they have stipulated that all audits in the small and medium business program must include the IVI procedures of bank deposit analysis test and either a rough net worth test or the source and application of funds test. Here is a summary of how those tests are completed:
Bank Deposit analysis:
Used to calculate gross revenues and additional funds required to pay for cash outlays and expenses.
Rough net worth test:
For this test, the taxpayer’s personal financial records will be reviewed. This will include banking and investment records, credit card statements, mortgage and loan document, property tax statements etc. The tools is used where there is a source of funds issues- that is that the income reported does not support the lifestyle.
Source and application of funds test:
This test measures identified sources of funds including reported income, against known applications of funds in a tax year to estimate the variance in total income reported.
For all of the above tests, CRA will be asking for your personal bank statements and possibly loan or credit card statements for all accounts.