In episode 3 of our Talking Real Estate with Peter and George video series, George Dube and Peter Cuttini discuss how to reduce your risk of a tax audit.
George:
Peter and I are going to be talking to you today about reducing the chance of what we’re going to call a really bad tax audit. And in saying this, it’s not to suggest that you’re going to avoid, if you will, an audit. And we’re not trying to suggest as well that you’ve got something to hide or something bad is going to happen with result of every audit. Because in fact, the vast majority are relatively speaking, easy to deal with, pretty fast, not a problem. But although you may not have anything to hide, we’re also not suggesting that you’ve got nothing better else to do, if you will, than deal with an audit. So we’re going to talk about how are some ways to potentially reduce that chance of the audit, but not eliminate the chance. Peter.
Peter:
Thanks, George. Yeah, let’s not kid ourselves, as real estate investors, as business people you’re going to get audited once in your business. It’s happened to George. It’s happened to me and it’s happened to the vast majority of the clients. It’s not something to be scared about. Do it right, handle it properly and don’t handle the tax audit by yourself. Your first person you should be speaking to is us. We will assist you with it, we’ll help you through it, but definitely reach out to your accountant, don’t do it alone. So we’re going to just go over a few points that we think help reduce the risk of a tax audit. Maybe about 10 points. We’ll talk fairly brief and we’ll go from there, so.
George:
In terms of one of the primary things that may seem real, real easy and in fact it is, it’s actually filing tax returns on time. Or information returns, depending on what we’re talking about. Just hitting the deadlines while again, it doesn’t mean it’s the end of the world in some cases if you’ve missed one, but being able to consistently file on time is one of the things that helps out in terms of avoiding further correspondence with Revenue Canada.
Peter:
If you’ve got to file three, four, five years of tax returns, CRA may ask why.
George:
Mm-hmm (affirmative). Continuing on that, in terms of at times, you’ve filed the tax return and there’s either something that you’ve missed, you forgot to include, found out one of the numbers actually wasn’t as accurate as you thought it was at the time, and there might be the need for an adjustment. So one of the things that we advise people though is try not to make adjustments after you’ve filed. So again, trying to get everything done right the first time. If an adjustment’s required, let’s also take consideration of the size of it.
So for example, if you’re going to get an extra $100 back as a result of this adjustment, I would never touch that with a 10 foot pole. Adjustments are something that will more than likely trigger interest from Revenue Canada whereas if it’s what I’ll call a standardized adjustment, in the sense of, “Oops, I forgot this T slip,” for example. Some interest didn’t come. You include a copy of it with the adjustment request where applicable, then that’s not so bad. It’s relatively easy to deal with something of that nature. A donation, a receipt is an example. But really consider, talk with your advisor whether the adjustment is needed in the first place.
In terms of then looking at… We noted the trends with the prior years. Revenue Canada and their computers are going to be taking a look at what you’ve filed to see how do you compare with prior years when you filed the tax returns. In other words, is your revenue or certain expenses showing a large fluctuation? And not that Revenue Canada doesn’t expect some fluctuations, particularly based on the nature of the business, but it is unquestionably something, again, that they’re going to look at. Looking at margins, it’s an indicator there may be an issue. It piques, potentially, somebody’s interest.
Peter:
And not only do they look at your prior years, they also will compare you with the industry that you’re in. If say, you’re in the construction industry and the gross margin on a new home is 15%, for example, and you’re at 3%. Well, that may trigger some more questions. In our vast experience with dealing with our clients we know where, I think, what George and I call red flags. This doesn’t look normal, and it may be, but we’ll advise you of where those red flags are and we may want to do the presentation slightly different. We may want to dig further in to the numbers and make sure that they’re right.
George:
Absolutely. So again, comparing with the industry. How do we compare with that? With a clean record. Do we show that we have a history, if you will, of having some issues? Or is that record, relatively speaking, clean, in the sense of, when there has been an audit there really has not been anything that was identified, if you will. It’s a good test that if you’ve had a major issue the last two, three years for example, while not a guarantee, you can be pretty confident Revenue Canada’s going to come visiting again.
Peter:
Yeah, if CRA is consistently finding that you’re doing something wrong or they always find stuff in an audit, they’ll be back next year and the year after until you’re clean. It’s unfortunate but that’s just the way it is.
George:
And to, I guess, a degree as well when we’re looking at those trends, for example, it may be that an unusual transaction is popping up or stands out like a red thumb. And while again, it’s not necessarily the end of the world and you most definitely need to report the transactions, as Peter said, maybe it’s also something we’re going to just want to have a little bit more information ready in case we do get a request for details from Revenue Canada. That at times of that initial phone call or question, if we can adequately answer that at the beginning, we may save ourselves quite a bit of effort down the road. So being aware of what may be of interest to Revenue Canada. In somewhat of a similar way, if you think of if you’re presenting your financial statements to a financial institution, you can pretty much guarantee there will be certain questions that they’re going to have. Well, let’s just prepare for it. Revenue Canada’s no different.
Peter:
The next one should be relatively straightforward but definitely be honest and ethical in your business and when dealing with CRA. We’re not saying don’t be aggressive but don’t lie to them, don’t cut corners. If you’re doing something that’s completely illegal you may get caught and if you do, they don’t like that kind of stuff. Be honest and also don’t try and get every little Mickey Mouse deduction that we talk about. Get the right tax planning. That will save you a lot more money than trying to put in an extra $200 of meals and entertainment. Because the worst part about it is once the CRA auditor comes in and sees that there are these fake transactions almost or deductions that really shouldn’t be there, they’re going to start questioning it more. They’re going to be there longer. They’re going to dig in to your records more than they would be if the records were clean.
George:
Sometimes you can just be that way too aggressive on something and then, just as Peter said, now you’ve just invited them to see what else you’ve got underneath the carpet. So getting the right advice beforehand. If we do have something different going on for example, or a specific transaction. Just something that’s, for lack of a better word, out of the ordinary. Again, why not talk with the advisors to see if this is the best way of presenting the information to Revenue Canada through financial statements, whatever that may be. I’ll let you… I know you’re crusading now, Peter, in terms of the bookkeeping side of things.
Peter:
Yeah. [inaudible 00:08:54], I’ve said this for years. Get your bookkeeping done. Get it done right. CRA hates when they ask for information and they give you 30 days and you keep asking for an extension to 60, 90 or longer. It looks so much better for a CRA auditor when you have all your ducks in a row. And I’ll give you a personal example. I got audited. Had the CRA auditor come to my office. Had a nice binder with all the information they were looking for, tabbed, cross-referenced. They were there for less than half a day and at the end they were like, “Great, I’ve got nothing.” Moved on. It was a clean audit. That’s really what you want to have going in to an audit. Give them the information they ask for. Get it on a timely manner. And make sure it’s clean because the dog’s breakfast or… They hate those type of information. And let’s not kid ourselves, their hindsight is worse for you than your hindsight on a transaction.
George:
No questions. And then extending that example further if you will, is not having that information available to Revenue Canada when they ask for it. And some of the forms that we do complete, you are perhaps not guaranteed an audit but you’re virtually guaranteed, if you will. So a couple of the examples were the GST and HST rebates and clearance certificates. There’s definitely a very different look to those from Revenue Canada as compared to a standard tax return for yourself personally or your corporation, trust, partnership returns, things of that nature. So knowing that, Revenue Canada is almost definitely going to ask for it or require it when the information is originally submitted. As Peter said, make sure it all ties in together. Make sure it’s referenced properly. Why get extra attention from Revenue Canada if it’s not needed. Making their job easier will make life much easier for yourself.
Peter:
And last one. Again, CRA will send you correspondence. There may be a request to file a tax return if you haven’t filed it on time or information request. Don’t ignore it. Don’t just put them in a drawer and say this will go away, because it won’t. The worst you want to do is get a request to file information and then get a demand to file information, and you don’t deal with it. CRA will just arbitrarily assess, and depending on how long it goes that you’re ignoring it, you may not have an opportunity to fight it, or it becomes very expensive to fight their arbitrary assessment. Contact us, make sure we review the information that we’re sending to CRA before doing it, or even we can draft the information that goes to CRA. But don’t ignore it. It’s the worst thing you can do.
George:
Yeah and just again, to pile on to Peter’s point there, where Revenue Canada’s, for example, just asking for more of requested information in the sense of, “Please show us five of your donation receipts.” Or an RSP slip or something to that effect. Okay, we really don’t need to be involved in that process, of course. But a lot of, relatively speaking, innocent enough questions may have different end objectives, if you will, from Revenue Canada. So again, Peter and I would like to know… Or your alternative advisors like to know what’s going on and it can be a way of again, saving you some considerable stress. It also allows us to help protect you where if we’re about to get into a disagreement there are strict timelines with respect to when we can formally disagree with Revenue Canada and still get a change made. Administratively, in some cases, beyond a shadow of a doubt we can still stretch that but I’d much rather not rely on an administrative position. I would much rather be within the rule of the land, if you will, in terms of the firm deadlines.
Peter:
So, that wraps up our quick presentation here. On the screen now is George and I’s contact information. Feel free to reach out to us if you have any questions on a CRA audit or if you have any general questions, we’ll be more than happy to help.
George:
Have a great day everybody.
To contact Peter or George you can email pcuttini@bdo.ca or gdube@bdo.ca.
Tags: audit
