Received a GST/HST Audit Letter – Fear not!
If you are the owner of a small business corporation and you just received a CRA GST/HST audit letter, do not panic. In one of our earlier posts, we talked in general about navigating a CRA audit. In this blog post, we’ll focus on GST/HST and go over what some of the audit triggers are, what to expect when you are going through the audit and how best to handle it.
How smooth or daunting the audit process goes, all depends on you. To navigate the audit process smoothly, you need to understand why and how the CRA GST/HST audits are conducted. Knowing this, we can implement improved accounting practices to set-up your business for success.
CRA GST/HST Audit Triggers
CRA requires any business with income of over $30,000 to be a GST/HST registrant and collect GST/HST on all taxable sales. When a return is filed, it is systematically assessed for high-risk. At times, the selection can also be at random. Whatever the case is, the focus is to identify for evidence of non-compliance and common filling errors.
Some of the common audit triggers are:
- Reporting significant sales or ITCs (input tax credits) in your initial years; CRA likes to conduct audits in initial years to ensure compliance from early stage.
- Deducting large business expenses – automobiles, meals and entertainment, interest, home office expense are favorites of CRA to dig deeper into.
- Revenue discrepancies between T2 and HST return filed.
- Recurring losses – losses can happen and that’s all right – as long as you maintain proper documentation.
- Operating in a cash-intensive industry – restaurants, repairs shops, construction, transportation – if you are in ant on of these industries expect CRA to give you extra love right out the gate.
…and the list goes on.
CRA GST/HST Audit Process – What To Expect
If you are reading this, chances are, you have already been selected and received “The call” from CRA – which is the initial step in the process. The auditor contacts you to inform about the audit and request documentation through an official letter.
A typical letter usually asks for:
- Banking records for all business accounts including bank statements
- Detailed general ledger
- Detailed listing of the GST/HST collected and input tax credits claimed
- Sales and purchase invoices
- Lease/purchase/sales agreements for any vehicle or capital assets leased, bought or sold
The business owner is required to provide all requested documentation within the 30-day period. Once the auditor receives and reviews the provided documents, additional documents may be required. At times, auditor may even request to visit your location for a more thorough review.
After the examination, an official letter is issued discussing their findings and final reassessment. Worry not, even this reassessment can be appealed if you feel the auditor misinterpreted. CRA allows you to file a GST/HST objection 90 days from the date of the reassessment, giving you enough time to gather additional information on auditor’s initial findings.
You Got “The Call”, Now What? How To Handle It?
As soon as you become aware of the GST/HST audit, be prepared. What this entails is ensuring that the books are up-to-date. This also includes making sure all transactions contain the necessary information as support. Take this time to also identify any unique or rather large transactions that occurred this period as they will likely be the focal point of the audit.
For example, a retail shop selling graphic t-shirts in B.C. decides to target customers outside the province by launching their website in January. The website attracts customers from the States and Ontario. The volume of sales from the two new customer base is 10 times the volume of sales from B.C. In this case, you would want to ensure that appropriate tax rates were set-up and used for the new customer base, and customer address is properly displayed on each invoice.
During the Audit: telephone discussions and on-site review
It is normal to feel scrutinized and at the edge when taking to a CRA auditor, that’s the nature of an audit. However, knowing fully well that nothing is reported incorrectly in your books should put you to ease. When dealing with a CRA auditor, be honest and prudent. Provide requested information to the auditor, answer all the auditor questions to the best of your ability and explain why one approach was chosen over another.
Additionally, although you may be hesitant to do this, request a follow-up meeting with the auditor to discuss their findings in person. A follow-up meeting is in your best interest as most of the technical issues can be resolved when there is open discussion. Therefore, what is formally reassessed in the final letter may only be a fraction of auditor’s initial findings.
This last but pivotal step also aids in preparing for the appeal process, if you decide to go that route. If not, this will give you the opportunity to resolve any non-compliance issues and improve processes to avoid future audits.
Contact Us: Make GST/HST Filing Easier
Let’s be honest, staying on top of your GST/HST can get hard. But managing a business is tougher. Leave the tax filings to the professionals. Email us at firstname.lastname@example.org or call any one of our team members at 905.565.0095 and see how we can make your life easier, so you can get back to thriving your business.
Think Accounting is a tech-savvy accounting firm based in Greater Toronto Area with offices in Mississauga and Oakville, helping ambitious and growth-focused business owners. We specialize in cloud accounting, tax planning, e-commerce accounting, corporate and personal taxes, sales taxes, cloud accounting systems implementation and other advisory services.