Income Tax Assessments, Reassessments & Audits

In 1917, during the First World War, the Canadian Government introduced The Income Tax War Act as a temporary measure to fund the war program.

This was the first time both individuals and corporations were taxed, and taxes finally became a permanent source of income for our Government when it was enacted under The Income Tax Act in 1948.

The basis of our tax program is the self assessed honour system where we report to the Canada Revenue Agency (CRA) our gross income earned, legitimate & eligible expenses, deductions, and tax credits.

Once the information is received by CRA, either in a paper or electronic format, the process then starts:

What is a Notice of Assessment (NOA)?

The first step in the process is a reply from CRA stating the tax return has been received and one of two things can happen – they accept the return as filed, OR it is challenged due to incomplete and/or inaccurate information provided.

Typically, the NOA arrives by mail with 2-3 months of filing and if further information is required by the taxpayer, a 90-day window is given to get documents to the CRA.

Once the missing information is provided to CRA the tax return is then either accepted as per the original filing or it is denied. This communication is referred to as a Notice of Reassessment.

What happens with Notice of Reassessment (NOR)?

A NOR arises after the CRA reviews the entire file and concludes that income is missing or that deductions or tax credits were disallowed. CRA has up to three years for both individuals and Canadian controlled private corporations to reassess a return. If it is deemed that fraud or intentional misrepresentation occurred, CRA has the right to extend beyond the three-year mark for an unlimited time frame.

While the individual can reply directly to the CRA and represent themselves, those that use the services of a professional tax filer tend to have better outcomes. The main reason is that the CRA views professional tax filers such as Chartered Professional Accountants as the “gatekeepers’ whose role is to weed out questionable expenses and to implement a professional code of ethics & conduct.

A NOR can be challenged if further information can be provided showing the taxpayer is correct OR it can be accepted by the taxpayer who then submits the missing tax owed. Penalties or fines can be added to the amount shown on the NOR if CRA so chooses.

Both the NOA and NOR have a 90-day window in which the taxpayer can dispute their ruling; this time period is not open ended.

What about tax audits?

CRA can request a random audit or a deliberately designed request whether they suspect fraud or not.

A random audit can be geared to specific industries like the hospitality industry which is known to not declare 100% of gratuity income such as tips. CRA will apply a metric and anyone outside of this metric would be audited.

A selected audit occurs when CRA requests the taxpayer to supply detailed documents supporting paperwork for a specific tax year or multiple past years. The documents can be returned to CRA electronically, depending on the volume of paperwork and documents.

CRA also has the ability to travel to the tax filer’s place of business and do an audit within their office. Typically, this is only done in most egregious of cases where the auditor feels there are multiple levels of fraud and several individuals involved.

Whether you have received a NOR or a full audit is requested, it is best to deal with CRA upfront and with respect. Nothing good comes out of a situation where the taxpayer is rude, uncooperative, or deceitful. The CRA employee wants to be treated with the same respect we all do, and a war with them never ends well!