The Difference Between a CRA Audit, and a CRA Review
The Canada Revenue Agency (“CRA”) has two options when looking at reassessing or adjusting tax returns. First, “tax reviews”, which are not formal audits, but rather a process that promotes awareness and compliance with tax laws. Meanwhile, audits are used by the CRA to protect and maintain the self-assessment tax return system.
How Far Back can CRA Audit?
There are limits as to how far back the CRA can audit with respect to reviewing someone’s tax returns. However, there are also times where CRA can audit as far back as they would like. Normally, the CRA will audit the most recent two or three tax years. So if 2017 filings were just completed, the CRA will usually audit the 2014 through 2016 tax years. If the CRA discovers huge errors, it is possible that they go back even further and audit other years. If the CRA sees fraud or serious issues with your tax returns, there are no limits as to how far they can audit.
Offshore audits looking for unreported income or assets held outside of Canada are usually longer than a typical audit because it is more serious and there is potentially, more money for the CRA to recover. That is why offshore audits encompass usually ten years worth of tax returns. So if an offshore audit is started in 2018, it usually asks for information and documentation starting in 2008.
Simple reviews where the CRA is only looking for proof of a credit typically only ask about one year.
So, how far back can CRA audit? The answer is that there is no limit as long as they can justify their results by claiming the taxpayer is lying and / or cheating on their tax returns.
Assessments and Reassessments
There are also limits as to how far back the CRA can go with respect to reassessing someone’s tax return. As mentioned above, the CRA administers assessments to promote awareness of and compliance with the laws it administers. The CRA conducts these assessments upon the completion of an audit on the taxpayer. The normal period for reassessment for Canadian income taxes is three (3) years from the date your tax return was initially assessed. For example, if you file your 2015 income tax return on April 30, 2016, the CRA will issue an initial Notice of Assessment on June 1, 2016. This also means that the Reassessment period will last until June 1, 2019.
However, as with audits, there are situations where the CRA can extend the Reassessment period. If the CRA believes the taxpayer has misrepresented their Tax Return due to carelessness or willful action, then the CRA can reassess the Tax Returns at any time. The CRA can do the same if it expects fraud by the taxpayer.
That said, the CRA must be able to prove fraud, neglect or wilful fraud. Simple mistakes on a taxpayer’s return do not equate to fraud. There must be more substantial errors and purposeful errors. The CRA can also reassess a taxpayer’s returns after the three (3) year period has passed if it can produce a waiver that was signed by the taxpayer.
How Long Should I keep CRA Records?
It is important to note that the year limits discussed above are different from how long you are required to retain your financial records and supporting documentation. Taxpayers are required to keep their financial documents and records for six years in case the CRA requests them. For example, you cannot destroy your 2017 tax returns or supporting documentation until 2023.
As an exception, if you filed late returns, the six-year rule applies to the date of filing, not the tax year. Documents should be maintained until the last date of appeal expires, or the six-year period ends. Taxpayer’s should use the latest date as their guideline.
For reassurance, taxpayers should keep their original tax records including the original tax return, invoices, receipts, cancelled cheques and anything else that supports the declarations they made in their respective tax return.
If you are being audited or reviewed by the CRA, we can help. It is in your best interest to have a tax lawyer on your side, because auditors are only after one thing, your money. Contact us today to learn more.
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.