March 18, 2019 by David Smagata, DAS
At some point in their lives, most Canadians will be subject to a tax audit from the Canada Revenue Agency (CRA). While the process can be anxiety-inducing and stressful, having the right insurance policy can help you prepare for an audit. It’s important to know what your rights are if you are audited and how to appeal the CRA’s decision if you don’t agree with the outcome.
The CRA’s auditing process begins after the tax return filing deadline (which falls in May for personal taxes). The CRA selects files for audit based on an internal risk assessment which includes a number of factors such as: the likelihood or frequency of errors in the tax return; whether there are indications of non-compliance with tax obligations; and, a comparison of the tax return with similar flies or previously filed tax returns for that individual/business. If the CRA flags your file, you may be audited.
When a taxpayer’s return is audited, the CRA requests copies of all documents (receipts, invoices etc.) that support the expenses and deductions that the taxpayer has claimed. Once the CRA receives and reviews these the documents, the CRA sends the taxpayer a reassessment letter. The reassessment letter explains how much more, (or less,) tax the CRA has determined that that taxpayer owes after analysing the documents.
Taxpayers have 90 days to respond to the reassessment letter. If the taxpayer disagrees with the reassessment, they can file a Notice of Objection with the CRA. The Notice of Objection is a document in which the taxpayer explains why they disagree with the CRA’s decision about the quantum of taxes owed and provides clear documentation to support their position. (Taxpayers who are not audited, but who disagree with the CRA’s initial assessment of their taxes owed can also file a Notice of Objection in order to appeal the CRA’s initial assessment of their tax liability.) The Notice of Objection is reviewed by a CRA Appeals Officer who then makes a decision to either to confirm the reassessment, cancel the reassessment, or vary the reassessment.
If the taxpayer disagrees with the decision of the CRA Appeals Officer, the taxpayer can bring a case against the CRA to the Tax Court of Canada. If the taxpayer loses their case at the Tax Court of Canada, they can appeal at the Federal Court of Appeal. If the taxpayer is unhappy with the decision at the Federal Court of Appeal the taxpayer can apply to have their case heard by the Supreme Court of Canada.
With legal expense personal or commercial coverage, a tax lawyer and a tax accountant will be assigned to handle a CRA tax audit or appeal. As a result, many of the steps described above can be taken off the individual’s or business owner’s already full to-do list, and be covered by their legal expense insurance policy. This provides policyholders with confidence that their complex matter will be handled correctly. Plus, it protects a family’s or business’s budget, as all legal fees are covered up to the policy’s limit for the Tax Protection insured event.
As Chief Legal Officer and an Insurance Executive, David Smagata leads Claims, Compliance, and Legal in the management of compliance risk, liability and litigation, and corporate oversight for DAS Legal Protection Inc. With almost 20 years of experience in litigation, in conjunction with strong managerial and operational background experience, David brings an insightful and proactive approach to legal issues and a unique ability to solve complex legal and corporate challenges in the financial services field.