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When does the Canada Revenue Agency investigate?

It’s never a good feeling to be put on notice that you are being audited by CRA. However, it happens more than people may think.

In general, reasons for investigations can include anything from random selection, to suspected potential errors to suspicious activity.

Canada has a self-assessment program in place for filing taxes. People, and businesses, voluntarily complete tax returns and forward them to CRA. Failing to file taxes can result in fines and in worse cases, tax evasion charges.

Here are three examples of the kinds of investigations CRA conducts.

Review of a tax return

CRA has several review programs in place for reviewing individual tax returns. It doesn’t matter in which manner you a file the return, whether manually or electronically; the reasons for selecting a file for review remain the same.

Some reasons for the selection of a review of a tax return include:

  • For comparison purposes of information on returns to information received from a third-party source;
  • Random selection;
  • The kind of deductions or credits claimed and/or an individual’s review history.

CRA does not review most returns as they come in, because there are such a large number of returns, and they are processed quickly so that the Notice of Assessment can be issued quickly. However, all returns are screened through a computer system and can be reviewed later on. In other words, you may get notified by CRA months down the line that you have been selected for review.

Business audits

CRA selects business files to audit based on a number of criteria, such as: if there have been signs of non-compliance or signs of error. It selects files through its risk-assessment system based on those, and other, factors.

The businesses that are usually selected for audit are small to medium sized businesses.

CRA will examine books and records of the business, which include things like:

  • Business records: this can include a wide variety of documents like invoices, receipts, contracts, journals, bank statements and more;
  • Personal records: can include things like mortgage documents, credit card statements and bank statements, etc.,;
  • Information that is available to CRA: this can include things like previously filed tax returns, property database information, credit bureau searches and more;
  • Adjustments which were made by your accountant or bookkeeper for income tax purposes.

Criminal Investigations Program (CIP)

This program is designed to investigate the most serious cases of tax evasion. If sufficient evidence of tax evasion and/or fraud is found, CRA may forward the case to the Public Prosecution Service of Canada for criminal prosecution.

The program focuses on investigating the gravest cases, such as:

  • Cases of financial crime investigated in conjunction with the Royal Canadian Mounted Police and other law enforcement partners, be they national or international;
  • Material cases of tax evasion which include international components;
  • Cases of high-level tax schemes with the purpose of defrauding the government;
  • Material cases involving income tax and/or GST/HST evasion, including the underground economy.

If a person is being investigated by CIP, they could face charges of tax evasion which can carry very steep fines of between 50% to 200% of the taxes evaded, to a maximum of two years in prison, if convicted.

Furthermore, if a person is charged and convicted on indictment, then the person could face a fine of between 100% to 200% of evaded taxes and up to five years in imprisonment.

If you have been selected for review or audit, you may want to contact your accountant, bookkeeper or tax lawyer. If a criminal investigation is being pursued against you, you should contact a lawyer as soon as possible.

Read more:

Canada Revenue Agency - Criminal Investigations Program