Audit or Investigation? Do you know the difference?

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Typically both can conducted by the Canada Revenue Agency but they are easily confused. Knowing what the differences are can really help when the heat is on.  Audit (Call your accountant) Audits are performed to ascertain the validity and reliability of information you previously returned to CRA. In short, an audit is an examination of you or your company’s financial affairs. It is an examination, not an investigation and therefore cannot result in criminal charges because the information obtained during the audit was obtained without the protection of the Charter of Rights and Freedoms. All information obtained is confidential. Investigation (Call your lawyer) An investigation is a probe or an inquiry into unfamiliar or questionable activities. An unfavourable result could land you a conviction and some jail time. You should never answer even the most innocent questions without seeking legal advice. Information obtained during an investigation must remain confidential until you have been charged. Tip  Always ask for a business card from the CRA representative. Usually you can quickly establish if this is an audit or an investigation. Information worth knowing Forms Occasionally CRA will ask you to complete certain forms as part of their ongoing search for information. At this point you should know that CRA suspects that there are some gaps and inconsistencies in the information you have  previously provided.  NEVER complete any forms or answer any questions without first discussing them with your accountant.

The alarm bells should start ringing if: • you are asked to complete a form asking for details about your personal expenditure over a three year period, • you are asked questions about your business practices, whom you bank with, bank account details, owners etc. • you are asked to clarify your relationship with clients you do business with. You may be part of a larger audit or investigation of one of your clients. It is a violation of Section 231.2(2) of the Income Tax Act to attempt to extract information regarding third parties who are not the subject of the audit. Though not obvious, anything that you say or answer may be held against you at any time, now and in the future.  Software In assessing the validity and believability of information you have returned, CRA makes use of sophisticated software that detects subtle changes and inconsistencies in your financial data. An example: Assuming that in year 1 your business Gross Profit Percentage is 52%, in year 2 its 42% and in year 3 its 65%. The wild swing in GP% will likely trigger an audit. Don’t believe me? The software is world renowned for its abilities and is used by revenue agencies throughout the world.  It’s not worth playing dice with the tax man always seek professional advice.    

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