Taxes and The Tax Man are not things you should only consider during tax season. The CRA’s audit and verification selection process is complicated and risk based, do you cannot always be sure when you are at risk of an audit. What is certain is that if your corporation has been less than compliant, the perceived risk level is increased, and the chances of an audit are higher.
It is not only the corporation (and its shareholders) that stand to lose on a CRA Audit. Directors, in specific instances, are personally liable for the corporation’s tax debt and, in some circumstances, so are persons who don’t deal with the corporation at arm’s length (when they receive property and cash from the corporation).
As with many things in life, prevention is the least costly and least painful solution. What are some things that your corporation can do to keep the CRA happy and to reduce the risk of a visit by an auditor?
The most obvious and the simplest thing your corporation can do is to stay up-to-date with all of its GST/HST, payroll, and income tax (including installment) filings and remissions. If you don’t file your returns on time or don’t make payments by the deadline, you are asking for trouble.
Related to this first point, always make sure you keep detailed records, including business information, invoices, bills, receipts, deposits, payments, and so on. This way, you can provide the CRA with any information they may request quickly and you don’t have to move to an audit. Also, don’t dispose of your information until more than 7 years have passed since the document would have been needed (this may in some cases be indefinitely).
Something that most small businesses run afoul of is shareholder accounts. This includes records of all payments (capital or loans) from shareholders and all payments to (dividends, loans, benefits, etc.) to shareholder (or people related to them). All debits and credits should be well documents and explainable. A corporation is, by law, a separate entity and you cannot use its money as your own (even if you own 100% of the shares).
It’s important to remember that where you misreport information to the CRA, in most cases the effect is that the CRA can reassess you at any time. There will be no limitation period.
Compliance is the key to tax safety. Doing a third-party audit by a tax professional, to make sure your accounts are up-to-date and that you are not facing any obvious risks is probably the best money any corporation can spend. Once an audit results, not only do you have to suffer the expenses associated with the Audit, but your corporation and you may face hundreds of thousands of dollars in taxes, penalties, and interest.
Faris CPA regularly provides its clients with effective tax risk assessments and analysis, even if you have another accountant for your day-to-day needs. Email Sam Faris.