So you think tax season is finally over now that you filed your return? Well, for almost three million Canadians it’s just beginning.
That is because the Canada Revenue Agency (CRA) is just starting to review the tax returns that were filed electronically or ones that did not have supporting information slips or receipts with their paper filings. It looks for anomalies with previous returns and other information on file, which may trigger a review. Using a T1 matching program, the agency also compares your information with that supplied by third parties such as employers, financial institutions, and a spouse or common-law partner.
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Once tax returns are filed, CRA performs pre-assessment reviews based on a risk scoring approach to detect errors and omissions.
However, most CRA reviews are done after the initial assessment. Called post-assessment reviews, they include random and targeted reviews based on risk assessment.
The agency usually has three years from the date on the assessment notice to reassess an individual’s return to recover additional taxes, benefits, interest and penalties.
CRA’s computer systems are highly sophisticated, despite the recent crash that delayed electronic filing for almost a week. Its automated compliance screening process allows it to track minor variations between this year’s return and previous ones, which might be enough to attract its attention.
Last year, CRA said it conducted 2.7 million such reviews of individual income tax returns, generating an additional $700 million in taxes through reassessment. That’s an average of $260 per taxpayer reassessed.
During the review process, CRA will frequently contact the taxpayer to request additional or supporting information on income sources or dependents. It will also ask for copies of receipts or other information to support claims, such as medical expenses, charitable donations, child-care expenses, spousal or child support payments and moving expenses.
These are critical categories that require careful maintenance of records to support claims for tax deductions and credits.
Because many of these reviews take place later in the year, it is important to keep records and receipts on hand to make it easier to respond to CRA requests. The Income Tax Act requires taxpayers to keep all supporting income tax records available for review for six years.
CRA also advises that a request for receipts and documentation is not considered an audit. It will tell you in clear terms if you are to be audited and will schedule a specific date on which the audit is to begin. It conducted almost 400,000 business audits last year and the number is likely to increase this year.
Larry Roche is a tax analyst with farm taxation and planning specialists Farm Business Consultants Inc. He can be contacted at fbc@fbc.ca or call 800-860-7011.
