March 12, 2019

Canada: Indirect Income Verification

The CRA specifically targets small- and medium-sized businesses, because of the perception that their records aren’t maintained as well as other larger companies. One of the ways the CRA looks for tax evasion is through estimating indirect income. The problem is, these estimates are based on assumptions and are not always correct. As a business owner and taxpayer, if you feel you are wrongly being audited you have the right to challenge. Just make sure you have the evidence to back up your challenge and get professional assistance, if needed.

Key Takeaways:

  • Sections 231.1 and 231.2 of Canada’s Income Tax Act allow the CRA to issue a Requirement for Information, which is essentially a letter demanding that the taxpayer (or any relevant third party) release specified documents or information.
  • Using indirect income verification is a way for the CRA to estimate a taxpayer’s income when dismal recordkeeping bars the more reliable, regular tax audit techniques.
  • A taxpayer has two options: to challenge the propriety of the auditor’s use of an indirect income verification method, or to challenge the indirect audit by analyzing and disputing every assumption and calculation of the assessment on a line-by-line and item-by-item basis.

“The CRA invokes its most aggressive tactics when auditing small and medium businesses—groups that the CRA perceives as most likely to retain poor records or lack internal controls. These aggressive tax audit methods fall under a class of techniques known as indirect income verification methods.”

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