Be Prepared: Navigating a GST/ HST CRA Audit Effectively

June 23, 2016

For many small and medium sized businesses in Canada, managing GST/HST tax issues can be complicated. This is why, when a letter arrives from the Canada Revenue Agency (CRA) stating that a business has been selected for a GST/HST audit, it typically causes significant anxiety for the company’s owner. While companies rarely intentionally misreport tax information, there is always the potential for unintended errors to be caught during an audit – which can create problems for a company depending on the circumstances and scope of the errors.

But the audit process does not need to be as complicated as some companies fear. There are a number of activities that companies can undertake when setting up a business and before, during and following a GST/HST audit, that can make the process more navigable. By preparing for a GST/HST audit early, business
owners can make sure their company can achieve the best possible outcome.

When Setting Up a Business

Most companies will go through a GST/HST audit at some point during their lifespan. Often, companies that have significant sales or input tax credits (ITCs) are audited within their first few years of business. This may be for several reasons – the most likely being that the CRA prefers to ensure tax compliance from the beginning. Companies can also be flagged for an audit based on possible discrepancies between their income tax and GST/HST filings, based on information reported by another company, or as a result of a random selection process.

There are a number of things that you can do when setting up a business to make sure you are prepared if the company becomes the subject of an audit. As a starting point, make sure you understand what tax you must collect and remit. Often, errors found during an audit are simply the result of not collecting or remitting the right amount of tax.

If your business has over $30,000/year in taxable supplies, including supplies made by associated persons, you must collect and remit GST/HST. The applicable rate of GST/HST to collect will differ depending on where your company does business. This can range from 5% GST only to varied levels of HST depending on the province (e.g. 13% in Ontario, 15% in Nova Scotia). If your company does business in multiple provinces, you will have the added challenge of ensuring that every transaction you undertake includes the applicable amount of tax.

To ensure the appropriate amount of tax is being collected, consider conducting a reasonability test. This test looks at whether the amount of tax collected is appropriate given your level of sales. If it is not, you may need to review your tax and invoicing systems to resolve any discrepancies. It can be useful to have an advisor familiar with tax issues help with this process, especially if your company has complex tax obligations.  

Before the audit begins

One of the most valuable activities you can undertake once you have received notification of an audit is to make sure that your supplier documentation and books and records are up to date. Such housekeeping can be essential for ensuring a smooth audit process. When books and records are not up to date, auditors will be more likely to dig deeper to find issues.

This is also the time to review any unique transactions that may have occurred during the audit period as these will likely be a key focus for the audit. You should also review the allocation methodologies used when determining ITCs as auditors often question why one model has been chosen over another.

During a GST/HST Audit

When an auditor is onsite, company owners and staff are often on edge and afraid to talk. But experience shows that one of the best mechanisms for managing a smooth audit process comes down to having open communications with the auditor. 

When an auditor is onsite, be open with them. This means answering questions to the best of your ability, providing documentation as requested, and being clear about how and why you chose specific courses of action when asked.

When an auditor has finished their onsite inspection, request a wrap-up meeting to discuss their findings. While most companies do not feel comfortable arranging such a meeting, it is considered best practice as it can reduce the number of issues that get assessed – and therefore those that need to be responded to formally. A post audit wrap-up meeting gives you the opportunity to clarify any issues that an auditor may have prior to the issues being assessed. This can save you both time and money associated with the appeals process.

Following a GST/HST Audit

Once an auditor has issued their audit assessment, there is a strict process that must be followed to manage any objections that a company may have. This process may include filing a written response to proposed adjustments, a Notice of Objection and, if necessary, an intent to appeal the decision to tax court. Each of these processes has specific deadlines that must be met. However, do not be afraid to ask the CRA for more time in order to document your position. Under some circumstances CRA may extend the deadline to a proposal or objection.

During the formal response audit period, it can be beneficial to obtain advice from an experienced tax accountant or lawyer, especially if the finding is significant or involves a gross negligence penalty. An advisor can help you respond to issues more effectively and, if needed, negotiate an appropriate settlement.

Be prepared

A GST/HST audit does not need to be feared. By taking the right steps when setting up your business and before, during and after an audit – you can make sure your company is in the best possible position to respond to any questions the CRA may have.

Find out more

If you would like more detailed information regarding the GST/HST audit process, what CRA auditors typically look for, the audit response process, and when to ask for help from an external advisor, watch our On Demand webinar: Navigating the GST/HST CRA Audit.
 

Contributors:
Ken Garth
Partner, Commodity Tax
705 645 5215 ext 3927
kgarth@bdo.ca
Brian Titanich
Senior Manager, Commodity Tax
403 205 5734
btitanich@bdo.ca
 

The information in this publication is current as of June 16, 2016.

This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.