Nothing in business creates as much panic as a letter from a Canada Revenue Agency (CRA) income tax auditor. No matter how successful you are as an owner-manager of a small- or medium-sized enterprise (SME) and how well you have succeeded in business-building, CRA can cause serious pain and may be able to take it all away.
We have been Canadian tax lawyers for 30 years and have seen it all, from SME business owners who contact us 3 days before a scheduled Tax Court of Canada trial to cautious professional accountants who call us at the first sign that a CRA tax audit is threatened. Our advantage is that we are both tax accountants and tax lawyers. We can help set up your business the right way from the get-go. And we can also help when you’re being audited, have been wrongly assessed, or when you have a tax dispute with CRA.
Here are the 6 most important tips in winning your income tax or GST/HST dispute with CRA:
1. Retain an experienced accountant when you set up your business
The key to winning a tax audit is to set up the playing field in your favour in advance. Accountants are not all created equal. In fact some are good and some are bad and some are terrible. Many tax problems are caused by incompetent or negligent accountants. A good accountant will ensure that your tax filings are done on time and are accurate. The accountant will respond to CRA enquiries on a timely basis. A bad accountant will unresponsive and will be the cause of your CRA tax dispute by not filing on time or filing wrong tax returns or not responding to routine CRA enquiries. This will often then be compounded by ignoring CRA requests. The next thing you know you’re into a major tax fight caused entirely by a bad accountant.
Unfortunately, our tax lawyers see this very often. Many SME clients come to us when their accountant of record has made a mess of records or tax filings, creating or compounding their tax problems.
2. Retain a tax professional at the first contact from CRA
Canadian tax rules are byzantine and complex. CRA auditors are trained to look at matters from the point of view that business owners owe tax. They are often wrong about the law, but they may sound convincing. Anything you tell or give a tax auditor will be used against you, even if you make an innocent mistake.
A taxpayer who has dealt with a CRA auditor on their own is often the first problem in a file we take over. Never respond directly to a tax auditor. In many cases, your accountant can and should respond to the initial contact.
If the matter is complex or involves tax law interpretation rather than simple audit evidence to support deduction claims, a Canadian tax lawyer should be involved at an early stage of the tax audit. The submissions to the auditor will be drafted by the tax law firm with input from the accountant. This will ensure that the file is properly documented from inception of the tax audit in the event that it goes to CRA appeals or to Tax Court.
3. Make sure you have a good tax case
This may sound obvious, but ask the question of your tax representative. What are the merits of your case? If CRA is correct in their assessment, then the sooner your tax professional responds and settles, the lower your fees will be. There is no point in pursuing a clearly losing dispute.
Beware of an accountant who has made a bad expense claim telling you that the fight has merit so as not to admit a mistake. Get a second opinion from a tax lawyer to ensure that it’s worth continuing with the dispute process.
4. Provide requested tax information on a timely basis
The Canadian tax professional you retain cannot be effective without active help from you as the SME owner, or from your controller. You or your staff have the information, documents, and knowledge necessary to support your case. No one else does. If you don’t take the time necessary to assemble the information and documents and explain them when requested, you are tying the hands of your tax advisor.
The tax dispute cannot be won without documentary evidence and explanations to support your claim. Provide it as soon as it’s requested.
5. Stay informed about your tax dispute
The tax lawyer or accountant should be updating you about your case. If you are not being copied on correspondence, or being provided with periodic reports, follow up. While you’ve retained a tax professional to handle the case, you also need to manage them.
They may be too busy to deal with your file on a timely basis, or may not be effective at dealing with tax disputes even if they are a good general accountant. Ultimately, it’s your case and your dollars if you lose the tax dispute and have to pay CRA.
6. Appeal the tax case if you have good facts and if cost justified
Auditors often decide cases against taxpayers, even if the taxpayer is correct. There may also be honest disputes about interpretation that the auditor will decide—no surprise—in favour of CRA. The fact that you have an adverse tax audit decision does not mean that you should give up.
Your tax representative should explain the merits of the case to you and if you have a good chance of winning. Then provided that the amount of taxes (plus interest and penalties) in dispute warrant spending additional professional fees, have your tax lawyer file a Notice of Objection with CRA. This appeal should generally be handled by a tax lawyer and not an accountant. If the accountant has handled the audit then it’s time to retain a Canadian tax lawyer.
David J Rotfleisch, CPA, JD is the founding tax lawyer of Rotfleisch & Samulovitch P.C., a Toronto-based boutique tax law firm. With over 30 years of experience as both a lawyer and chartered professional accountant, he has helped start-up businesses, resident and non-resident business owners and corporations with their tax planning, with will and estate planning, voluntary disclosures and tax dispute resolution including tax litigation. Visit their website or contact David directly at david@taxpage.com
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