Audit are conducted by the Canada Revenue Agency (CRA) on an employer’s payroll and employment records as well as other areas like HST. The CRA is responsible for administering tax laws and regulations in Canada, including the collection of payroll taxes.
How does the CRA start the audit? Generally, it starts with a letter telling you why the business is selected and what you need to prepare for the audit. During a payroll audit, the CRA examines an employer’s records and processes related to employee compensation, deductions, and remittances of payroll taxes such as income tax, Canada Pension Plan (CPP) contributions, and Employment Insurance (EI) premiums. The purpose of the audit is to ensure that employers are accurately calculating, withholding, and remitting the required amounts of payroll taxes on behalf of their employees.
The CRA Payroll Audit typically involves a review of various documents, including payroll registers, employee records, pay stubs, T4 slips (which summarize employment income and deductions), and remittance records. The auditors assess whether the employer has correctly classified workers as employees or independent contractors, calculated payroll deductions accurately, and remitted the correct amounts to the CRA on time. So, the first priority for you is to ensure all requested documents are avaialble and all the numbers are reconciled each other before handing in to auditors. One client has mentioned his lawyer’s advice – don’t over do it. What it means, deliver the requested information not beyond. A unrelated document may trigger the auditor’s curosity and lead to further investigation. The requested documents generally includes the balance sheet, income statement and trial balance. Arranging the conversation between dedicated senior staff or your accountant is a good idea.
If any discrepancies or errors are identified during the audit, the CRA may assess penalties and interest on the amounts owed. The severity of penalties depends on the nature and extent of non-compliance. Employers may also be required to make adjustments to their payroll records and remit any outstanding amounts to the CRA. The CRA auditor will conclude the findings in a letter with all the details.
If you are unclear on the findings, be courteous and ask for the reference. Sometimes, the CRA may make a mistake as well. If you still don’t agree with the assessment, you still have a chance to fight back in the tax court.But, it would be very expensive if a tax lawyer was hired.
What are those common adjustmnets from the CRA auditors?Here are a few examples:
not/not properly calculating the vehicle standby charge and operating expense benefit on employer owned vehicles.
the flat rate vehicle allowances paid to employees (not prescribed by the CRA) but not reporting them as a taxable benefit.
mistreating individuals as sub-contractors when they are actually employees
shareholder benefits are not being reported
CPP/EI is not properly calculated
taxable benefits for employees are not included in T4s
It’s important for businesses to maintain accurate payroll and employment records and comply with all relevant tax laws to avoid potential audits and penalties. If you have specific concerns or require further information about a CRA Payroll Audit, it is recommended to consult with a qualified tax professional. And always remember, stay calm as audits conducted may be based on red flags but also you may be selected as one of the ramdom samples of the large population as well.
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