For many small business owners, mentioning a Canada Revenue Agency (CRA) audit can send shivers down their spine. If we put it in the legal context, nobody would want to be investigated or prosecuted. The entire process is stressful as every document and every transaction is analyzed in detail, and intent is questioned. And if the CRA finds any discrepancies, mistakes, or omissions, it could have financial, operational, legal and other intangible implications. No wonder business owners fear a CRA audit.

Understanding the best and worst consequences of a CRA audit can prepare you for what is coming and encourage you to follow best practices to steer clear of an audit. In this article, we will understand the consequences of a CRA audit to prepare you for what is coming.

Financial Implications of a CRA Audit 

Immediate: The immediate impact of a CRA audit is on business finances. The CRA will assess your corporate tax returns, tax credits, and income sources, asking you for supporting documents. You will face penalties if they find any minor discrepancies of late filing or outstanding taxes. You will be charged interest from the day the taxes are due, along with exceptional tax. Since the tax audit is for several years, the charges will be hefty and could exceed your annual earnings. If you do not pay them, the CRA could also seize your property or assets to recover the tax dues and fines.

The penalties will be levied depending on the severity of the mistakes.

• A simple mistake like failure to file a return by the deadline could attract a 5% penalty and a 1% interest for every month of delay for up to 12 months. It is when you find mistakes and make a voluntary disclosure. If the CRA finds this mistake and sends you a formal demand for tax returns, the penalty and interest will double and could go up to $2,500.
• Repeated mistakes and failure to report income could attract a 20% penalty.
• In the worst case, the CRA identifies gross negligence, such as false information, understating tax, or overstating tax credits. In such a scenario, the penalty could be up to 50% of the tax payable.

And this is still not the worst implication.

Long Term: The CRA reports the hefty fines for gross negligence or failure to comply with tax laws to credit bureaus. This will affect the credit ratings of individuals or businesses, thereby impacting their ability to take loans.

Moreover, you might have to change your tax planning strategies and spend more on compliance and accounting, as the CRA will monitor you closely for several years.

Operational Implications of a CRA Audit 

The CRA audit will affect not only your business finances but also your operations. The auditor might ask you to change internal controls and accounting procedures depending on the audit findings. You may also have to deploy new software that complies with the requirements. Moreover, you might have to fill the knowledge gaps by training your staff on the tax laws and updates.

Potential Legal Implications of a CRA Tax Audit

Matters could escalate if the audit findings identify severe issues like tax evasion. Remember, the CRA is a government agency and will share its findings with other relevant agencies. Any critical issues with your books of accounts, business practices, or tax filings could be revealed in an audit. Some issues could even trigger criminal, civil, or regulatory proceedings.

At this point, tax penalties will be the least of your worries. 

Intangible Implications

All the financial, legal, and operational implications of a CRA audit could tarnish your business reputation and deter customers and vendors from working with you because any audit findings from your business could lead the CRA to check the details of the associated parties.

Even if the matters don’t escalate to the worst level, the audit process is stressful and consumes the business owner’s time. It builds a lot of stress and anxiety, affecting the business owners’ ability to make sound business decisions. Such events also diminish workplace morale. These implications, though indirect, can significantly hamper a business.

Knowing the consequences of a CRA audit can make many business owners make an effort and spend time to stay tax compliant. If you receive a notice from the CRA asking for supporting documents, it is best to have tax professionals well-versed in tax laws and CRA audits by your side.

Contact Glenn Graydon Wright LLP in Oakville to Help You with CRA Audits

A skilled tax consultant will assess your situation and tell you where you stand and the likely audit outcome. Once you know your situation, you can devise strategies with the tax consultant to reduce the implications and prevent matters from escalating. At Glenn Graydon Wright LLP, tax consultants are updated with the tax laws, can help you with the CRA audits, and even help your business stay tax compliant to avoid audits. To learn more about how Glenn Graydon Wright LLP can provide you with the best tax consulting expertise, call today at 905-845-6633 or connect with us online to schedule an initial consultation.