Canada Revenue Agency turns up the heat on cash businesses
The Canadian tax system relies upon self-assessment, which means, essentially, that you’re trusted to be honest in your reporting, maintain good books, and hang on to the records needed to support your claim. And most people do just that.
Every year though, the CRA highlights certain areas in search of unreported income like cash-intensive businesses, such as restaurants, for instance.
Recently, CRA has taken to double-checking reported company revenues by indirect means, such as extrapolating total sales based on tip income declared by wait staff.
Auditors will also try to determine if your lifestyle is roughly equivalent to your income and net worth.
The net worth method relies on the concept that when someone accumulates wealth during a tax year, they either invest it or spends it. As a result, an auditor conducting a net worth audit will consider an increase in the taxpayer’s net worth throughout the year as taxable income, explains Ottawa laywer Sebastien Desmarais.
From there, the auditor will add all non-deductible expenditures to the taxpayer’s net worth and then compare that number to the taxpayer’s net worth at the end of the taxation year. Any increase over the year will be considered income for tax purposes.
The onus is on you to rebut all of the CRA’s assumptions and findings. And that can be tough to do.
"When you have a net-worth audit," says Toronto tax lawyer David Piccolo, “you almost have to go through it with a fine-tooth comb” to see if the CRA's assumptions are accurate.
Have you ever been the subject of a net worth audit? How did things work out?
By Gordon Powers, MSN Money