In early May 2014 I received a call from a long-time client of mine. They just received a call from Canada Revenue Agency (CRA) saying they were being audited for the year 2011. My client is sharp. He didn’t panic or get angry, but simply asked “how do I know who you really are based on a telephone call?” And, “I want your request in a letter before I do anything further”. My client also contacted their CA as they weren’t sure who was to do what, and what was to happen next. Little did we know this would become the Audit from Hell for both my clients and me.
Between the CA, my clients and me, it was determined that I would handle the audit to keep costs to a minimum. When the client received the CRA letter our first approach was to contact the auditor to let him know that I would be representing the client during the audit. I reviewed with him, his FIRST list of required documentation and established a meeting day and time. I then let the client know what they had to provide; i.e., Corporate Minute Book, mileage logs, insurance policy documents, copies of all capital assets purchased and disposed of during the year, loan agreements to and from the Shareholder, PLUS the Shareholder and Spouse Personal and Joint Accounts for the year. The Montana Group could supply the balance of the information since it was all recorded in QuickBooks; detailed general ledger, bank reconciliations, schedules of asset purchases and disposal, GST/HST returns, and the list goes on.
The first meeting went fairly smoothly, taking just over 4 hours. We reviewed everything that was requested and supplied, plus what was still outstanding, based on delays with the bank and lawyer. As the information was received from the client, I forwarded the documentation to the auditor. It seems the more we supplied the more additional information was required. The SECOND request was based on the detailed general ledger report in which the auditor highlighted various expenses he wanted to see the paid receipts for. The time required by my client to pull this information together took numerous hours, and to say the least was very stressful.
By early October the auditor was finally satisfied that we had answered all the questions, supplied him with all the required documentation and was ready to provide his supervisor with his report regarding the corporation. This was no quick and easy audit.
The THIRD report which needed to be completed was a Personal Expenditures Worksheet. The client had to think back 3 years and estimate what it cost to live weekly, monthly and annually. Some of the headings in which numbers had to be supplied were; food, shelter, healthcare, transportation, household operations, personal care, gifts and contributions, and that list goes on. As I said, those were only the headings. The details of each were numerous in each category.
Even though this was a corporate audit for 2011, it does not exempt the shareholder from having to supply all personal information as requested. And those are the details I will give you in my next blog. They are ugly.
Remember, there is a compelling reason why your bookkeeper or accountant tells you to save all your paperwork. We’ve been exposed to audits before and can anticipate what is required, but I and a number of accountants I’ve spoken to regarding this experience, have not seen an audit delved into this deeply – especially with a client that has never been late with filing and paying payroll liabilities, HST or corporate taxes. And we understand, this is just the beginning of the “new” audit procedures. Some individuals incorporate because they want to protect their personal assets and reduce their liability, but having a corporation will not protect your personal financial transactions from the eyes of a CRA audit.
Stay tuned for PART 2. I welcome your feedback. You can connect with me via email or telephone, leave a comment here on the site or click the contact tab at the bottom of the screen if you are reading this post on the website.
Until next time,