WHAT IS AN AUDIT?
During a business audit, the Canada Revenue Agency will examine the books and records of businesses or self-employed persons to make sure the business has fulfilled its tax obligations including income tax, employee benefits, payroll remittances, and GST/HST.
A trust examination is a type of business audit that seeks to audit only the GST/HST or payroll deductions and remittances of your corporation.
Personal audits can include the audit of your previously claimed principal residence exemption for a property that you recently sold.
An audit can also include a determination of whether the income you earned from the sale of your properties should be taxed as business income or capital gains.
More often these days, the CRA is conducting pre-assessment reviews of the deductions claimed on individual’s personal tax returns. A Pre-Assessment Review is akin to a mini audit, where the CRA requests receipts and submissions to substantiate that which the individual has claimed.
WHAT HAPPENS WHEN YOU ARE AUDITED?
You will first receive a notice from the CRA of their intention to audit. The notice will usually outline the preliminary information that they require from you. The start of an audit is the best time to obtain legal representation as you want strong legal counsel to prepare explanations to support the manner in which you have filed your taxes.
M7 Taxes Inc. will communicate with the auditors or trust examiners on your behalf and will prepare the necessary legal submissions required to resolve the issues relating to your audit. We will prepare comprehensive submissions setting out extensive legal arguments in support of our position.
WHY YOU NEED A REPRESENTATIVE?
The CRA’s methods and tactics can be tricky. They may ask you to sign documents waiving your rights or may tell you the law requires certain conditions, where in fact it does not. An audit will result in a Notice of Reassessment which outlines how much you owe in taxes. Don’t go through an audit unrepresented. You will likely pay more than you have to.
With years of experience in corporate and tax law, M7 Taxes Inc. is your premier partner for all your tax needs when facing an audit or trust examination.
WHAT SHOULD I KNOW ABOUT EMPLOYERS AUDITS?
Many employer disputes with the Workplace Safety and Insurance Board (WSIB) stem from an employer audit. The WSIB has the right to conduct a routine payroll and classification audit by going into an employer’s workplace to look at its books and accounts to determine if an employer is remitting the correct amount of premiums.
The WSIB field auditor (auditor) can investigate and ask any questions he/she considers necessary to determine the accuracy of the financial statement’s employers must provide to the WSIB and the amount of the employer’s payroll.
WHAT KIND OF INFORMATION DO I NEED TO GIVE THE WSIB?
The WSIB requires employers to provide it with a significant amount of business information upon registration, and all of this information and more will be verified during the employer audit, including:
The account number of any accounts previously registered with the WSIB;
The Revenue Canada Number and/or Goods and Services Tax (GST) number;
The Employer Health Tax number;
The bank name and branch information;
The estimated insurable earnings for the current year (the amounts typically reported on your workers’ pay stubs and T4 slips as gross earnings, including deductions for income tax, Canada Pension Plan (CPP) and employment insurance, and possibly other earnings that are not reported on the T4 slip, i.e., room and board, bonuses and commissions) up to the maximum insurable earnings ceiling for that year;
Identification of the predominant payroll, if the employer engages in more than one business activity, and whether separate payroll records are maintained for each business activity, where applicable;
While the employer audit does not include a review of the employer’s accident reporting practices to ensure all injuries are being reported according to WSIB policy — that is done through a separate WSIB auditing program called “Workwell” — the auditor can review first aid-related or healthcare-related records at any time during the audit process.
HOW DOES THE WSIB CHOOSE WHICH EMPLOYERS TO AUDIT?
The WSIB identifies employers for an audit using a variety of methods including random selection, requests from other WSIB branches, special reviews of particular industries, and risk analysis to identify activities of an individual employer that fall outside the norm of other employers in the same industry. The WSIB does not generally conduct surprise audits. The auditor will usually send a Notice of Audit visit letter to the employer indicating that an audit of the employer’s operations is planned for a specified date. The letter will usually let the employer know that the purpose of the audit is to review the payroll records and business activities of the employer’s business as it relates to the employer’s assessment rate group(s), or the allocation of accident claims to specific rate groups. The letter will also ask the employer to have several types of documentation available, covering the current year and the two previous years included in the review.
WHAT INFORMATION DO I NEED TO GATHER FOR THE AUDIT TO REVIEW?
The information typically required to complete an audit includes:
Records of subcontractors and independent operators;
Canada Revenue Agency (CRA) contractors’ reports;
Clearance certificates for any subcontractors that are not reported as workers;
The general ledger or cancelled cheques;
WSIB file and working papers that were used to calculate payroll returns;
First aid and healthcare records;
If the employer has business activities that the WSIB’s classification scheme has separated into more than one classification unit, the employer is required to maintain segregated payrolls and must be able to produce documents to support the segregation of wage records and payroll for each classification unit. In addition to keeping accurate wage records, employers with multiple classification units must be able to provide the auditor with additional documentation such as:
Time sheets and cards or time logs;
Job descriptions and duties;
Invoices and contracts for contractors;
Mileage records / logs for trucking companies;
HOW LONG WILL IT TAKE THE WSIB TO COMPLETE THE AUDIT?
Other records including employer management reports that break down earnings according to business activity, department, product line, cost centres and occupation, and/or contract costing documents or budget reports may also be reviewed.
The amount of time it takes to complete an audit will be different for each employer as it depends on the size of the employer’s operation and the number of issues identified during the audit. An employer is required by law to comply with an audit. If an employer is not cooperating, the WSIB can request an order from a judge of the Superior Court of Justice authorizing one or more WSIB employees to enter and search any premises to locate books and accounts of an employer and can do so by force if necessary. The WSIB is also allowed to remove the books and accounts so they can be examined and can keep them for as long as it takes to complete the audit.
WHAT KINDS OF REPORTING PROBLEMS DO AUDITORS TEND TO FIND?
WSIB auditors have compiled a summary of common reporting errors identified during employer payroll/classification audits, primarily related to:
The classification of business activities for the purposes of assigning employers to the appropriate rate group for base premium rates;
Errors in the calculation of insurable earnings, either by omitting some benefits that should be included or paying premiums on amounts that exceed the maximum insurable earnings ceiling;
Failing to report payments to contractors considered by the WSIB to be workers;
Identifying the individuals considered by the WSIB to be executive officers for the purposes of deducting earnings;
Maintaining segregated payrolls for more than one business activity, and the calculation of common earnings from ancillary operations supporting more than one business activity;
WHAT HAPPENS IF THE WSIB FINDS SOMETHING WRONG?
An auditor will usually review the employer’s payroll records and other documents for the two years prior to the current year. However, if the auditor finds discrepancies in any of the employer’s records, the WSIB may choose to expand the scope of the audit and make premium debit adjustments for up to five prior calendar years in addition to the current year. This could happen if the employer fails to provide complete or accurate information to the WSIB, if the employer delays, withholds or fails to fully disclose relevant information, or if the employer fails to act on information provided by the WSIB that directly affects the employer’s premium. The WSIB can make premium debit adjustments to an employer’s account beyond five years, or in any year, if it determines that the employer has committed either a fraudulent act or an offence under the Workplace Safety and Insurance Act (WSIA).
WHAT HAPPENS IF I DO NOT FULLY COOPERATE?
A person who obstructs or hinders an audit could also face a fine of up to $25,000, or up to six months imprisonment, or both, and a company found in breach could be fined up to $100,000.
HOW CAN I PREPARE FOR THE AUDITOR'S ARRIVAL?
Although a “desk audit” can take place in which the WSIB asks the employer to send its financial records to the WSIB, an on-site field auditor will conduct the work on the employer’s premises in most cases. In either case, it is extremely important to properly prepare for this assessment. The employer should make it as easy as possible for the auditor to conduct the review. All of the information should be ready when the auditor arrives, ideally organized chronologically and in subject folders to make it easier to process the volume and complicated nature of information that is typically involved. If possible, it is helpful to provide the auditor with a workspace where he/she can work without interruption. It is advisable not to argue with an auditor. Try to keep in mind that the auditor is just doing his/her job.
WHAT HAPPENS AFTER THE AUDIT HAS BEEN COMPLETED?
Once the audit has been completed, the employer can ask for a copy of the auditor’s preliminary findings and the auditor should review that information with you. The auditor will send the employer a decision letter after the audit has been processed to identify his/her findings, and to explain the results of the audit and any action(s) to be taken. This may include a debit or credit adjustment to the employer’s account if a correction is made to
The employer’s classification
the amount of insurable earnings calculated and reported (including the worker status for executive officers, independent operators or subcontractors, as well as optional insurance and the earnings of non-registered employers)
reported or paid premiums
This letter should also inform the employer that a Statement of Account will be issued, showing the results of the audited recalculation of the employer’s premiums. Interest would be calculated and then added to the employer’s account on any difference in premiums for each year the annual payroll was adjusted. The date of notification for any premium adjustment as a result of an employer audit is the date of the audit visit that is indicated on the Notice of Audit visit.
WHAT SHOULD I DO IF I DISAGREE WITH THE AUDITOR'S DECISION?
As with most other WSIB issues, an employer has the right to object to an auditor’s decision. This must be done formally, in writing, within six months of the date of the auditor’s decision letter.
CAN SOMEONE HELP ME WITH THIS?
Absolutely. If you have any questions about how to prepare for an employer audit, or if you have received an audit decision that you do not agree with and have questions, please call the Office of M7 Taxes Inc.
YOU CAN COUNT ON US!