Receiving a reassessment or audit letter from the Canada Revenue Agency (CRA) can be intimidating and stressful. These letters indicate that the CRA is reviewing your tax return more closely to verify its accuracy or investigate specific issues. However, understanding what these letters mean and how to respond can help you navigate the process confidently, minimize potential penalties, and protect your rights. This detailed guide explains what reassessment and audit letters are, why you might receive them, and the steps you should take to respond effectively.
What Is a CRA Reassessment?
A Notice of Reassessment is issued by the CRA when they have reviewed your previously filed tax return and determined that changes are necessary. This may result from:
- Errors or omissions on your original return
- Discrepancies between your return and third-party information slips
- Additional information submitted to the CRA after filing
- Audit findings or reviews
The reassessment adjusts your income, deductions, credits, or tax payable and includes an explanation of changes.
What Is a CRA Audit Letter?
An audit letter is a formal notice that the CRA intends to conduct an audit of your tax return. This audit can be:
- Correspondence Audit: A review conducted by mail requesting additional documents or explanations.
- Field Audit: A more detailed in-person examination of your records, often conducted at your home or place of business.
Audits assess the accuracy of your reported income, expenses, and credits to ensure compliance with tax laws.
Why You Might Receive These Letters
Common triggers include:
- Inconsistencies between your reported income and third-party slips (T4, T5, etc.)
- Large or unusual deductions or credits
- Random selection for quality assurance
- Tips from informants or other CRA sources
- Prior history of errors or audits
How to Respond to a CRA Reassessment
- Carefully Review the Notice: Understand what changes the CRA has made and why.
- Compare With Your Original Return: Identify the differences and verify if the reassessment is correct.
- Pay Any Balance Owing: To avoid interest and penalties, pay any taxes owed by the deadline.
- Contact the CRA: If you disagree or need clarification, call the CRA to discuss.
- File a Notice of Objection: If you still disagree, submit a formal objection within 90 days using Form T400A.
- Keep Documentation: Retain all relevant documents supporting your position.
How to Handle a CRA Audit Letter
- Read the Letter Thoroughly: Note the audit type, requested documents, deadlines, and contact information.
- Gather Your Records: Collect all receipts, invoices, contracts, bank statements, and tax documents related to the audit period.
- Seek Professional Advice: Consider consulting a tax professional or accountant experienced in audits.
- Respond Promptly and Fully: Provide the requested information by the deadline, whether by mail or in person.
- Be Honest and Cooperative: Transparency helps build credibility with the auditor.
- Prepare for Possible Outcomes: The audit may result in no change, adjustments, or further investigation.
Tips to Prepare for a CRA Audit
- Maintain organized and complete records throughout the year
- Keep digital or physical copies of all tax-related documents
- Ensure your tax returns are accurate and supported by documentation
- Respond to CRA communications quickly and professionally
- Understand your rights as a taxpayer during audits
Understanding Your Rights During Reassessments and Audits
You have the right to:
- Be informed clearly about the audit or reassessment process
- Request reasonable time to gather documents
- Seek representation by a tax professional or lawyer
- Appeal decisions through formal objection and tax court processes
- Privacy and confidentiality of your personal information
What Happens After an Audit or Reassessment?
Following an audit or reassessment, the CRA will issue a Notice of Reassessment if changes are made. You may need to pay additional taxes, or you could receive a refund. It is important to:
- Review the outcome carefully
- Discuss with your tax advisor if you disagree
- Take appropriate action within appeal deadlines
Conclusion
Receiving a reassessment or audit letter from the CRA does not necessarily mean wrongdoing; it is part of the tax system’s checks and balances. By understanding the process, responding promptly and accurately, and seeking professional help when needed, you can navigate reassessments and audits confidently and protect your interests. Good record-keeping and proactive communication with the CRA are your best tools for a smooth resolution.
