The Tax Audit Part 6 - The Proposal

The proposal letter is exactly what the name indicates, a proposal.  You can either agree or disagree.  You can agree with part of it, all of it, or none of it.  The proposal once it has been discussed will form the basis for any potential re-assessment.
It is very important that when you get a proposal letter you review it right away and determine if you agree with the position the CRA has taken.  If you don’t understand what the letter is saying call the auditor and request a meeting so the auditor can explain the proposed adjustments to you in plain language.
At this point it is usually a very very good idea to get professional help if you haven’t done so already.  That said, I have met accountants that could not figure out what the auditor was trying to say in the proposal letter.  If you still can’t understand the nature of the proposal I would encourage you to ask for a meeting with the auditor’s Team Leader.  While this may feel like a bad idea, how can you determine if what the auditor did was right if you can’t understand it.
Read the proposal letter with a healthy amount of scepticism.  The information is based on the auditors interpretation of what was in your records, and their further interpretation of what the tax law says about a particular expense.  Just because the auditor says it is so does not mean it is true.  Let me be clear.  AUDITORS ARE NOT ALWAYS RIGHT, IN FACT THEY ARE QUITE OFTEN WRONG.  The problem is that you can’t determine if they are right or not if you can’t figure out what they are saying.
Let me give you an example.  If you buy a house and sell it for more than it cost in most instances you will have a capital gain.  If you sell it for less than it cost, you will in most instances have a capital loss.  However, if you are a realtor you will have the gains and losses treated as income. CRA can also consider intent.  If your intent was to “flip” the property quickly, they may determine that it was an “adventure in the nature of trade”, and try to tax it as income instead of a capital gain.  Funny thing is they will only do this if it is a gain.  If you claim it as a loss on account of income (non-capital loss) because you intended to “flip” it quickly, I can pretty much guarantee you they will try to say it is on account of capital (and you can only use it against capital gains).  If your head hurts after reading this last paragraph, then you understand that tax law is all about interpretation.  That is why I get the big buck.  It takes years to learn this stuff and a lifetime to master it.
At this point you can respond to the auditor in writing or in a meeting.  I suggest in writing, because it gives you time to compose your arguments as to why you disagree with the auditor’s position.  Writing also allows you to keep your emotions in check because you are not confronted by the person who is causing you all the grief you have just been through.  Make sure you explain why the auditor is “in your opinion” wrong and what you think the proper outcome should be.  Being fluent in tax legislation really helps, because they won’t change their mind just because you say they are wrong.  You may be able to convince them that an assumption was erroneous or invalid, if you can present a more logical approach or some valid reasons for why you did what you did.
In any event, understand that this is only your first of many opportunities to try and change the outcome of the audit.  As I stated above, AUDITORS ARE NOT ALWAYS RIGHT, IN FACT THEY ARE QUITE OFTEN WRONG.  Repeat this mantra over and over until you start to believe it, because it is true.

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