CRA Audits - Net Worth Approach

For those of you who have not heard of this prepare to be amazed, awed, and shocked.  The CRA has the ability to do an audit even if you do not have documents, or if you refuse to provide documents to them.  They will also use this method of audit if they think that you are not reporting all your income.

In a normal audit they look at your records (invoices, receipts, etc.) and look for items that are not allowed, or which may have been omitted.  A net worth audit is like working backwards.  The CRA look at living expenses, what you buy, where you live, etc., and basically establish how much income you would have needed to support your lifestyle. 

How can they do this if I don’t give them any records?  Glad you asked.  The CRA has the power to go directly to the bank and MAKE them give over copies of your bank statements.   “Wait, sorry, someone is yelling out there”.  Question?  “How do the CRA know where I bank?”  That is a really good question.  The CRA can run a credit report with companies like Equifax.  Every time you apply for a loan, open a bank account, or get a credit card, that information goes into a central database.  This means that the CRA can find your bank account(s) in a heartbeat.  They can also find all your credit cards, and who you have your mortgage with.  In short the CRA can find out a lot of information about you, and get copies of statements, payment histories, and other information by going directly.

Now that you know you cannot hide from the CRA here is what you need to know about a net worth audit.  1) Net Worth is not an exact science, and is usually done by the most inexperienced auditors the CRA has.  Further, the team leaders reviewing the work have either never done them, or have not done them in a very long time.  This means the likelihood of mistakes and double counting are very high.  2) Net worth assessments are very hard to fight without documentation to prove that the CRA’s conclusions are wrong or at least flawed.  Net Worth audits have also been upheld in Tax Court, so if you want to fight you better have documents and proof that the CRA is wrong.

I provide this information so that you are warned.  It is a good idea to track loans you make and receive so that you have a paper trail.  Most people don’t do this as it is personal and they don’t really think twice because under normal circumstances these transactions have no tax consequences.  The CRA can cause tax consequences if they choose to do a net worth audit.  Therefore pay attention and document all your financial transactions that involve giving or receiving sizeable sums of money.

Having worked for the CRA I have done net worth audits and understand how they are supposed to work.  If you find yourself in this situation, don’t delay.  Get in touch with us so that we can help you before the problem becomes insurmountable.