Are you prepared for a GST/HST audit?

Filing and Paying your GST/HST late can draw the attention of CRA like the Eye of Sauron!

Last Blog Post we discussed how to claim HST credits on mixed use expenses. This post we'll discuss GST/HST audits and how to avoid them!

1. HST is Serious Business to the CRA: CRA conducts reviews and audits on income tax returns and also on GST/HST returns. If an entrepreneur owes income taxes, that's their own money that the law dictates needs to be contributed to society. But if an entrepreneur owes GST/HST, that's CRA's money, and CRA is more aggressive in their collections procedures, even mandating that the bank takes the money directly from the business bank account and freezing the bank if necessary. Because when an entrepreneur doesn't remit to the government the GST/HST they collect on CRA's behalf, that's akin to stealing funds from CRA. So if you receive a collections call from CRA regarding GST/HST, don't ignore that call... talk and figure out a payment plan with them so that they do not need to resort to the extreme measures of contacting your bank. Also, if an expense is disallowed in an income tax audit, it's only about 25% important. That is, if a $100 expense is disallowed, it may effect how much income tax you owe on the revised profit, so, only about 25% of the change; $25. But GST/HST is dollar for dollar important! If you are disallowed a $100 dollar GST/HST credit, you will owe all $100 back of the disallowed credit; that's what I mean when I write GST/HST is "dollar for dollar" important, and CRA takes GST/HST very seriously. If a business owes both GST/HST and Income Taxes, CRA demands that the GST/HST is paid down first. (Payroll taxes are even more serious... that's the Employee's money, so that's at the top of CRA's list! Same deal, ignore collections, and they move on to your bank and freeze your funds. So not something you can put off!)
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2. You Gotta See it to Believe it!: Many people assume that everything has GST/HST on it, but this is far from the truth. I always say, "You gotta see it to believe it". There is no GST/HST on loan payments, insurance, bank charges, interest charges, and zero rated supplies such as unprepared food. Oh, you see tax on your insurance policy? Take a closer look... that's RST (Retail Sales Tax) or PST (Provincial Sales Tax), the provincial portion of sales tax, not GST/HST, so it is not a GST/HST Credit. Which leads me to my next point, it's gotta either say GST or HST, or it's not going to Feds (CRA). PST, QST, RST are all provincial sales taxes that CRA doesn't get passed up to them. So if they aren't expecting to get it, you don't get it back. Which again, leads me to my next point, you have to be able to support that CRA will be receiving the funds from the business billing you. And to do that, the bill or receipt has to show the GST/HST number of the collecting business, and also specify how much GST/HST is being collected. A business MUST be registered to collect GST/HST to add it to their bill, and the only way you know that for sure is if they have the GST/HST number right on the bill itself. Just because an entrepreneur is a business, it does not automatically mean they are registered for GST/HST (as we discussed in November's newsletter). If CRA can't see and confirm that CRA is to receive those funds from the business issuing the bill on the paperwork, your GST/HST credit will be denied in an audit. That also means that just a vendor statement is NOT enough support. It doesn't show what was purchased (could be zero rated goods!) and if it was subject to GST/HST and if so, how much. Similarly, a line on a bank or credit card statement just won't cut it in an audit, (it is not accepted in an income tax audit or a GST/HST audit. There's no way around it.. ya need that paperwork!) It's also the wild west of sales tax out there in internet land. Just because a fee is charged to you from an online subscription, you cannot assume that it does or does not have GST/HST. I've even seen GST/HST charged on transactions in USD (like Shopify fees), so look at the bill to confirm... you gotta see it to believe it.
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3. Avoid a GST/HST Audit: Even if you feel confident that your business is claiming GST/HST credits correctly, GST/HST audits take a lot of time, work, and energy that you would rather put somewhere else. There is one simple and best way to reduce your chances of a GST/HST Audit; file and pay your GST/HST on time. Consider that CRA has limited resources. They cannot audit and review every single business. So, they focus their attention on businesses where they are most likely to find incorrectly claimed credits. And those businesses where they are most likely to find incorrectly claimed credits are disorganized businesses. It's that simple. Filing and paying late is like attracting the Eye of Sauron. Though filing and paying on time is no guarantee against an audit. CRA does do random audits also, as well as focusing in on sectors that often are susceptible to cash transactions such as restaurants and construction. Just being part of these industries increases your chances of an audit, so it's always good to be confident in your bookkeeping and tax filing, and keeping good records. There are two different ways CRA can take a closer look at your GST/HST; they can conduct either an Audit or a Review. Audits are more intense, CRA often wants to see every single document. But these are quite costly for CRA to perform, so they sometimes instead just do a Review, which is more like a "spot check". In a Review situation, they'll ask to see a listing of all the transactions for the period, and the top 10 largest invoices, and the top ten largest bills. Then they'll ask for a few random others from the list, and ask a few additional questions, and that's it. So, Reviews are much less work for both CRA and the Business. Reviews can be triggered simply because a business that usually files a payable return suddenly files a large refundable return. And CRA just wants to check that the reason for the refund is legit before they release the funds!

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