Letter from CRA? Don't panic!

Getting a letter or call from the tax authorities can be unsettling to say the least. However, in the vast majority of cases, the contact is just a routine part of the CRA’s processing review mandate.

The Canadian tax system is termed a “self-assessing” system, in which taxpayers report income earned and claim deductions and credits. Prior to the advent of e-filing the CRA could easily verify claims made by taxpayers as they were usually required to include receipts or documentation to prove their claims.

For the over 90% of roughly 29 million returns e-filed this year, there is no paper trail. Consequently, the potential exists for misrepresentation or reporting errors on a large scale.

The CRA’s response to that risk is to conduct a variety of review programs, some of them before a Notice of Assessment is issued for the taxpayer’s return, and others after. In all cases, the purpose of the review is to obtain the information or documentation needed to support claims for deductions or credits. The CRA also administers a Matching Program, in which information reported on the taxpayer’s return (both income and deductions) is compared to that provided to the CRA by third-party sources (like T4s filed by employers or T5s filed by financial institutions).

A selected taxpayer will be asked to provide verification or proof of deductions or credits claimed on the return -usually by way of receipts or documentation. The Matching Program involves comparison by the CRA of information received from different sources (i.e., matching up the amount of employment income reported by a taxpayer with the amount showing on the T4 slip issued by the employer). Where the figures match up, there is no need for the further action by the CRA. Where they don’t, the taxpayer will likely be contacted with a request for an explanation of the discrepancy.

Many taxpayers assume they are selected because there is something wrong on their return, or that the letter is the start of an audit, but that’s not necessarily the case. Canada’s tax laws are complex and, over the years, there are areas the CRA has determined taxpayers are more likely to make errors on their return and therefore have an increased chance of being reviewed:

• dependant tax credit claims, or claims for medical expenses, moving expenses or tuition tax credits
• deductions or credits claimed that are significantly different than those claimed in previous returns
• the taxpayer’s return has been reviewed in previous years (especially if an adjustment was made)
• many returns are picked simply on random selection

Taxpayers whose returns are selected for review will be contacted by the CRA, usually by letter, identifying the deduction or credit for which the CRA wants documentation, or the income or deduction amount about which a discrepancy seems to exist. The taxpayer will usually have a few weeks to respond in writing, attaching receipts or other documentation requested. Be sure to include the reference number from the CRA letter (usually found on the top right-hand corner).

It’s the taxpayer’s responsibility to provide proof of any claims made on a return. Where a taxpayer does not respond to a CRA request or does not provide proof, the Agency will proceed on the basis that the requested verification or proof does not exist and will assess or reassess accordingly.

Taxpayers who have registered for the CRA’s online tax program My Account (or whose representative is registered for the Agency’s Represent a Client online service) can usually submit required documentation electronically.

The CRA website includes more detailed information on the return review process, available at https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/review-your-tax-return-cra.html.

The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact our office for more information on this subject and how it pertains to your specific tax or financial situation.