Canadian Tax Adviser
February 7, 2012

CRA's T1 Compliance Letter Campaign for Business Expenses

Dave Regan
Toronto, Scientific Research and Experimental Development

Some self-employed individuals may receive a compliance letter from the CRA that describes the eligibility criteria of certain expenses that apply to that taxpayer's business activities. These letters note that the CRA may audit these expenses and asks taxpayers to voluntarily disclose any expenses that shouldn't have been claimed.

The letter details the eligibility criteria for the following expenses:

  • Capital, current and personal expenses
  • Meals and entertainment
  • Offices expenses
  • Salary and wages
  • Motor vehicle expenses
  • Simplified logbook for motor vehicle expense provisions
  • Business-use-of-home expenses.

This audit initiative is part of the CRA's "educational" outreach letter campaign targeting expenses claimed by individuals on their T1 personal tax returns. For example, in 2010, the CRA announced that certain Canadian taxpayers that claimed a business or rental loss in their recent income tax and benefit returns would receive a letter from the CRA that provides information about eligibility criteria for these losses. Other taxpayers would receive a similar letter, but would also be advised of CRA's intention to conduct audits of motor vehicles expenses and business-use-of-home losses.

Compliance letter
At a recent CICA Tax Conference in October 2011, the CRA responded to a question on whether taxpayers should be concerned if they receive a compliance letter. The CRA explained that it has undertaken the compliance letter initiative as part of a "best practices" approach used by tax administrations in other countries (especially in the United Kingdom). The CRA currently uses two types of letters — education letters and intent to audit letters. The CRA's strategy is to send letters to a large number of taxpayers to bring tax audit risks to their attention and encourage them to come forward and "auto-correct" if they have not been fully compliant in a particular targeted area.

The CRA indicated that while taxpayers should not necessarily be concerned if they receive a compliance letter, they should take the opportunity to correct their situation if appropriate. The CRA emphasized that this project is being run in a statistically valid way and taxpayers can expect to see a lot more of these letters coming from the CRA.

For more information, contact your KPMG adviser.


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