Blachford Tax Law’s Post

These are great questions! Y'all are gonna love Net Worth Audit Awareness Month. Will be digging into several of the issues raised in these comments. 😁

Some years back, CRA started reviewing personal financial accounts when they audited owner-managed businesses. I had a client asked for this data a few years back, and he was shocked to have to provide copies of financial accounts for himself, his wife (also an owner) and their two adult children still living at home. CRA quickly recognized there was nothing inconsistent with their filings. This comes out of "risk-based auditing". The only risks that get a true audit from CRA (as opposed to post-assessment review or similar verifications & enforcements projects) are signs of aggressive tax planning or indicators that not all income is being reported. Our client had a buyout of a former shareholder followed by a reorg (several deemed year-ends in there), and a project-based business with volatile revenues. Those clearly triggered the AI/business intelligence systems as risky. After several months, and a few (pretty relevant) questions, CRA advised that they were closing their files as there was nothing to find, so no NWA resulted.

It's important to distinguish an NWA from other audit methodologies. (See my PITA Notes to 231.1(1) under "Methodology" for a list of eight different methods.) An audit based on bank deposits being presumed to be business income is NOT a Net Worth Audit. An NWA is an audit that looks at total worth before and after, measures what it costs to live for a year, and presumes the taxpayer must have had $X income to survive the year. See also my PITA Notes to 152(7) on NWAs.

Thank you for sharing this and your link is also very helpful. In the practice, we have noticed that the methodology being used for NWA are also being used in GST and other audit. Not sure how they are related but there is always a nudge of finding something 'undisclosed' or 'cash sale' possibly. The most uncomfortable part is always when it extends to other family members credit cards, bank statements and even they are not even closely related to any investment in the business (TOSI, Shares, Trusts; all excluded). I just got one question - the first call/letter that comes in is usually just asking for GL, visiting the client site/home office; when you declare it to be NWA and ask for expert help ?

Thanks for sharing! What is the average cost to defend against a NWA in your experience?

Thanks for getting the word out! Clients always underestimate what CRA can do. How many years does CRA typically ask for this information? I have seen some CRA audit's open the past 10 years.

On a slightly related note, I was helping a client with a response to a CERB review and the CRA asked for all of their bank statements for the entire period (including the months preceding and following the months that CERB was claimed). The client was understandably concerned about this, as they were not thrilled at having CRA see all of their banking activity.

This is a very interesting topic to learn. Thank you for creating the NWA Month! Dean Blachford

Thanks for spreading the word out Dean Blachford