The Lifestyle Audit

Canada Revenue is in an endless chase to tax the underground economy. One of its newest methods is the lifestyle audit. This type of audit was first used to audit people in the drug trade. Now it is being used to go after the underground economy that exists in our construction and trades industry.

How does it work?

The actual audit is triggered by either an unreasonably low reporting of taxable income by a tradesman or possibly somebody being reported directly to CRA. The taxpayer will get a notification and be required to surrender to an auditor all personal information relating to finances. This includes bank statements on all accounts, mortgage and loan documents, and a list of all assets. The auditor calculates the cost of maintaining the residence. The cost of paying down mortgages, loans, and other debts. The auditor will also look at the overall costs of food, clothing, children, education, and healthcare.

With all of the information, the auditor will determine the total monthly cost of the lifestyle as presented by the taxpayer. This information is fed into the CRA data processing system. This system calculates the income required to support the lifestyle presented by the taxpayer. On this, information a total tax owing is calculated and the taxpayer has assessed the tax.

The bill is presented to the taxpayer and the burden of proof falls on the taxpayer to prove the calculations incorrect there seems to be little or no defense to this audit approach.

What we learn from this is, if you cheat you will get caught.