Webinar: CARP - Reviewing your corporate tax Return and Common Mistakes
Corporation Assessing Review – Limited Review and Common Mistakes
Hello and welcome to our webinar on the Corporate Assessing Review Program, which is also known as CARP. My name is Jason and I am your presenter today.
This webinar will be of interest to you if you own a business and submit T2 corporate tax returns. We will be discussing what to do if your Corporate Tax return is selected for a review by CARP. We will talk about how it works and also look at common mistakes made in completing corporate tax returns.
Being prepared for such a review can go a long way toward easing your concerns. It can also help the examination go smoothly and quickly. That way you can get your focus back on running your business as soon as possible.
Today’s webinar will be recorded and posted on Canada.ca/cra-videos so you can refer to it in the future.
Today we will discuss the following subjects:
- What is Corporation Assessing Review Program (CARP)?
- Reviewing your Corporate Tax Return
- How will you know if you’ve been selected for a limited review?
- Responding to CARP
- Common mistakes
- How My Business Account (or MyBA) can help
What is Corporation Assessing Review Program (CARP)?
Canada's tax system is based on self-assessment and voluntary compliance. In other words, the CRA relies upon you to complete your own tax returns and comply with tax law to the best of your knowledge. You are responsible for reporting income earned and claiming your own deductions and credits.
The Corporation Assessing Review Program…or as we’ve nicknamed it, CARP, is a way for the CRA to help ensure small and medium-sized businesses are completing their T2 corporate tax returns properly. CARP reviews around 150,000 T2 returns every year. These can be reviews of your returns filed in the previous years.
The CARP review has four main objectives:
One, to review parts of your T2 corporation tax returns to make sure that your business is filing properly.
Two, we also identify potential inconsistencies in returns and adjust them accordingly.
Three, to educate business owners and their representatives about their filing obligations.
And lastly, to address non-compliance.
It is important to note that a CARP review does not look at your entire T2 corporate income tax return. CARP conducts limited reviews of single line items on the T2 Tax Return. A limited review means that only part of your T2 is reviewed at a time however, during the audit selection process, CRA may give your corporation income tax return a general audit. The lines CARP might review are income, expenses, deductions or credits claimed or reported.
So, how does a review work?
Limited review of your Corporate Tax Return
A limited review consists of selecting accounts for the verification of specific lines of the T2 return, and then requesting documentation from you to confirm these claims. We will contact you through letters, phone calls, and/or through My Business Account online and may ask for supporting documentation to verify the information in your corporate return.
Here is an example of a limited review: You run a small business as a florist. You claimed travel expenses on your T2 corporate tax returns for the deliveries you made last year. If you are selected for a limited review, you might be asked to provide documentation – for example receipts – to support your expense claims.
CARP operates on a risk-based project approach. That means we target known gaps in compliance. If we see areas where there already appear to be problems, we will be reviewing those. In our experience, most businesses want to do things right. Intentional non-compliance is rare. Sometimes it’s just a matter of getting a little help and know-how to get back on track. These reviews are intended to help your business. We will discuss some other ways you can get help with taxes a little bit later in this webinar.
How does a CARP review work?
If your Corporate Tax Return has been selected for a validation, you can expect the following steps to occur:
- You will receive a letter or a phone call from one of our reviewers based in Surrey, British Columbia or St. Johns, Newfoundland-Labrador.
- CRA employees who call your business may ask for your business account number and other information to verify your identity. A CRA employee will never ask you for immediate payments by e-transfer, PayPal, interact or others, and will never use aggressive language. To learn about how to protect yourself from scams, visit Canada.ca/tax-tips under “What to expect when the Canada Revenue Agency contacts you”.
- We may also request information such as receipts or documents to support a claim or deduction claimed on your Corporate Tax Return.
- Once the review has been completed you will receive a letter or Notice of Reassessment informing you of the outcome of your review.
- The reviewers in the CARP program are there to help you. Feel free to ask them any questions you have.
- Once we have finished our review, please do not destroy your documents. Information Circular 78-10R5, Books and Records Retention/Destruction, states the procedures for keeping and destroying records.
Responding to a CARP request for information
The first step once you receive any correspondence from us is to RESPOND.
If you need help, we'll work with you to answer any questions or concerns you may have.
If you do not respond in the timeframe we have asked, it could result in an automatic reassessment.
If you need more time, you can request an extension. Instructions on how to request an extension are on the letter you would have received from us.
Here are some common mistakes that we see when conducting limited reviews on corporate tax returns:
- Incomplete information and documents
- Misunderstandings of what is personal rather than business expenses
- Incorrectly claimed deductions and credits
- Expenditures that should be capitalized, and
- Misclassification of income
We will now go through these errors and outline ways to avoid them.
Here are examples of incomplete information/documents.
No reply to our request for supporting documentation: If there is no response to any of our requests for information, we will reassess your return by disallowing the claim, expense, deduction, or credit. In order to avoid this, contact us as soon as possible to request an extension or clarify anything you do not understand.
Expenses claimed are not supported with receipts and invoices: Please ensure you save all receipts and invoices. We may ask for these to support your claim. If you cannot provide the requested documentation, we may disallow the expense.
Name on receipts and invoices is different from company or corporation name: If an expense is submitted in a name other than that of your corporation, there is a potential that it will not be allowed.
Now let’s talk about personal versus business expenses.
Professional Fees: Personal income tax preparation, personal wills, and family trust expenses are not allowable business expenses.
Travel: Taking family members on a business trip, unnecessary travel, and travel to and from work are not allowable expenses.
Meals and Entertainment: Golf fees and club memberships are not allowable expenses.
Life Insurance: You cannot claim personal life insurance expenses.
Motor Vehicle Expenses: Vehicle expenditures must only be expensed at the percentage in which the vehicle is used for business unless there is a taxable benefit claimed by the individual. There is also a lease payment limit on passenger vehicles.
Here you will find an example of when an adjustment was made during an expense review. The expense line on the Schedule 125, Income Statement is not directly changed.
Instead, the disallowed amount is added to income on the Schedule 1, Net Income (or Loss) for Tax Purposes.
In this example, there was no reply to our request for documentation. As a result, the entire travel expense was added to income on the Schedule 1, “Net Income (or Loss) for Tax Purposes.”
Here are examples of incorrectly claiming deductions.
Meals & Entertainment: Although there are exceptions, the Income Tax Act restricts the deduction for meals and entertainment expenses to 50% of the amount actually paid, provided it was for the purpose of earning income. If you claim an amount for meals and entertainment as an expense on Schedule 125, “Income Statement of your T2 return”, 50% of that amount should be added back on Schedule 1, “Net Income (or Loss) for Tax Purposes” of your T2 return.
Capital Asset Acquisitions: If you acquire an asset, it has to be claimed on line 203, “Cost of acquisitions during the year” as an acquisition on Schedule 8, “Capital Cost Allowance (CCA)” of your T2, and in that first year, the 50% rule applies. The asset can then depreciate at the maximum CCA rate designated for that specific class.
Passenger Vehicles: Passenger vehicles purchased by a corporation are subject to an undepreciated capital cost limitation of $30,000 + GST/HST (if applicable) on the schedule 8, Capital Cost Allowance. Passenger vehicles that are leased by a corporation are expensed on the schedule 125 (Income Statement). They have a maximum limit based on a calculation, but cannot exceed $800/month + GST/HST.
Advertising and Promotion: Golf fees are not deductible expenses. Meals and Entertainment claimed as advertising and promotion may still be subject to the 50% rule.
Let’s review the re-classification of income.
General Tax Reduction: also known as GTR, cannot be used to reduce tax on investment income. Investment income must be correctly identified on the schedule 7, “Calculation of Investment and Active Business Income” of your T2 return to ensure the general tax reduction is calculated correctly.
Small Business Deduction: You cannot claim a small business deduction if you operate a specified investment business, also known as a SIB. A SIB is a business that has the principal purpose of deriving income from property including: interest, dividends, rents, or royalties. The main purpose of these businesses is to derive income from property. SIB rules are not applicable in cases where the corporation employs more than 5 fulltime year-round employees.
Let’s look at an example.
In this example, the corporation claimed $56,566 for a small business deduction or SBD. During an SBD review, we will request a description of how your corporation earns its income and we will request a copy of your financial statements.
Our example corporation originally filed its T2 return indicating Part 1 tax as $36,601.
There was no response to our letter requesting information, so the SBD of $56,566 was disallowed.
As a result, the T2 Part 1 tax payable now calculates at $115,350, which is an increase of $78,749.
When the SBD is disallowed, this not only changes the tax rate, but it may also impact other calculations on the return and the balance due date. Certain conditions related to the SBD determine the balance due date for Canadian Controlled Private Corporations (CCPCs). If the SBD was not claimed in the current or previous tax year, the balance due date is 2 months after their tax year end. However, the balance due date could be 3 months after their tax year end if SBD was claimed. A disallowed SBD means it was not claimed, and the balance due date could change from 3 months to 2 months after the tax year end. If this balance due date changes, it may cause an increase in interest on amounts owing.
If your corporation is under review for the small business deduction and you do not respond to our request for information, we will adjust your T2 Schedule 7, “Calculation of Investment and Active Business Income”. We will increase Line 32, “total income from property”, to reduce the SBD claimed to $0.
So, as you can see, it is very important to respond when you are contacted about a review.
Here are some examples of expenditures that should be capitalized.
Professional Fees: If the corporation has claimed professional fees in relation to the purchase of a capital asset, these fees should be included in the purchase price and reported as a capital expense, not a current one. Fees relating to incorporation or amalgamation, depending on the amount should be capitalized.
Repairs and Maintenance: A current expense would be restoring an asset to its original condition. A capital expense would be purchasing a new asset, or improving an existing asset to provide a lasting benefit. For example, repainting a wooden building is a current expense, whereas replacing a wooden exterior with vinyl siding is a capital expense.
Now you know about how our CARP reviews work, how to respond, and some of the pitfalls to avoid.
We’d also like to tell you about our service My Business Account that can help you stay on track with your T2 corporate returns and further avoid problems if you are selected for a CARP review.
My Business Account, or MyBA, is a secure online portal that business owners can use to interact with the CRA on most business accounts.
Through MyBA, you can receive electronic copies of letters and documentation from us. You can also submit your receipts and documentation, which helps ensure they are received in a timely manner.
And with that, we’ve reached the end of this webinar. I hope that you now have a better understanding of CARP and how we are here to help small and medium-sized businesses ensure their corporate returns are up to date and filed correctly.
Thank you for watching.
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