By the time the end of summer approaches, the tax return filing deadline for all Canadian individual taxpayers has passed, and nearly all tax filers will have filed the required return for the 2024 tax year and received a Notice of Assessment from the Canada Revenue Agency (CRA) with respect to that return. It can, therefore, be extremely unsettling for taxpayers to receive unexpected correspondence from the CRA at this time of year, especially where the Agency is requesting additional information about claims made on the tax return for 2024, despite that return already having been filed and processed. When that happens, the recipients of such correspondence often assume the worst – that they are being or are about to be audited, and that the prospect of a large tax bill, along with penalties and interest charges (or worse), looms.

Happily for such taxpayers, that doomsday scenario is almost never the reality. The most likely explanation for such correspondence is that the taxpayer’s return has been selected for review as part of the CRA’s return verification process. And that taxpayer is far from alone – each year the CRA sends out around 3 million tax review letters, meaning that almost 10% of tax filers receive such a query from the Agency.

The explanation for why so many tax review letters are issued – and the need for the return verification process generally – lies in how Canadians now file their tax returns. When filing a paper income tax return was the norm, taxpayers often filed hard copies of receipts to support claims made on the return for tax deductions or credits, which provided the CRA with the documentation needed to verify any such claims. That, however, is no longer the case. Nearly all (for 2024 returns, the figure is 93%) taxpayers now prepare their annual income tax return (or have that return prepared on their behalf) using tax preparation software, and file the completed return using one of the Agency’s electronic tax filing methods. By definition, those methods do not involve any “paper trail” – that is, documentation which would support the claims made on the return are not filed with that return or, usually, not at all.

In the six months between February 6 and August 24 of this year, the Canada Revenue Agency received and processed just under 30.5 million individual income tax returns for the 2024 tax year which were filed online, and it issued a Notice of Assessment in respect of each one of those returns. The CRA’s self-imposed “service standard” for issuing a Notice of Assessment with respect to a return filed online is around two weeks, even for such returns filed during the busiest part of tax filing season. It’s clearly impossible for the CRA to review each return filed in detail while meeting that processing and turnaround schedule. And, in fact, in order to meet that processing time commitment, the Agency does not review returns at the time of filing. Rather, as stated on the CRA website: “The Canada Revenue Agency (CRA) processes most returns without conducting a manual review of the information reported so that a notice of assessment can be issued as quickly as possible. However, all returns are screened by CRA’s computer system and may be subject to review at a later date.”

Most returns filed are accurate and complete and, even where errors (or deliberate fraud) has occurred the amounts involved are, on an individual basis, usually quite small. However, given the number of returns filed each year, the potential exists for the loss of a significant amount of tax revenue for the federal government. And the CRA’s response to that risk is to conduct a wide range of review programs to ensure that amounts reported on a return are accurate and that claims made for tax deductions or credits are justified. While the CRA administers a number of different types of review programs, in all cases the purpose of the review is to obtain from the taxpayer the information or documentation needed to support claims for deductions or credits made by that taxpayer on the return, or to explain any discrepancies noted by the Agency.  

In some cases, an individual taxpayer whose return has been selected under any of the CRA’s review programs may receive a telephone call from the Agency, rather than a letter. As virtually everyone knows by now, fraudulent or “scam” calls in which individuals claim to be from the CRA have become commonplace. Given the prevalence of such fraudulent calls, it’s important that the taxpayer who receives such a call verifies the identity of the person claiming to be a representative of the Agency. To assist taxpayers in confirming that any telephone contact received is a legitimate one, the CRA has provided information on how to respond to such a call; that information can be found on the CRA website at https://www.canada.ca/en/revenue-agency/corporate/scams-fraud/verify-cra-contact.html.

Whether the contact from the CRA happens by phone or by letter, a taxpayer whose return is selected as part of a return processing review program will be asked to provide verification or proof of deductions or credits claimed on the return – usually by way of receipts or similar documentation.

Of course, most taxpayers are not concerned so much with the kind of program or programs under which they are contacted as they are with why their return was singled out for review or follow-up. Most taxpayers assume that it’s because there is something wrong on their return, but that’s not usually the case. Returns are selected by the CRA for review for any one of a number of reasons.

Canada’s tax laws are complex and, over the years, there are areas in which the CRA has determined that taxpayers are more likely to make errors on their return. For instance, one of the most common claims made on individual income tax returns is a claim for the medical expense tax credit. While the rules governing that tax credit are relatively straightforward, the process of determining just which medical expenses qualify for the credit can be anything but. The listing provided on the CRA website of the types of medical expenses which can qualify for the medical expense tax credit has 132 entries. However, not all such expenses are claimable in all circumstances. In some cases a prescription from a medical professional is required in to order to claim the medical expense tax credit for that expense, while in other cases it is not, and the reason for the difference is not always obvious. For instance, the cost of dentures can be claimed as a medical expense without the need for a prescription, but claiming that credit for the cost of eyeglasses requires the taxpayer to have such a prescription. Costs incurred to purchase a wheelchair do not require a prescription to qualify for the medical expense tax credit, but the cost of acquiring a cane or a walker does. As well, some medical expenses can be claimed by all taxpayers, while others can be claimed only by individuals who are eligible for the disability tax credit. 

Given the complexity of the requirements, it’s not hard to see how errors can be made by the taxpayer when making a claim for the medical expense tax credit. Consequently, a return which includes claims for a deduction or credit in areas which the CRA has found to be more likely to include errors made by the taxpayer (which would include, in addition to the medical expense tax credit, claims for the dependant tax credit, moving expenses, or tuition tax credits) has an increased chance of being reviewed. Sometimes, deductions or credits claimed by the taxpayer are significantly different or greater than those claimed in previous returns, and that, too, may attract the CRA’s attention. And, if the taxpayer’s return has been reviewed in previous years and, especially, if an adjustment was made following that review, subsequent reviews may be more likely. Finally, many returns are picked for the processing review programs simply on the basis of random selection.  

The CRA also administers a Matching Program, in which information reported on the taxpayer’s return (both income and deductions) is compared to information provided to the CRA by third-party sources (like T4s filed by employers or T5s filed by banks or other financial institutions). Where figures which appear on an information slip – for instance, the amount of employment income earned – don’t match up with the amount of employment income reported by the taxpayer, they will be contacted to provide an explanation of the discrepancy.

Regardless of the program under which the review is being conducted, or the reason for the follow-up, the process is the same. Taxpayers whose returns are selected for review will be contacted by the CRA, usually by a letter which identifies the deduction or credit claim for which the CRA is seeking documentation, or the income or deduction amount about which a discrepancy seems to exist. The taxpayer will be given a reasonable period of time – usually a few weeks from the date of the letter – in which to respond to the CRA’s request. That response should be in writing, attaching, if needed, the receipts or other documentation which the CRA has requested. All correspondence from the CRA under its review programs will include a reference number, which is usually found in the top right-hand corner of the CRA’s letter. That number is the means by which the CRA tracks the particular inquiry, and should be included in the response sent to the Agency. It’s important to remember, as well, that it’s the taxpayer’s responsibility to provide proof, where requested, of any claims made on a return. Where a taxpayer does not respond to a CRA request or does not provide such proof, the Agency will proceed on the basis that the requested verification or proof does not exist and will reassess accordingly.

Taxpayers who have registered for the CRA’s online tax program My Account (or whose representative is similarly registered for the Agency’s Represent a Client online service) can usually submit required documentation electronically. More information on how to do so can be found on the CRA website at Submitting documents online – Pre-assessment Review, Processing Review and Request Verification Programs – Canada.ca.

Whatever the reason a particular return was selected for review and verification by the CRA, one thing is certain. A prompt response to the CRA’s enquiry, providing the Agency with the information or documentation requested, will, in the vast majority of cases, bring the matter to a speedy conclusion, to the satisfaction of both the Agency and the taxpayer.

More detailed information on the CRA’s processing review process and be found on the Agency’s website at https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/review-your-tax-return-cra.html.