# Audited! Will hriing a specialized Accountant help my case?



## Rotate (Oct 1, 2014)

Hi all, I have been audited.

The CRA is proposing to disallow the income and expenses reported over the last three years (over $20,000 in business losses). They determined that (1) The business activity was not conducted in a sufficiently commercial manner; (2) it was not conducted in pursuit of profit, (3) a source of income did not exist for purposes of section 9 in the income tax act. 

I have 30 days to reply to their letter. 

I am thinking of hiring a new accountant for a consultation because I am unsatisfied with my long-time accountant. I am unsure if it will benefit me to pay $500 for a consultation with Darryl Hayashi. I also found Tax Audit Solutions but they charge a retainer of $2500 minimum.

As a bit of background:

I have been claiming losses since 2003.

I have a full-time job (earn $70,000/year), but my business is as a DJ and Music Producer. The DJ'ing is profitable, but the Music Production is not. 

If I just bite the bullet and don't reply to the CRA, how much am I likely to owe in their reassessment?

I appreciate any input you have to offer. Thanks in advance for providing input to this valuable forum!


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## hush (Apr 13, 2014)

I don't think it's in your best interest to not reply to CRA. You'll end up paying more in evaluation fees and whatever they feel like charging you along with interest. I had a sh*tty accountant screw my books right up, but being honest and punctual with CRA has worked out for me. Yes, I still have interest and fees to pay, but they are willing to give you more leeway if you comply.


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## Plugging Along (Jan 3, 2011)

You are best to reply to CRA, as the onus is on you to prove your case.

i could be wrong, but if you haven't made a profit since you started in 2003, you may not win your can. There is a expecting that there is a reasonable chance of profits. 11 years seems like a long time.


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## james4beach (Nov 15, 2012)

Don't ignore the CRA letter.

The CRA seems concerned that your business may be a place to dump expenses to drive down your tax liability (a tax shelter), perhaps for an activity that's actually a hobby. Business expenses are meant to match up with income producing activities, in a business that's run with the intention of being profitable. You may want to read this page, though it applies to US rules.

How good is your documentation and paper trail, supporting evidence, that kind of thing? You'll have to step back and make an honest judgement of how your situation looks, given the paper trail and supporting evidence that you operate with a profit motivate, operate professionally and conduct it like a business and not like a hobby.


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## OptsyEagle (Nov 29, 2009)

Yes. Most people that were "legitimately" losing money since 2003 would most likely have discontinued that business a long time ago. The only significant exceptions would be the taxpayer that wants to pay less tax.

You are probably in around a 35% tax bracket so I would suspect the disallowance of $20,000 of losses would result in a tax bill in the $7,000 range.


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## marina628 (Dec 14, 2010)

When I started my business we had lots of expenses first 2-3 years but we were also pulling out $xxx,xxx a year in pay cheques.I vaguely remember something from my accountant that these early losses were ok but after 3-4 years they can say it is not a viable business.I actually felt relief when I had to pay my first corporate tax bill as it indicated we had 'made it' .Same goes for rental properties , know somebody who rented a small basement apartment but they lived upstairs in the house but always managed to get $3000 -$4000 loss and after the 3rd year CRA Disallowed it as a investment.


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## Just a Guy (Mar 27, 2012)

I can't find the reference anymore, but I thought CRA was challenged in court about a business needing to make a profit within a certain number of years and lost the challenge. It was several years ago, and I'm sure it was appealed, but I do remember hearing the headlines...anyone else remember?


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## Guban (Jul 5, 2011)

Just a Guy said:


> I can't find the reference anymore, but I thought CRA was challenged in court about a business needing to make a profit within a certain number of years and lost the challenge. It was several years ago, and I'm sure it was appealed, but I do remember hearing the headlines...anyone else remember?


I don't have the reference, but I thought that CRA lost if it was definitely a commercial venture, where there was no personal benefit. If you were a bad business person that ran a store, you could continue to write off forever. If you had a sold sweaters, but made yourself (and family/friends) lots of sweaters, you can't continue to write off your machinery and materials.


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## Guban (Jul 5, 2011)

OptsyEagle said:


> Yes. Most people that were "legitimately" losing money since 2003 would most likely have discontinued that business a long time ago. The only significant exceptions would be the taxpayer that wants to pay less tax.
> 
> You are probably in around a 35% tax bracket so I would suspect the disallowance of $20,000 of losses would result in a tax bill in the $7,000 range.


Plus potential interest/penalty!


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## Charlie (May 20, 2011)

You're probably looking at $10Kish depending on your rate and how far back they're going. Compounding interest adds up.

Some of those 'specialized' firms are very expensive -- note the $2500 retainer. You may not get your money's worth.

A music production/DJ biz with continual losses is challengeable as there is often a personal/hobby component. They note you had no source of revenue -- that doesn't help. You need to show the business purpose, reasonable expectation of profit and that you were operating in a business manner. May be tough with continual losses. I think CRA has some info on artist type businesses. Read up on those and work with your current or similar type accountant and submit. It's worth a shot to defend, but it may be a tough sell.


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## james4beach (Nov 15, 2012)

What's also working against the original poster is that there is deep suspicion around DJ'ing and music production in general, as a field of "business".

Here's a billion $ example: a public company, SFXE

In this short analysis from a year ago, it's mentioned that SFXE -- an electronic music production company -- pays out more money than it makes. The note that accompanies the numbers: "*The structure of this company is not to make money... it's so transparent. What a joke*"

So to the OP: yes you may be running a bona fide business, but there are lots of people in this line of work that don't, and that works against you from the CRA perspective, unfortunately.


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## indexxx (Oct 31, 2011)

If I remember right, there is a time limit on claiming unprofitable side businesses- something like 2-4 years. I was looking into it for some of my hobby/side interests that could occasionally generate modest revenue; my accountant mentioned it once and then last year I happened across it on the internet somewhere.


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## CPA Candidate (Dec 15, 2013)

This is a little late but this subject was just covered in the tax course I am taking.

The courts have distinguished between a commercial activity and a hobby or personal venture by looking at whether there is a personal/hobby element to the activity. It appears that there is a hobby element here.
In cases where a hobby element has been identified, expenses can only be deducted up to the amount of revenue earned, hence no losses can be realized. The ITA denies expenses not made to produce income under parts 18(1)(a) and 18(1)(h).

This is likely not a case that can be won by the taxpayer.


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## OurBigFatWallet (Jan 20, 2014)

This is actually fairly common. After 2-3 years of significant business losses, CRA will want you to show some business income (profit) otherwise they will start to question the legitimacy of the entire business. I always advise my clients to reply to the letter and at minimum explain the situation to CRA and determine a total of possible taxes owing. 

Remember, you'd be looking at the total of the now-included business income for the applicable tax year(s) plus non-deductible interest. They should be able to give you a total as at a certain date. If you do decide to argue against them you'll need to prove the business is legitimate and viable. A few key points to consider:

- what have you done in the past few years to maintain the long term viability of the business?
- are there any long term contracts you have pursued (and retained) that will start to make the business profitable in the future?
- are there circumstances beyond your control that caused the business losses (ie. equipment failure, sickness, etc)
- does the business have a separate bank account, are the transactions recorded separately, etc?
- do you have any documentation showing exactly why there are business losses (ie. receipts for large unforeseen expenditures)? The more documentation you have, the better

I'd definitely consider hiring professional help for this but I'd meet with a few different CA firms to get their point of view before deciding. Best of luck and keep us posted


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## joncnca (Jul 12, 2009)

This doesn't sound like an audit. It's a request for information. CRA made a request for me to justify some professional fees in the past, so I assembled all my justification including payments and bank statements and rationale for claim. I sent everthing in and they allowed it. 

Your case is a little more involved, but don't ignore it and get it in on time. These requests are fairly common, but if they end up doing a full audit, that's supposed to be Very much more invasive, so nip it in the bud and if you owe taxes, then you owe taxes, don't try to outsmart them. But if it's legit, then justify with your evidence. 

If you have documentation and some organizational skills , don't waste your money on a professional unless you're totally stumped. But is seems pretty clear what CRA wants from you, you either have it or you don't, no professional has some magic trick to make this go away. 

You make 70k per year, likely means you're at least somewhat competent and can handle giving them the info they want.


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