The Canada Revenue Agency sometimes uses a basis of accounting known as net worth to assess, calculate and issue assessments against certain taxpayers.
The net worth basis of accounting consists of determining the amounts a taxpayer would have omitted to report, by proceeding with an analysis of his assets, year after year.
When a taxpayer is in disagreement with an assessment issued by taxation authorities, he has the right to contest such assessment before the administrative courts of the various taxation authorities. It is sort of an administrative appeal.
A tax audit is the procedure whereby taxation authorities ensure a taxpayer’s legality and compliance with tax laws.
As the taxation system in Canada is based on the principle of self-assessment, it is important for taxation officers to have the possibility to audit a taxpayer’s accounting books, records and other such documents in order to ensure compliance with the law, including make sure that what is reported is a reflection of reality.