Getting a letter from a Canada Revenue Agency (CRA) auditor informing you that you’ve been selected for an audit could be terrifying. This week, the CRA finished over 61,000 real estate audits on income tax, which took around six years to complete. These audits resulted in 13 criminal charges.
These auditors are only doing their jobs to ensure that businesses aren’t committing fraud, and you know this. However, this doesn’t minimize your anxiety and the work you must do for your business to pass the audit.
We’ve outlined seven red flags the CRA might be on the lookout for. Ensure you avoid these as much as possible to lower your chances of getting audited.
1. Revenue Discrepancies
When reporting your revenue to the CRA, ensure you are consistent across the different forms you need to file. These include your Goods and Services Tax (GST) or Harmonized Sales Tax (HST) returns.
Ensure these are consistent with other parties that may also report your income, such as your spouse or employer.
If the CRA finds discrepancies in the figures you report, you might soon receive a notice from a CRA auditor.
2. Claiming Unreasonable Business Expenses
The CRA pays attention to your history of business expenses, so they might become suspicious if they notice any inconsistencies or excesses.
For example, if you make a $20,000 claim on business transportation expenses when you usually only spend half of that amount might seem fishy and warrant a CRA audit.
3. Rounded Figures
It’s rare to find receipts or expenses that are ideally “round” numbers, such as $200, $3000, etc. So if your tax returns are filed with these seemingly perfect figures, it might alert the CRA to possible fraud.
Make sure to report exact amounts down to the cent. Accuracy is of great importance and could save you from the gruelling work of handling an audit.
4. Home Office Deductions
If you freelance, own a small business or work from home, you might consider applying for a home office deduction.
This claim will allow you to deduct a percentage of your rent and utilities, among other expenses, as you use these to make a living.
Suppose you have multiple income sources and do not use your space or appliances exclusively for work. In that case, the CRA could get wind of this and ask for an audit.
5. Business Vehicle Deductions
Like the home office deduction, you could also claim tax deductions on your vehicle. However, you must carefully deduct only the expenses incurred from business use.
If you have a company vehicle, you could deduct 100 percent if the car is used only for business purposes.
However, if you use your vehicle for personal and business purposes, you must meticulously track your expenses. This is you don’t alert the CRA of possible fraud.
6. Not Providing More Information
Sometimes, the CRA could ask you for more information, especially if you filed incomplete or incorrect paperwork. They do this through a Notice of Reassessment.
It’s best to respond promptly to the CRA and provide them with the necessary information. If not, expect an audit.
7. Recurring Losses
It is normal for businesses to have a few losses, especially during their first couple of years. However, it will seem suspicious if your business consistently loses money.
One bad year isn’t likely to warrant an audit, but consistent and recurring losses could alert the CRA.
Nobody wants to undergo a CRA audit, so it is crucial to prevent it from happening before they send you a notice. If you need help handling your personal or business finances, don’t hesitate to ask for help and hire an experienced accountant.
