Just done preparing meals for my family. Now, it’s time for me to complete my blog.
Just done preparing meals for my family. Now, it’s time for me to complete my blog.
A new client came to my office the other day handing out a crisp brown envelope from Canada Revenue Agency (CRA). In that letter, my client is being notified that his small business company is subject to a CRA audit. We all agree that CRA audit is usually pretty stressful if you do not have all the backups and proper justifications to the information reflected in the tax returns filed.
As a taxpayer, the chance of being audited are unpredictable as the whole system is solely controlled by CRA. While there is no guarantee to avoid a CRA audit, as a taxpayer you can minimize the odds of being audited by closely paying attention to the items that can trigger the likelihood of an audit.
Below are the 10 Audit Triggers and how to mitigate them
Indications of non-compliance with tax obligations- Upon reviewing the program accounts of my new client, he did overlook to file 2 consecutive years of HST and company income tax return. Gaps in filing your tax obligations, not filing your tax on time or consistently late are an obvious red flag for your company to be the audit contestant.
Likelihood or frequency of errors in tax returns- Filing a return with errors can easily attract Auditor’s attention.
Revenue Discrepancies- Declared revenue for all company’s program accounts such as HST and Corporate Income are compared across all tax forms. Any inconsistencies and unusual discrepancies may result for the auditor to look further on your tax declarations/account.
Claiming 100% business use of a vehicle- CRA agents know that claiming 100% business use of a vehicle is impossible especially if the owner has only one car.
Changes in shareholder loans and large balances- having a large receivable/debit balance to shareholder loans account are considered to be a red flag too. Agents viewed this issue as personal expenses by the shareholder being recorded as advances to shareholders and taking personal expenses as business expenses.
Running a cash-intensive business- Do you own a restaurant business, as a contractor, hair salon, Renovation Company, and other cash-intensive business? Having a cash-intensive business can also expect high scrutiny from the CRA. It is a general notion of the auditor that there are huge opportunities not to declare part of or all-cash sales as taxable income.
Out of Norm- Declaring income/expenses being significantly higher or lower than the norm in your industry. CRA auditor will compare your financial data across other companies to verify reasonability of taxpayers declared amount. Be aware that CRA has access to all the financial information from different/various industries for comparability purposes.
Constantly declaring losses- Carrying losses are normal. However constant declaration of years of losses in a row will potentially trigger an audit. CRA definition of business is that there must be a reasonable expectation of profit.
Non Compliance of required info- If CRA needs further verification in your filed tax returns; they usually sent a letter to request for the missing information/documents. Giving the taxpayer for a due date when to forward the required documents. If you ignore their request, the CRA agent will make a decision based on the information they have on file and can trigger an audit invitation.
CRA’s computer-generated list- This last item is out of taxpayers control as the selection rules/criteria are solely under the hands of CRA. However, complying with the above nine items will somehow put the taxpayers in a safe spot whether there is an audit or not.
In conclusion, honesty and prudence are the best policy- proper bookkeeping and meticulous record-keeping can go a long way when it comes to CRA audit. Whether you are selected for an audit or for compliance purposes, the control to pass this process is solely on your hand (business owner).
