Recently, I joined a conversation about tax audits and the common fear surrounding them. It became clear that many people are anxious about audits due to the unknowns involved. Unless you've experienced one, it's hard to know what to expect.
So, what might trigger an audit? Here are some common factors that could prompt the Canada Revenue Agency (CRA) to review your business:
Top Audit Triggers
Expenses: For sole proprietors in Canada, business expenses are reported on personal income taxes. Increased expenses can trigger an audit, even if they're justified by business growth. Ensure all expenses are properly documented and backed by receipts. Make sure you're not donating to the tax man by using our Free Tax Expense Guide.
Filing Late Tax Returns: Consistently filing late—whether for corporate tax returns, GST, or sales tax—can attract attention. Filing late once might be overlooked, but repeated delays signal disorganization and potential issues.
Complex Tax Returns: Running multiple businesses, having diverse investments, or foreign income can complicate your tax return and raise flags. The CRA, like the IRS, seeks to cover audit costs and may target complex returns for potential errors.
Missing Sources of Income: Failing to report all income sources, such as T4 slips or investment income, can prompt an audit. The CRA may suspect other omissions if one source is missed.
Higher Expenses Than Industry Standard: The CRA uses the NAICS code to classify businesses and compare expenses. If your expenses exceed industry norms, it could trigger an audit. Honest reporting is key to avoiding issues.
Recurring Losses: Consistent business or property rental losses over several years can lead to scrutiny. Ensure your records are thorough to justify any losses.
Claiming 100% of Vehicle Expenses: Claiming full vehicle expenses as a business deduction is a red flag. Accurate tracking is essential, and it's often advisable not to claim 100% unless justified by a professional.
Be sure to read this blog, Expenses You Can Write Off In Your Online Business.
Best Practices for Audit Preparedness
- Tracking and Records: Maintain solid records and a reliable system for saving and tracking documents. Backup all data and ensure accuracy.
- Work with a Trusted Professional: Collaborate with a bookkeeper or accountant familiar with your industry. Their expertise can save you money and hassle, ensuring you can substantiate your tax claims if audited.
Need Assistance?
We offer various packages to support our clients. Contact us to learn how we can help you prepare for tax season and potential audits.
