Running a business, and filing taxes, take up all your time. Amidst this, you don’t want to trigger special attention from the Canada Revenue Agency (CRA). Those who come under audit believe there is a fault in their stars, or the CRA picked a not-so-lucky draw. But if you think from the CRA’s perspective, they receive millions of tax filings, and it is practically impossible for them to audit every single filing. So they use some filters to shortlist their audits and add a pinch of random selections (the unlucky draw) to the mix.
What Triggers CRA Audit?
You can reduce your chances of being shortlisted in the CRA’s filters by filling your taxes timely and correctly. Even if you find an error in your filings, better take the pains to voluntarily re-file your taxes for the CRA understands that mistakes happen and appreciates honesty.
In this article, we will talk about ways to avoid triggering CRA’s attention to your taxation. Because once audited, you come under the CRA’s attention, leaving little room for error.
Tax filings are all about income and expenses, and anything that looks off place could trigger an audit.
Never Miss Reporting an Income
As a business owner, you would have several sources of income from business and investments. For example, some business owners rent out their office space or buy and sell some stocks.
The CRA receives all T-slips, and it has a program to match the slips with your returns. Even if you missed filing a T-slip, the other party in the transaction must have filed. If the CRA finds your portion of the transaction missing, you face a 10% penalty in the first instance and 20% in subsequent instances.
Several instances of missing income could create suspicion and trigger an audit. The best practice is to report all income. Any transaction that made you a profit or a loss needs to be reported. Even contributions to your registered retirement savings plan need to be reported.
The CRA Notices Major Discrepancies in Reported Income and Business Profile
The CRA receives tax filings from everyone, including your peers and your neighbourhood. One way they shortlist their audit target is by identifying discrepancies in the income of businesses and people with similar profiles. For instance, you live in a neighbourhood with an average reported income of $150,000. But your reported income is only $50,000. Such discrepancy will highlight your profile as an outlier and attract unwanted attention from the CRA.
Make sure your tax filings give a correct picture of your business.
The CRA audit also depends on the expenses you report and the tax credit you claim. As a result, certain incomes and expenses tend to be the most common target of the CRA audit.
Unusually High Expenses and Repeated Losses Can Invite CRA’s Attention
The CRA works on simple logic; you are doing a business to make a profit. Every company has huge expenses and losses in the beginning, and they get a tax benefit. But if this trend continues for years, it may raise suspicion. Business losses may extend for several years. So the CRA might look at your expenses to identify if you reported personal expenses as business expenses to show losses and avoid taxes.
The best way to avoid this suspicion is to track every business expense accurately. For instance, you claim $20 or $250 as a business lunch cost. It might raise suspicion. Use reasonable costs that are believable.
Vehicle expense is one great trigger. You can’t claim 100% of your personal vehicle expense as a business expense. Justify every ride, the date, destination, and purpose. And remember, riding from home to office and back is not a business expense. Similar is the case with home business expenses. For example, in a five-bedroom condo, you can claim one room for office expenses but not all five rooms.
Ask yourself, did this expense contribute to earning revenue for the company, and claim only that part as a business expense. The best way is to automate as many records as possible.
Do Not Overpay Salary to Family Members
One way to withdraw money from the business tax-efficiently is by paying salaries to family members and yourself. The CRA notices the salary paid to spouse and children and matches it with the market trend and your records. However, overpaying salary to your spouse and children for services they provided and not documenting the amounts paid could trigger an audit. This could lead to double taxation because audit reassessment will deny these salaries as a business expense. Meanwhile, the salary recipient will be liable to pay individual tax on that income.
The solution is to treat your spouse and children like other employees and follow the procedure to document their salary.
Overusing Tax Credits and Deductions are Easily Noticed by the CRA
The CRA offers many tax benefits to small business owners. But if you overuse them, it invites trouble. The most overused tax shelter is donations to fake non-profit organizations. The CRA has a list of charities where you can donate and claim the tax benefit without raising suspicion.
It is better to report honestly all income and expenses. Talk to your tax consultant before claiming any tax deductions. It is recommended to take professional help while filing taxes. Dishonest or wrong filings might save you tax and accountant expenses now, but it would cost you several times more if they trigger a CRA audit.
Contact ESS CPAs LLP for Accounting and Audit Support Services
ESS CPAs LLP in Burlington can provide your business with complete assurance and audit services to ensure your company’s full compliance with tax regulations and keep tabs on the business’s financial health. Our CPAs are highly skilled and serve the local Burlington and Halton business community with professionalism and a dedication to excellent service. To speak with one of our knowledgeable Chartered Professional Accountants, please get in touch with us online or by telephone at 905-517-2297.