Truthfully, there is no way to prevent yourself from undergoing a CRA audit. It can happen any time. So let National Tax Service help you prepare for the unexpected.
Following are the most common methods of generating tax audits by the CRA. Followed by some simple steps that you can take to protect yourself, your family and your business.
- Failure to report taxable income
The CRA and its powerful computer system are always selecting tax returns for review and audit. If there are large year over year discrepancies in revenues, expenses and/or losses the CRA will take a closer look and might select you as a candidate for investigation.
- Industry norms
Personal and corporate tax returns are assigned an industry code indicator. The purpose of this code is to match revenues and expenses of similar businesses. If your business has large discrepancies compared to similar businesses this may result in an audit to determine if revenues and expenses have been properly recorded.
- Supporting documentation
Claiming expenses without supporting documentation is an open invitation for an audit and subsequent reassessment. In the eyes of a Canada Revenue Agency auditor, receipts are not always enough. So go that extra mile and keep a diary or logbook to further validate all necessary expenses.
- Intra-government communication
Departments of the Federal Government may share information. So be confident that if there are discrepancies in your reporting from one government agency to another you will be targeted for an in-depth examination.
- Timely filing
Filing tax returns after the prescribed deadlines can result in penalties and interest charges. Worse, they may red flag you for further investigation. You should always file your tax returns in a timely fashion.
- Tax Arrears
Those unable to pay their tax arrears in a timely manner will be contacted by the CRA and, if unable to immediately pay in full, will be subjected to intense scrutiny. Phone calls, questionnaires and visits to your home and place of work will ensue. Prior year tax filings may also be examined.
- Improper Expense Claims
Only claim those expenditures properly made in the course of your business. As an example, do not claim home office expenses unless you truly use your home to “regularly and on an ongoing basis meet your clients there”. There are proper ways of deducting part of your home as a legitimate business expense. To do otherwise will attract the attentions of the Canada Revenue Agency. Who will give your tax filings a thorough going over.
- Inheritances and gifts
When benefiting from an inheritance or gift remember to properly document the origin the windfall. An unexplained ‘step up’ in your lifestyle could result in a Lifestyle Audit. Be prepared to verify all sources of income.
- Reasonable Expectation of Profit
Any sort of business that incurs ongoing losses will always draw the attention of the CRA. And they may attempt to deny such losses stating that you did not attempt to run the business profitably. Or that the business had no reasonable expectation of profit. They may say that your venture was simply a means to use personal expenses to create a loss against taxable income. All which result in debit reassessments. And a tax liability. More than just receipts will be needed to fend off such a challenge. Have a business plan. Keep a diary or your personal efforts. And keep a logbook to back up the where and why of all business expenditures.
Under CRA’s computer matching program all information slips (T3’s, T4’s etc.) have identifying numbers such as your social insurance number or Business Number. As a result it becomes very simple for the CRA to compare and catch those who fail to report all of their taxable income.
National Tax Service can not prevent an audit or an investigation but we can prepare you for a positive outcome.