Paying attention in the following areas can decrease the risk of getting an audit notice from the CRA.
1. Being Outside the Normal Range
What this means is that the CRA has extensive information on the income of various businesses. So if you declare income that is greatly more or less than the norm in your industry you will automatically draw attention.
2. Discrepancies in Revenue
The CRA compares your revenue across all of the tax forms you file. If they don’t match then you will have a very good chance of receiving a notice.
Make sure that the revenue you declare in your tax form matches the amount declared on your spouse’s tax return, your GST/HST tax return and information provided by employers, financial institutions and other third parties.
3. Home-Office Deduction Claims
If applicable, this deduction allows you to claim a percentage of your rent, utilities, phone bills, insurance, real estate taxes and other costs in your tax return.
However, if your home-office is not being used to earn a business income and is not used regularly to meet with clients, customers or patients than your small business does not qualify for the deduction and the CRA is aware of this. If this is the case than its best not to claim this deduction on your tax return.
4. Full Use of a Vehicle in a Business
This is one of the biggest red flags for the CRA because they know that it is very rare for a business or individual to use a vehicle for business 100% of the time especially if there is no other car available for personal use.
It is also easy for auditors to disallow this deduction because many people don’t keep the proper records.
5. Deducting Business Expenses
Be very careful when deducting business expenses from your tax return. Claiming large deductions in areas such as travel, interest expense, advertisements, meals and entertainment should be avoided as they are closely monitored by the CRA.
6. Large Charitable Deductions
The CRA knows how much taxpayers at each income level give to charity. If you donate more than that amount than you will attract their attention. Also keep in mind that donations involving capital property have a greater chance of being reviewed.
7. Employing a Family Member
Employing your spouse or child in your small business is a legal form of income splitting and it is allowed as long as the rules are followed.
The issues arise when small businesses don’t follow these rules and this makes them an easy target for auditors.
8. Cash-Intensive Businesses
You should also expect extra scrutiny if you run a retail business, hair salon, bar, tax service, home renovation or home improvement service. This is because these are all cash-intensive ventures. They have lots of opportunities to take in cash and can also be tempted not to report all of their taxable income.
9. Recurring Losses
It’s natural to experience a loss sometime when running a business. However, if your claim losses for several years in a row than you’ll invite a CRA audit. This is because these losses are usually used to offset other income.
Keep in mind that in order to qualify as a business you need to have a reasonable expectation of profit and the CRA’s idea of what is reasonable is usually very different from yours.
10. Shareholder Loans and Large Balances
Corporations should keep an eye on changes in shareholder loans and debit balances as these are red flags for the CRA. They will look for loans taken from the company and personal expenses which maybe recorded as business expenses.
In conclusion, it’s very possible to minimize your chances of getting an audit notice. Honesty and proper recordkeeping goes a long way in keeping auditors away from your business. And even if they do show up, you’ll have all the records needed to back up your tax claims.
Any questions or concerns? Give us a call and we’ll be happy to guide you.