The Canada Revenue Agency (CRA) sends around 30,000 letters every year letting people know that they’re being audited. While this is just a fraction of the 27 million people who file their taxes, you shouldn’t assume that getting an audit notice is completely random.
Your chances of getting audited decrease if you keep an eye out for the following red flags.
1. Home Office Expenses
The pandemic caused an unprecedented number of people to work from home but that doesn’t mean you can claim regular home maintenance expenses (landscaping, cleaning, snow clearing) as home office expenses.
Since these expenses are often over-declared, the CRA introduced a temporary flat-rate method to calculate your home office expenses. If you worked from home more than 50% of the time for at least 4 consecutive weeks in 2020, you can claim $2 for each day you worked from home up to a maximum of $400 for the year.
2. Working in the Family Business
If a family member is on your payroll or if you work closely with other family members in a business and one of them gets audited, then chances are the entire family will get audited.
If you’re working in several businesses, you can expect the red flags to multiply.
If you have a family member on the payroll as a contractor, then you’re more likely to get noticed by the CRA. This is because this is a way for families to favor certain relatives and decrease their income tax liability.
In any case, be sure to maintain detailed and accurate records.
3. Abnormally High Donations to Charity
If your charitable donations are abnormally high as compared to your income then you could be flagged by the CRA for an audit.
Another thing the CRA looks out for are donations to organizations they suspect are involved in tax schemes.
Make sure you’re donating to registered charitable organizations and always get an official tax receipt for the money donated. Don’t claim any taxes you can’t get a receipt for.
4. Previous Audits
If you were audited before and the CRA found errors, omissions and discrepancies then it’s possible you might be audited again.
If it wasn’t a major issue or there were just a few hundred dollars’ worth of errors, you’ll be moved down into the low risk category and this will decrease your chances of being audited again.
Make sure to keep proper records and documentation.
5. Cash Businesses
Cash businesses such as hair salons and restaurants have higher chances of being audited. This is because cash transactions are harder to trace and it’s easy to under-report how much money is passing through the business.
The CRA will also compare your business with others in the industry. So if your salon is reporting 20% cash sales while the others in your neighborhood are reporting 30% cash sales, then your chances of getting audited increase.
Remember to always avoid working for cash under the table because if you get audited you could face major penalties and interest charges.
6. Differences between HST and Income
The CRA will always compare the sales reported on your tax return with the HST return for the same period. If there’s a difference, it’ll raise a flag for the CRA.
They will also look at the HST amount you owe and compare it to the amount that was collected. If there are any differences, they will ask you to clarify them.
It’s best to run these calculations in advance yourself and have your supporting documents ready in case the CRA asks questions.
7. Automobile Claims
The CRA knows if you use your car in your business, it’s not possible you’ll never use it in your personal life. That’s why you should never claim 100% of your automobile expenses as a business expense.
In order to claim automobile expenses on your tax return you should keep detailed records of each trip you take for business purposes. This includes the purpose of the trip, the kilometers travelled, the date and destination address.
8. Real Estate Businesses
The CRA keeps a close watch on real estate businesses. Common audits in this industry include new home constructions, HST rebates, principal residence exemptions and real estate transactions which are not very common.
You should expect to receive an audit notice if you’re earning a living by fixing and flipping houses and condos.
The CRA has a special audit project dedicated to monitoring flippers. They need to do this because condo flippers often incorrectly categorize their taxable income and get lower tax rates by claiming capital gains instead of income.
9. Living Extravagantly
The CRA is very likely to ask questions if your spending does not match your reported annual income.
Some people who are very good at budgeting might get flagged by the CRA as well. In this case, the agency will ask for clarification on what they view as questionable. So just keep your all records and documents in order and show them how you manage your money so well.
10. Being Self-Employed
If you’re self-employed chances are you’ll get audited at some time during your career. That’s because you don’t receive a T4 slip and no tax is withheld from your income. When you’re employed by someone else, the CRA puts you in a low risk category.
As a business owner, you can manage this making sure that you put aside at least 25-30% of your income every year to cover your taxes. Keep all of your documents in order and work with your tax consultant to file your return accurately.
The team at Syed A. Raza Professional Corporation has more than 14 years of experience in helping our clients file their returns every year and minimizing their chances of getting audited. For more information, contact us and get a free consultation.