Whenever you file your income taxes, be ready for the CRA to come knocking anytime. The CRA thoroughly scrutinizes tax returns especially those filed by small businesses and entrepreneurs or the self-employed. Therefore, you run a higher risk of being audited compared to those who are employed. Below are a few tips to help you avoid a CRA audit.
Ensure All Your Revenues Match
One mistake that people make which lands them in trouble is having revenue discrepancies. The CRA will confirm the revenue from different sources including what is declared on your GST return, the spouse’s return and other information such as what your employer has provided. In case there is a mismatch, the CRA may request an audit.
Ensure The Profit Margins Are Reasonable
If you declare income that is extremely high or too low for your industry, the CRA may come looking for you to perform an audit. The Canadian Revenue Authority has done extensive research on profits obtained by businesses in all industries so they will suspect if something appears unusual with your tax filing.
Avoid Deducting Large Business Expenses
Most business owners will take advantage of the tax deductions obtained when they remove business expenses from their income. However, you need to be very cautious about deducting very large business expenses if you don’t want the CRA to come knocking. For instance, if you have spent handsomely on advertising, travel or miscellaneous costs, the CRA may consider this unusual and request for an audit. Avoid deductions that you are not entitled to. For instance, if you are self-employed you may consider claiming the home office deduction which allows you to eliminate a percentage of your rent, utilities and phone bills if you work from home. However, you can be caught if you make this deduction yet you don’t use your home office space exclusively for business.
Don’t Claim That You Use Your Vehicle 100% For Business
It’s very rare for someone who is self-employed to use their vehicle for business only. Therefore, don’t make the mistake of claiming this when filing your taxes. The CRA will want to request an audit in order to find out if you have the required records to support this claim.
Avoid Recording Personal Expenses As Business Expenses
One of the mistakes that most entrepreneurs make is failing to distinguish between their personal expense and a business expense. This is one of the areas auditors watch out for when scrutinizing your filed returns.
Do You Collect A Lot Of Cash?
If you run a business where you collect cash as opposed to checks in your business, the CRA may want to perform an audit more often than in any other business. Most people who run businesses where they collect cash from people are often audited because they may fail to report all the taxable income. This includes home improvement contractors, restaurants, hair salons, and bars.
Additionally, if you keep on reporting losses in your business for several years, the CRA may want to perform an audit in order to determine if the reporting has been properly done.
Sohail Afzal, CPA, CMA, MBA
Sohail Afzal, (CPA, CMA, MBA) is the founder & CEO of GTA Accounting Professional Corporation. He is a highly experienced Chartered Professional Accountant and businessman himself and understands the challenges that many businesses face when it comes to cash flow management. As an experienced business consultant & tax advisor, he is helping companies grow by providing the technical, financial, and contractual information necessary for strategic decision-making.