To answer this question, we need to know who get audited by CRA. CRA never publish their methodology however following is from Rajasri’s experience.
CRA has the wealth of information from taxpayers and they use this information to create expected industry average that can be compared to your tax filling. This is done automatically with computer algorithms. For example, low profit margins relative to industry average can red flag and trigger audits. All business need to have reasonable expectation of profit and should not have continuous losses.
Many industries are identified by CRA as higher risk for tax evasion. These are generally business that deal with cash transactions that are difficult to trace the money. Various trade people in the construction businesses, subcontractors and auto mechanics fall in to this category.
Every taxpayer needs to keep good paper records to pass CRA’s tax audit. Prove of payment alone is not sufficient to pass the audit. CRA will look for relevance and validity of the transactions. For example, you need proper invoice in the business name and it should be issued by proper registered business.
Owners claiming personal expenses as a business deduction are one aspect of checkup. For example, home renovations claimed as business repairs or personal travels charged as business travel are very common charge backs. It is recommended keeping the business and personal expenses separate. If some items are debatable, document the business connection on the receipt.
CRA likes consistency. You should compare your current tax returns to three previous years and identify any swings or big variations; this will help identifying mistakes or to reasoning the change in business. CRA may also audit you if your lifestyle does not match your reported income.
If you receive a call or letter; respond promptly. You cannot ignore and hope that it will go away. Be polite on all communications. If you neglect, they will rule against you. Best will be to get a qualified and experienced accountant like me for help.
If the mistake is an error, you will be reassessed with the correct tax plus penalty and interest. If required, we can negotiate a payment plan with CRA.
Late or incomplete filing or late payment may prompt phone calls from CRA. If you are audited and found errors or omissions in the past, there is good possibility you will be checked again to confirm you are not making the same mistakes again.
Time to time, CRA identifies significant non-compliance within different types of business. As there will be vast number of suspects, CRA will create projects targeting particular type of businesses or type of tax credits. Currently, CRA is targeting taxpayers who purchased a new home or condo from the builders and sold them too quickly. They may not be eligible for new home HST.
If you are selected for audit randomly or because CRA received reliable tips from third party such as your ex-spouse, business partners or angry employees; you should consult qualified professionals who can assist you through the process while protecting your interest.
Rajasri Sriskandarajah MBA, CPA, CGA
Rajasri CPA, believe in “Keeping you out of Trouble”. If CRA audit arises, Raj will represent you and assist you through the process. His office provides full cycle accounting services that keeps your accounting and tax planning current. This includes bookkeeping, payroll, corporate and personal taxes, compilation and reporting. Education combined with over 25 years of accounting and management experience dealing with small to midsized business and CRA have made him to understand tax law and CRA’s position.