So, you want your taxes to be audited? Here are some fast-track ways to
Okay, in all seriousness, nobody ever wants to be audited by the CRA, but
here are 9 ways to trigger an audit, and some of the pitfalls to avoid if
you want to keep the taxman away from you.
1. Being unreasonable in your claims
For example, if you have $30k in business revenue and you are claiming $10k
in meals and entertainment expenses, or you are claiming 100% of your
vehicle expenses when you only own one vehicle. CRA uses other methods to
determine reasonableness as well, such as comparing other similar
businesses in your classification and comparing year over year claims that
you have made on prior tax returns.
2. Forgetting to include slips
Generally speaking, if you miss a single slip in a tax year, they’re not
usually too harsh but if it happens multiple times over a short period then
the CRA will penalize you up to 20% of the value of the slip regardless of
whether you would have actually owed taxes or not. Did you receive a slip
for $1 and think it’s not worth claiming? Think again, if you miss that $1
slip today and 3 years from now you miss the $10000 slip you could be in
for a $2000 penalty even if that slip didn’t trigger any taxes being owed.
3. Working in an at-risk industry (such as restaurants and construction)
that have been identified as part of the underground (cash) economy
This is why it is very important to declare ALL of your income, especially
when you are in an industry that CRA frequently runs special audits on.
4. Reporting business and/or rental losses for many years.
CRA knows when you first purchase a property and/or start a business, it’s
likely that you will have losses for a period of time while you are
building, but if those losses continue to pile up and/or don’t get smaller
over time, then you will likely find yourself with a letter from CRA. This
is commonly referred to as ‘reasonable expectation of profit’, and can vary
from industry to industry, depending on upfront costs to get started.
5. Paying unreasonable salaries and/or wages to non-arms length parties
(ex. parents, spouse, children)
It’s okay to hire your spouse or children to work for you, but how much you
pay them has to be reasonable based on skills and market. For example, you
can’t pay your children $100 per hour to clean your office if you wouldn’t
hire someone for that same wage outside of your family. But a restaurant
owner could hire their children to wash dishes at $15/hr if they would pay
the same wage to another person for the same work.
6. Demographical information
So you think that Statistics Canada Census every five years is a waste of
time? This census information is used for so many things such as targeted
social programs and building infrastructure, but the CRA also uses this
data to determine if you are paying your fair share of taxes. If people in
your area have a median family income of $120k per year and you are only
making $40k they may have questions for you. Especially if it’s typically
an affluent area.
7. Rounding and estimations
When you file your tax return you are expected to have all of your
accounting and bookkeeping up to date and properly entered, so if you file
your taxes with $100,000 in revenue, $5000 in Advertising, $3000 in meals
and entertainment, $6000 in office expenses, as well as $8000 in vehicle
expenses there is a very high probability that you will be called upon to
prove your claims since your expenses will never all work out to be even
numbers all the time.
8. Self-employed and independent contractors
Being self-employed or an independent contractor isn’t a guarantee to be
audited but there is a much higher risk because you are in charge of your
own tax filing. This means you could claim to have made $100k in sales and
paid $90k in expenses but if the CRA doesn’t feel this is reasonable based
on your line of business, they will question it for validity. Independent
contractors are also at a higher risk because the CRA quite often views
these “independents” as “self-employed employees”, meaning the company they
are contracting with doesn’t want to pay their holiday and vacation pay, or
statutory deductions such as CPP, EI, and WSIB, so they classify them this
way to avoid those expenses, which can add thousands of dollars per year to
the total costs.
9. Not filing returns
Quite often people go many years without filing tax returns, and this can
happen for many reasons such as lifestyle issues, family circumstances, or
just sheer laziness of the taxpayer, but if CRA believes that you owe them
money, they usually won’t let you go for long. The problem with waiting is,
quite often books and records are lost, misplaced and/or damaged (try
reading a thermal paper receipt 4 years after it’s been issued, or even 4
weeks if you left it on the dashboard of your vehicle)
When you hire Premier Professional Accountants to do the work for you, we
will make sure to do things properly, to keep the tax man away from you, or
at least make sure you sail through the audit without having to navigate
the heavy waves in rough seas.
With 20 years and counting of industry experience working in the field of accounting and taxation, Shawn P. Stemmler brings a depth of knowledge in government legislation including the Income Tax Act, Excise Tax Act, Employment Standards Act, and more to the table when serving our clients.
Shawn’s addition to the Premier Professional Accountants team in 2021 has been a welcomed addition for our clients. He’s quickly put his tax compliance knowledge to great use in helping clients navigate relationships with his existing client base and the clients of Premier Professional Accountants Inc.