What Triggers Tax Audits in Canada
The Canada Revenue Agency (CRA) uses a risk assessment system to help them pinpoint which tax returns might need their attention. Through this system, along with the Matching Program, the agency is in a preferable position to identify auditable returns. While choosing which tax return they should audit is randomly done, CRA gets alerted when they encounter a specific tax document with lacking or unverifiable information.
Why Businesses Find Tax Audits Unpleasant
A CRA audit involves an examination of records and books to find out whether a business’s tax returns correctly reflect all of its earnings, revenues, and expenses for a given period. While the audit doesn’t always leave business owners worried, they might be found guilty of tax-related offences. It’s an inconvenient, unwelcome disruption. The audit can escalate quickly if not done correctly, leaving you with significant personal and financial consequences.
This is why most business owners avoid a tax audit in Canada. This is also why these businesses hire accounting experts to keep their records and file their tax returns on their behalf. If your records are in order, you will come out of it unscathed, no matter how many tax audits the CRA conducts.
Apart from choosing a skilled accounting firm, you can also skip CRA tax audits by knowing what triggers it. If you can stay away from these events, you can also prevent business disruptions and inconveniences.
Unusual Alterations in Credits or Deductions
If you have more credit or deduction claims than in the past years, there is a very high chance that CRA will flag your tax returns for checking. Fortunately, if you have sufficient pieces of evidence to substantiate your claims, the tax auditor will close your case and subsequently issue a completion letter.
Unreasonable Business Expenses
Suppose you’re self-employed or a small business owner, an excessive business-related expense in your tax documents can launch an audit. CRA may consider such expense reasonable if operating in a small home office.
However, CRA might consider it a red flag if you claim that your office takes more than half of your property. In the same vein, if you declare that all of your vehicle-related expenses are business expenses, the CRA will also find you suspicious, since this is unreasonable.
If you’re self-employed and completing your tax returns, you need to be as accurate as possible. Keep all records to help you substantiate your claims. The mere fact that you’re self-employed can raise the risk of being audited.
If you’re a company employee, your employee will issue a document called T4 or the Statement of Remuneration Paid. The latter will also send a copy of this file to the CRA. If you fail to report all your T4 income, the risk assessment system will most likely pick this fact up.
Moreover, if you declare a notably less income than similarly situated individuals within your neighbourhood, CRA will also consider this a red flag. When the said agency suspects people’s involvement in an under-the-table business or underground economy, they have a plethora of ways to paint a more accurate financial picture. This will help them come up with a higher tax computation.
Keep Your Tax Records in Order
A tax audit may not be completely avoidable. However, you can prevent them from happening by taking note of these triggers. It’s also a great practice always keep your financial records in order. If you can’t handle your books and financial documents, it’s best to give the job to the experts. You may pay for their expertise, but it can spare you from many “humps and bumps” with the CRA.
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