Ask the author | 9.1.2017 | No Comments

A Canada Revenue Agency (CRA) audit of your small business costs money, takes up your time, and causes a whole lot of stress. Is it possible to avoid a CRA audit? There are no guarantees, but here are some tips that may help keep you off the CRA’s radar screen.

  1. Be aware that there are different types of audits – “An audit is a review of your business’ books and records by the CRA to ensure that your tax return accurately reflects the taxes owed by the business and to ensure the business is meeting all of its filing and payment obligations,” says Chartered Professional Accountant Chris Bodnar, a partner with Crawford, Smith & Swallow LLP in Niagara Falls. “The CRA may perform an income tax audit, a Harmonized Sales Tax (HST) audit and an employer compliance audit, which includes Canada Pension Plan, Employment Insurance, tax withholding and taxable benefit reporting.” The CRA may audit records at its offices or perform a field audit, meaning it reviews records at your place of business or CA’s office.
  1. Understand how the CRA decides who to audit – “The CRA typically uses four ways to select businesses to audit,” explains Chartered Professional Accountant Winnie Yu Wong, a partner with Chan Yu Wong Chartered Accountants LLP in Richmond Hill. “It can use a computer-generated list to select financial information of businesses within the same industry or occupation, which is then used to decide who to audit. The CRA also carries out projects targeting particular groups or businesses from time to time, usually when there are indications of significant tax filing non-compliance within the group. The third way is responding to information from other audits, investigations, outside sources or tips. Last, but not least, they select many files because of their association with other files. For example, if your business partner is being audited, your file will likely be triggered for an audit as well.” Audits can also be random or triggered by an unusual tax filing or comparison of information to third-party sources such as tax information slips.
  1. Avoid audit triggers – “Audit triggers include consecutive years of losses reported, especially if the business is owned personally and/or has an element of personal enjoyment to it,” says Bodnar. “High expense claims relative to business revenue and compared to other businesses in your industry can also be a red flag. Unreported or under-reported income is a major audit trigger, as are large charitable donations and transactions with non-arm’s length parties.” The CRA may also audit you if your lifestyle does not match your reported income level, if you claim excessive home office deductions or if you contribute to tax shelters that are being investigated.
  1. Keep good records – “Claiming personal expenses as a business deduction is probably the area most attacked by the CRA,” says Bodnar “Keep business and personal expenses separate and have separate bank accounts for your business and personal finances. Keep documentation and receipts for expenses you want to claim, and, if there is a personal element, document the business connection on the receipt.”
  1. File and pay your taxes on time – “Late filing or payment may well attract phone calls or appointments with the CRA for audits,” warns Yu Wong. “Make sure your returns are accurate and complete.”
  1. Consult a Chartered Accountant – “Your CPA will help make sure your returns are prepared correctly, with completed records and proper documentation,” says Yu Wong. “If a CRA audit ever arises, your CPA can perform a review of your returns to ensure transparency and will help you respond to the auditor’s questions.” Because your CPA understands tax law and CRA positions, he or she can also recommend legitimate tax-planning strategies and calculate the minimum amount of tax you owe.

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