While being audited may seem like a random and unjust punishment from the universe, there are concrete reasons why one business or individual is targeted over another. Far from picking names out of a hat, the Canada Revenue Agency (CRA) has a sophisticated assessment system working behind the scenes.
Using purpose-built tools and programs, the CRA can zero in on returns that look incomplete, inaccurate, overblown, or otherwise fishy. These are the ‘high-risk’ outliers that attract the CRA’s attention.
If you want to avoid the stress, inconvenience and intrusion of a CRA audit, steering clear of the following triggers will tilt the odds in your favour.
- There are many reasons the CRA may audit your tax return, such as random selection, tax history, or types of deductions claimed.
- It’s important to report all of your income on your tax return.
- If you are self-employed, be sure to implement good record keeping so you’re ready to provide information if and when the CRA asks for it.
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1. Forgetting to report income
Not reporting your income from T-slips is never a good idea. This is because any employer you work for will issue you a T4 and send the CRA a copy. If you don’t report all of your T4 income, the CRA will notice.
Avoid this misstep by keeping a record of any transaction that involves a cash payment—and remembering to claim it when the time comes.
2. Claiming unusually high credits or deductions
The CRA looks for consistency in your tax returns, even when you’re self-employed or running a small business. If, in a given year there’s a sudden and dramatic rise in your income (or your credits and deductions), your return may be flagged for a review.
Making sure you’ve clearly documented all activity will go a long way if the CRA comes knocking.
3. Refusing (or forgetting) to provide more information
If the CRA has questions or concerns about your tax return, they’ll request more information via a Request for information. If you receive one, resistance is futile!
Providing the requested information promptly and politely is the best thing you can do to put their concerns to rest and prevent the situation from escalating into an audit.
4. Home office deductions that are through the roof
A home office that takes up 10% of your home’s floor space seems reasonable. A home office that takes up half of your six-bedroom home seems unrealistic and may trigger an audit.
When calculating what percentage of your home is used for your business, or WFH office space, be precise, be reasonable, and, above all, follow the CRA’s guidelines for making home office deductions.
5. Writing off 100% of your vehicle
If you own a parking garage and buy a snowplow, the CRA may not raise an eyebrow if you write-off the entire purchase as a business expense. If, however, you attempt to write off 100% of the family sedan, the CRA may have a hard time believing you don’t use it to take the kids to playdates and soccer practice.
The same logic applies to vehicle-related expenses: be precise, be reasonable, and follow the guidelines.
6. Overusing tax shelters
Legitimate tax shelters like RRSPs or TFSAs are perfectly acceptable and won’t ever raise an eyebrow at the CRA. Warning bells go off, however, when they come across a non-profit they’ve never heard of. This is because thousands of audits are triggered every year from fake non-profit organizations and their sketchy receipts, which are notorious for inflating donation amounts.
Before donating to your favourite cause, make sure it is on the ‘official’ CRA list of charities. Especially if you intend to claim your donation against your taxable income.
7. A rental property that keeps losing money
Do you own a rental property, like a condo, or rent out the basement apartment in your home? It’s possible your expenses may exceed your rental income. In a year of extensive repairs or a prolonged vacancy, for example, claiming a loss is acceptable. When losses occur for consecutive years, however, the CRA will likely take notice.
Be ready to justify your claim with a well-documented account of your expenses.
3 tips to keep in mind
Still worried the universe is against you and you’ll somehow be flagged for audit? For the ultimate piece of mind, here are three final tips:
- Make accurate record-keeping your favourite. If you’re self-employed, accounting software like Quickbooks makes the process simple and intuitive.
- Register for CRA My Account. By housing all your tax information and account balances in one place, this feature dramatically reduces the odds of having an inaccurate or incomplete return, which in turn greatly reduces the odds of being audited. A total game-changer.
- If you notice an error or omission after you’ve filed, amend your return. It’s easy and worth the effort. Remember: accuracy and transparency are your best defense against attracting the kind of attention you don’t want.
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