Getting a notice of audit from the Canada Revenue Agency (CRA) is the worst fear of every taxpayer. But, provided you keep accurate records that the CRA needs to review, you don’t have to worry about getting audited. And unless you have a small business, you’re less likely to be subject to CRA audits.
Personal income tax returns are not a significant compliance risk compared to business income tax returns. This means you have less chance of encountering a tax investigation if you’re an individual taxpayer. However, if you’re managing a small business, going through a time-consuming and potentially expensive tax audit is the last thing you want on your plate.
So, is there any way you can avoid an income tax audit in your business? Not drawing the attention of CRA auditors is the best thing you can do.
Thus, be mindful of the following factors that make you more prone to a tax audit:
1. Cash-Intensive Industry
The industry you belong to can increase your likelihood of being audited. If you’re part of cash-intensive sectors, such as construction, restaurants, and retail, the CRA is more likely to target you for an audit.
Such industries often have extensive cash transactions, making them more susceptible to tax fraud. If this is your case, be more careful with your tax filings and prepare for more potential inquiries at the starting point.
2. Repeated Business Losses
Every small business experiences losses. But showing repeated losses over multiple years can lead to the CRA questioning if your business is legalized. You need to demonstrate a reasonable expectation of profit to qualify as a legitimate business.
The CRA will get suspicious if your business losses continue for several years. They’re likely to look into your expenses and evaluate if there are personal costs you reported as business expenses to show losses or avoid taxes.
3. Unreasonable Expense Claims
One of the significant tax advantages of running a small business is the ability to deduct its expenses. But claiming unreasonable expenses is a surefire way to subject your business to a CRA tax audit. Since they usually pay special attention to miscellaneous and interest costs, you need to be more careful in claiming large deductions in these areas.
4. Income Tax Discrepancies
Any discrepancy in your income tax returns is a significant red flag for the CRA. Remember that they usually compare your reported income tax return to your industry and location average.
For example, you live in a neighborhood with an average income of $100,000, but you only reported $45,000. Such discrepancies can draw unwanted attention from the CRA.
Ensure to give an accurate picture of your business in your tax filings and be as diligent as possible to steer clear of discrepancies.
5. Rounded-Off Numbers in Tax Returns
The CRA expects you to report exact amounts of your income and expenses up to the cent. If they see rounded-off numbers in your tax returns, they will likely believe that you don’t have the receipts or you’re only providing estimates. Make sure to put exact numbers to avoid CRA suspicion and tax audit.
6. Ensure Your Tax Filings Don’t Attract Undue Attention
Anyone can get audited by the CRA. However, avoiding the factors we discussed can help decrease your risks. Be more careful and proactive in filing your tax returns so you won’t easily attract the undue attention of the CRA. Still, preparing your business for a possible CRA tax audit is always a good idea.