Avoid Audit Triggers for your Business
If you’ve ever been audited it may come as a surprise but there may have been factors in your business that you could flag you. I always assume that the CRA uses data analysis to identify audit targets. We know for sure that they run audit programs based on likelihoods of collection. For example: there is currently a CRA audit project examining Class 10 automobile expenses in corporations. Here are our top 10 audit triggers for businesses:
1. Cash heavy businesses including restaurants, taxis, some construction business.
When you have a business operating mainly in cash the CRA expects that you are not fully reporting income. They are now aggressively investigating many cash businesses.
2. Vehicle expenses
At a glance the CRA can’t determine what percentage a vehicle is used for business. It’s vital that you keep a mileage log to keep track of your business trips and record all of your fuel, maintenance and insurance expenses.
3. Lifestyle incongruency may trigger an audit
If you live like a Instagram model but only claim $30k you’re waving a large red flag. CRA also looks at household income vs your neighbors.
4. Industry audit trigger
A tax audit can be triggered simply by the type of industry you’re in. Some businesses historically have a higher rate of errors, and CRA uses this history to focus on those industries more.
5. Variance from industry standard
The CRA compares your business to others in the same industry. For example if you have significantly higher cost of goods sold vs the average you could trigger an audit. You can find your industry averages on the Statistic Canada website.
6. Repeated losses
The CRA can flag your business for an audit if you claim repeat losses, especially if it is to offset other gains or earnings.
7. Requesting adjustments on filings
If a tax payer requests an adjustment that will reduce their taxable income, especially if they are requesting a refund they have a high chance of being flagged for an audit.
If there are discrepancies between documents this can trigger an audit, for example: HST return vs T2, payroll taxes vs T4, marital status of self and spouse. It’s best to use a professional – this is what we do!
9. Shareholder loans may flag you for audit
Shareholders who take revolving loans from their business are easy targets. Especially if they aren’t repaid within a year of the fiscal year end. Shareholder loans can quickly be added to your income and made not deductible in your business.
10. Prior audits
If you have previously received an audit based on a certain pattern of activity and that same pattern shows up again in subsequent years then the odds are higher for you to receive another audit.
Try to control the uncontrollable as best you can to avoid CRA audit triggers. Follow the golden rules: 1. File on time 2. pay your taxes and 3. pay on time.