The Canada Revenue Agency (CRA) is focusing more and more on targeted auditing which can have serious repercussions on small business owners if the numbers on their filings at tax time are not adding up. As an experienced small business accountant, I have outlined 10 red flags below that the CRA seeks out during audit season for businesses to help you and your business proactively plan accordingly.
Can you confidently say that your business’s books are bullet-proof? Is your business prudent with every area of filing during tax season? Hiring a small business accountant to ensure that your business’s taxes are filed accurately can go a long way.
The Canada Revenue Agency (CRA) has become increasingly intentional in its tax audits over the last decade due to research discovering that random audits detected a measly 12.2% non-compliant cases compared to targeted audits based on risk assessment that detected significantly more non-compliant cases at a staggering 46.7%.
In 2017, approximately 30,000 businesses received the dreaded letter from CRA notifying them that they were subject to an audit during return season. More than half of these businesses were small to medium-sized.
As a small business accountant, I will disclose the red flags that will prompt you and your small business to gain unwanted attention by CRA during audit season:
- Revenue Discrepancies — Is your income consistent across all tax forms? Is the revenue noted on your tax return consistent with the revenue claimed for your business’s GST/HST tax return, spouse’s tax return, information on tax returns filed by employers, financial institutions and other third parties? Are the numbers adding up and telling the same story? If there is any inconsistency, your business will have a higher chance of being flagged.
- Out Of The Ordinary — Declaring business income that is much higher or lower than similar businesses in your industry will get the attention of the CRA. They have a substantial amount of data from countless years of filed tax returns that have helped them pinpoint an approximate expected income revenue for specific businesses. If your business’s income falls outside of the industry standard, your business will likely be flagged.
- Unusually High Business Expenses — Sizeable business deductions in advertising and promotion, meals and entertainment, travel, miscellaneous and interest expenses will increase your business’s chances of being flagged by the CRA during audit season.
- Home Office Deduction — If the percentage claimed as space dedicated to your home office is disproportionate to the rest of your house, or the area claimed is not exclusively used for your business, the CRA will flag your tax return as a business of interest.
- Business Use of Vehicle — Many small businesses claim 100% use of their vehicle for business, when that couldn’t be further from the truth, and the CRA is vigilant on these claims. If a business claims 100% use of a vehicle, your business and tax return is instantly on their radar.
- Shareholder Loans and High Balances — The CRA looks for personal expenses recorded as business expenses and loans taken from a company. This includes a difference reported in shareholder loans or unusually high balances.
- Running a Cash-Incentive Business – Independent contractors, small retail outlets and food service operators, hairdressers, home-based businesses, professionals, real estate agents and daycare owners are the most likely businesses to be flagged for an audit. This is due to the fact that these businesses have the opportunity to receive cash and potentially not report all income.
- Recurring Reported Losses – Let’s face it, losses happen sometimes. It can be the cost of doing business depending on the nature and industry of your business. What the CRA is really focused on is recurring losses that are reported to offset other income. If reported losses when filing business taxes becomes common, the CRA will most likely flag your business for an audit.
- Large Charitable Donations – Donations have come under scrutiny lately as more “buy -low-donate-high” charitable donations are arising. This can involve anything, whereby one colludes with a dealer to buy these items relatively cheap, and then makes a donation for a tax receipt from a registered charity at a higher market value. The CRA has an idea of the dollar value that is donated by businesses of your stature, and if it is noticeably higher than the “norm”, your business will likely be flagged.
- Family On The Payroll — Unfortunately, too many small businesses with family on the payroll have abused the Canadian tax system and not reported income and paid family members correctly to CRA standards; therefore a business that has family on the payroll has a high chance of being flagged.
It is safe to say that as a small business owner, you are going into tax season as an underdog. In addition to the 10 factors listed above that can cause you to be flagged during audit season, self-employment is also a disadvantage when filing.
Hiring a small business accountant that is experienced with filing for small to medium-sized businesses can help you file your taxes with peace of mind. Knowing that your tax return is audit-proof and you can focus on your business’s operations is priceless.
Contact Me
For any questions you may have, please feel free to contact me by phone at (306) 530-9548 or by using my online contact form below.
