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Tax Reporting Behaviours That Can Lead to a CRA Audit of Your Business

Guest Post | Nov 19, 2022

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As a business owner, it can be tempting to play up your expenses and tamp down your income to “help” reduce your payable tax amounts. While many Canadians round up or down here and there, entering false information on a tax return is against the law and can lead to more trouble than it’s worth.

As the experts at Taxpage will tell you, the CRA has a lot of data it relies on when processing returns and software designed specifically to catch and flag anomalies. The list below contains some of the more common ways business owners draw the wrong kind of attention to themselves.

Things You Can Do To Get Your Business Audited

While there are no rules written in stone about what triggers a tax audit, and many are simply random, doing the following can put you at risk of a CRA audit.

Drastic Changes in Income Reporting

Sudden changes in your revenues, expenses, credits, deductions, etc., especially those that significantly impact your total payable or owed, can get noticed.

Constantly Losing Money

Losses at startup are normal and expected, but if it’s years down the road and you’re still losing money, the CRA might want to know how you’re still in business.

Out-of-Whack Expense Reporting

When you file your taxes under the appropriate industry code, just assume that your return is being compared to industry averages. If you think the CRA is unaware of what your expenses should be, think again.

The same is true if you operate a home business and try to write off all of your monthly bills, home renos, new tech and home furnishings.

Income Underreporting

Again, industry codes give the CRA information on average profit margins in your industry. Underreporting your net income may get you flagged.

Charitable Donations That Don’t Make Sense

If your charitable donations represent a significant-to-large percentage of your net income, this obviously looks suspicious.

Not Reporting Your T-Slips

If you’ve received a T slip such as a T4, T4(OAS), T4(p), T5, T4A, etc., you can rest assured that the CRA has received it too. Not reporting it will only cause them to investigate whether it was you or your employer that didn’t properly report.

Unpaid Loans to Shareholders

If you or another shareholder in your corporation takes a loan from the business and doesn’t repay it within a year or is taking a loan every year, this can very much look like unreported income on a personal tax return that should be taxed at a higher rate.

Discrepancies Between Your Income Tax and HST Returns

Yes, these two returns are checked against each other, so if you report different revenue numbers on each, you can reasonably expect a tax audit.

The Bottom Line on CRA Audits

If you are notified of an impending CRA audit, don’t waste any time or try to represent yourself at the audit; hire a tax lawyer right away. The CRA is out to prove that you made a mistake (or worse) and is going to look at the numbers through that accusatory lens.

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If they ask you questions, you must answer, and any answer you give, they will use to try and incriminate you further. You need an advocate on your side who will keep them honest, protect you from yourself and potentially save you large amounts of money on a reassessment.

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