Did you know certain types of tax filers tend to capture the Canada Revenue Agency’s (CRA) attention more than others?
Often the ones that catch the most attention from the CRA are sole proprietors or partnerships since it’s easier for these kinds of businesses to understate income and/or overstate expenses.
While you do have access to many legal deductions as a business owner in Canada, you should know that certain things will definitely raise a red flag. Here are seven things you need to know to avoid CRA audit:
1. Don’t Deduct Unrealistic Home Office Expenses
Do you work from home? The CRA allows employees, self-employed individuals, and small business owners to deduct home office expenses when they use their homes for business. However, the CRA sets requirements about how often you use the space and if it’s for personal use as well.
Usually, you’re allowed to deduct expenses based on the size of your home office.
For example, if your home office takes up 10% of your house, then you can deduct 10% of the cost of electricity, heating, and maintenance. However, you can’t deduct 10% of your mortgage interest, property taxes, home insurance, or capital cost allowance – this will surely raise a red flag.
You also need to be realistic about the size of your home office. If, for example, you have a five bedroom home, it’s unrealistic to say that your home office takes up 50% of your space. That’s just asking for an audit!
2. Don’t Deduct All Vehicle Expenses
If you need to use your car for work, the CRA lets you write off expenses related to the use of your vehicle. However, attempting to write off 100% of your vehicle expenses as work-related will inevitably catch the attention of the CRA.
For instance, if you use a snow plow for work because you own a snow removal company, writing off 100% of those vehicle expenses is legitimate. But if you own a minivan and work as a Virtual Assistant, chances are the CRA will find it suspicious if you claim that you use it exclusively for work.
3. Don’t Embellish Your Travel and Entertainment Expenses
Going away on business trips is certainly legal, and you can even deduct many of the expenses you accumulate while you are away. To avoid CRA audit, you must have proof that it was a legitimate business trip.
The CRA will want to know who you met with, where, and the purpose of the meeting. If your business dinner wasn’t really a chance to network, but more of an opportunity to impress your friends, don’t try and write it off! A good rule of thumb is to always write down what you talked about and what you presented to keep track of what was a legitimate expense or not.
4. Claiming Repeated Losses Can Raise a Red Flag
As a new business owner, you’re sure to experience a few tough years. However, if you continuously report business losses, the CRA might start to consider your business as a hobby. You’ll need to prove that your business is legitimate with real customers and income, even if your income doesn’t cover initial start-up costs.
5. Don’t Try to Hide Cash Income
Legally, you must report all your income to the CRA, including any cash or trade that you received in exchange for your services. Although it might seem easy to hide some money away, the CRA has various ways of determining the likelihood that you are collecting cash and not reporting it.
Often, the CRA will look at your tax return and compare your income to the income of others in your neighborhood. If you live in an area where the average house costs $1.5 million, but you’re only reporting an income of $30,000 a year, the CRA could become suspicious and decide to audit you.
6. Always Provide More Information When Asked
If you’re claiming a lot of deductions, the CRA might send you an inquiry notice asking to see proof. For example, if you’ve claimed a medical expense and filed your return electronically, the CRA could ask you to send in copies of the receipts that prove that you’re actually eligible for that deduction.
This is not an audit. All you need to do is send in your receipts as proof, usually within 30 days of receiving the inquiry notice. If you’re unable to provide evidence, you may not be able to avoid CRA audit. So always make sure you keep your records for a minimum of six years.
7. Don’t Round Your Income
Rounding up or down is never a good idea when it comes to filing your taxes. You need to declare the actual amount you earned down to the penny. If you made $52,582.61, then don’t file a tax return stating you made $52,000 even. Always double check your figures because if you submit a correction after you’ve sent in your income taxes, that mistake could raise a red flag and cause the CRA to take a closer look at your entire return.
Bonus Tip: Hire a Professional Accountant
As a business owner, there’s no guarantee that you’ll never be audited. Mistakes happen, and the CRA randomly chooses individuals and businesses for audits every year. By hiring a professional accountant who will help you file your taxes properly the first time, you will significantly reduce your chances of being audited.
Often the expense of hiring a professional accountant pays for itself in the long-run. You’ll have the peace of mind knowing that all your business deductions were reviewed by a professional who had a deep understanding tax law and your accountant will help you keep your books organized should the CRA ask for further proof.
If you’re looking for a professional accountant to add your team, reach out to Canadian Cloud Accounting. Our team of experts will stay on top of all your business financials and help you with all your government remittances! We look forward to serving you.
