Top Reasons Why You Might Get Audited
Coming up to the end of the year, we have not only seen a large uptick in the number of CRA reviews/audits for clients but have also talked to accountants who have seen the same thing with their clients. There is no way of knowing for sure who will be selected for an audit but there are certain situations where you should absolutely make sure you have everything correct with the proper documentation and backup.
It’s important not to panic if selected. If you have the proper backup and know your expenses are legitimate expenses you won’t have anything to worry about. CRA will usually give you 30 days to respond from the date their letter was sent. If you need more time you can usually call and they will extend the time frame.
Individuals/Self Employed
Consecutive business losses or ABIL
Operating a side business or a small business with losses each year could get CRA come looking. If you are claiming a loss on shares of a private Canadian corporation (Allowable Business Investment Loss) this, could also trigger an audit.
Large rental expenses relative to income
Any time a rental property on form T776 creates large losses, CRA will want a breakdown of all the expenses going into that loss because this loss will reduce your income from other sources you claim, thereby potentially getting a larger refund. CRA might want to see projections of how the rental income in the future will look, how you priced your rental per month and plans on how you intend to get the rental property into a profitable position.
Legal expenses
If you try to deduct a large amount of legal expenses for the year, you are almost certain to have these audited. Usually you can claim legal expenses on your tax return when you are trying to collect a salary from a former or current employer, or fighting CRA when they are reviewing your income tax return.
Large home office expenses
If claiming a home office you would report the square footage of your home divided by the total square footage of the house, multiplied by all home office expenses. If you are reporting extremely large home office expenses or the square footage of your office seems too large, that could trigger CRA to come looking for more information.
Out of country medical
Claiming large amounts of out of country medical bills could mean that CRA would want to verify that the medical expenses falls under eligible medical expenses in Canada.
Support payments
Because any support payments to an ex-spouse is deductible, this area has a higher chance of being reviewed.
Out of country tuition
Tuition outside of Canada can get very pricey. Usually in the $30,000 and up per year. For anyone claiming out of Canada tuition, you will need to have the TL11A form that will be completed by the university your child attended.
Rounded numbers
If you are using all round numbers in your tax return, it indicates to CRA you could be just guessing the amounts and don’t have actual receipts to back it up. Putting in $2,000, $5,000, $1,500 is more suspect than $2,394.53, $5,090.43 or $1,598.34.
Vehicle expenses
If you have the same amount of kilometres driven each year, it could prompt an audit. You need to keep a log of kms driven for business each year and the total kms driven throughout the year. CRA will want to see this log and if not you might have to go back in time and reconstruct it. Easier to just keep it.
Amendments
I’ve noticed that any time a client was getting a refund and they missed certain expenses on the initial return, once we amended the tax return to receive a larger refund, it usually meant CRA wanted more details of all the expenses.
Corporations
HST collected for the year doesn’t match up with total revenue on T2/financial statements
Cash types of businesses like restaurants, landscaping, etc.
Paying family members wages that aren’t representative of actual work performed
Large variances of income or expenses compared to other years
Random selection
Shareholder loan balances on each balance sheet
If someone has a poor compliance history with CRA in terms of always filing late or past review issues, the odds are higher that they will be reviewed in the future.
The CRA also has a “snitch” line. So if you have an ex-business/ex-martial partner or someone mad like an angry neighbour at you that knows you are doing something wrong tax wise, they could call this line and tell CRA.
If you are contacted one thing to keep in mind is that CRA wants to see actual receipts, not just the invoice/amount being charged to the bank or credit card you used. If you had bought more than one thing at the time of purchase like paper for your business but than also groceries on the same bill, the statement won’t show the breakdown. The actual receipt will. You should keep these receipts for 6 years from after filing the tax return.
DISCLAIMER: The articles posted on TaxCrunch should not be considered specific advice to anyone readying. Please reach out to a professional advisor to seek guidance on any issues mentioned in this post before acting upon anything written here. All posts are time sensitive to what is law at the time written and are subject to changes in legislation.