Anyone who has filed a tax return has concerns about an audit. Although many audits are simply a random sampling, audits are generally triggered by certain factors that will make it more susceptible to a second look. This article will look at a number of those areas that the CRA targets.
Self-Employment – Most people work for an employer who withholds taxes and reports that information both to the individual and to the Canada Revenue Agency. When someone is self-employed, they do not receive a T4 and that can make the CRA a little more willing to look into your books.
Where you Work – There are a number of businesses or fields that deal with cash transactions, like wait staff in a restaurant, an owner of a construction company, or someone who buys or sells gold.
Expenses – In our growing electronic age, it is very easy for the CRA to compare your expenses with your competitors in the same industry. If your data is out of line with the others, someone will probably question the return.
Adjustments – If you have requested a refund or other significant adjustment to the taxable income, the return will be reviewed. The CRA doesn’t want to make any adjustments unless they are sure they are correct and warranted.
Real Estate – There are certainly a number of opportunities in the real estate market today. The CRA is aware of that and pays close attention when something shows up in the tax return.
Repeated Loss – If you operate a business, the CRA believes that you should have a “reasonable expectation of profit”. So, if your business continually loses money, and especially if those losses offset other income, your return will be checked carefully.
High Expenses – A red flag is when an individual uses their personal vehicle for business travel. If you keep detailed records and logs of mileage and other business expenses to back up your deduction, you will have no problem justifying your return. The problem is when the expenses are estimated without any documentation back up so the CRA can easily deny the entries.
Similarly those people who claim home office expenses are under analysis. They will look at such things as actual home space devoted to business versus what is reported, as well as charging off cleaning costs, storage areas, etc. Again, the CRA will use available information to compare your claim versus standard usage. If it appears out of line, you will be audited.
Charitable Contributions – Always keep all receipts. If you claim donations of clothing or other items to a thrift shop, be sure to get a signed document that you can retain. If charitable deductions seem out of line, there is a good chance of a CRA audit. Also if you contributed money to a charity that has subsequently been found to be suspicious or fraudulent, this will also trigger a closer look at all the contributions you made.
There are many other factors that make up a CRA audit, but these are a few of the more common situations that will cause the CRA to take notice of your returns.
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- The Capex Team