red flags that could lead to a CRA audit

10 red flags that could lead to a CRA audit

Audits can stem from things you do — or don’t do — when filing your tax return.

Typically, the tax agency will send out about 30,000 letters a year letting Canadians know they’re being audited. While that’s just a fraction of the 27.5 million taxpayers out there, you may still be sweating over what to do if you are one of the lucky few.

But being chosen for a CRA audit isn’t as random as you may think it is.

You’re less likely to attract attention from the CRA if you watch out for these common red flags when you’re filing your taxes this season.

1. Discrepancies between your income and HST

One of the first things the CRA will do with your return is run a sales or revenue comparison. The agency will compare the sales reported on your corporate or personal income tax return to what was reported on Line 101 of your HST return from the same period.

If they notice a difference in the amounts, it raises a flag for the CRA that maybe sales have been under-reported for either your income tax or HST.

They’ll also take a closer look at your HST by comparing what you owe (13 percent of your reported sales) and how much was actually collected. If there’s a discrepancy, the CRA will ask you to clarify it.

You can run these calculations yourself in advance and get your supporting documentation prepared if the CRA comes back with questions.


2. Living large

If you’re living in a $3-million-dollar home, traveling most of the year on your personal yacht and collecting vintage cars, but reporting a $35,000 annual income, the CRA is not just going to assume you’re great at budgeting.

Red flag: on whatever scale you’re living, if it seems out of step with what you’re earning, it’s going to draw interest from the CRA.

That being said, some people who are legitimately good at budgeting and stretching a dollar may be flagged for a CRA audit through this approach. Before you get audited, the CRA will ask for clarification on what they see as questionable. All you’ll need to do is prove how you manage your money so well.

3. Being self-employed

Unfortunately, if you don’t receive a T4, you’re much more likely to be audited at some point in your career. That’s because when you receive a T4, it’s likely that your employer has withheld sufficient tax, so the CRA views you as low risk.

When it comes to auditing, the tax agency prefers to spend its time and energy on higher-risk taxpayers.

And when you’re self-employed, your taxes are not withheld at the source, which ups the likelihood that what you owe may be incorrectly reported.

Red flag: If you run your own business or work as a freelancer, or there’s not much, you can do to prevent being targeted for a CRA audit. Your best option is to set aside plenty of your earnings throughout the year (25 percent to 30 percent), keep all your documentation, and work with a tax professional or file with a reliable software program to ensure you claim everything appropriately.

4. Car claims

Even if you use your car for work, the CRA knows it’s unlikely you never use it for personal use. So if you’re claiming 100 percent of your vehicle expenses for business purposes, the CRA is going to be a little suspicious — especially since driving from home to work is technically considered personal use.

If you want to claim some of your car expenses on your taxes, what you should do is keep a detailed record of your kilometers, including the date, address, and purpose of each trip.


5. Running a cash business

Cash may be king, but it also causes plenty of trouble from its throne.

When your business involves a lot of cash transactions, it’s harder to trace those funds. And if you’re dealing in cash, it can be tempting (and oh so easy) to under-report how much money is actually passing through the business.

Knowing that the CRA often assumes more opportunities to recover taxes from undeclared cash income from this type of business.

If you’re running a restaurant, hair salon, or contracting business (or anything else that often deals in cash), keep accurate and detailed records if you ever get flagged.

Red flag: Be aware that the CRA will compare your business with others in your industry. So if you’re reporting 18 percent cash sales, but all the other restaurants in your neighborhood are declaring around 30 percent, you’re way more likely to be flagged.

And always avoid working for cash under the table. If you ever get audited, you’ll face major penalties and some hefty interest charges.

6. House flipping

With how much money you can make through buying and selling real estate, it’s something the CRA likes to keep a close eye on.

Common real-estate-related audits are HST rebates, pre-sale condo flips, new home construction, principal residence exemptions, and other less common real-estate transactions.

If you’re getting into house flipping or just involved in several home purchases and sales, you should expect to get audited eventually.

Red flag: The CRA has an audit project dedicated to these real-estate transactions. It has been monitoring new builds, keeping track of purchasers and whether they live in their units or end up selling them. The tax agency issue is that condo flippers often incorrectly categorize their taxable income, qualifying for lower tax rates by claiming capital gains treatment instead of income treatment.

Flippers have been able to continue to turn profits in the hot housing market — as homebuyers rush to take advantage of record-low mortgage rates before they disappear.

7. The family business

The family that works together often gets audited together. If you’ve got family members on the payroll or you work closely with them, if one of you is getting audited, that probably means you all are.

That’s especially true if one of you is on the payroll as a contractor, which unfortunately may not be fishy in your case, but is often a way for families to favor certain members and reduce their income tax liability.

Red flag: And if you’re involved in multiple businesses at the same time, expect the flags to multiply as well.

As with all the other freelancing, self-employment, or contractor situations, it’s just a matter of taking great care to maintain detailed and accurate records.

8. Large charitable donations

There are plenty of causes that need the help this year, and it doesn’t hurt that you can write-off that good deed, too.

But if your charitable donation is abnormally high compared to your income, it’s a red flag for the CRA.

Red flag: The tax agency is also on the lookout for donations to organizations they suspect are involved in tax schemes.

Remember, you can only claim donations to registered charitable organizations, and if you’re asked, you’ll need to be able to present an official tax receipt. Don’t claim anything you can’t get a receipt for.
9. Home office expenses

It’s time to finally expense all those new home office products you bought last year, right?

Red flag: Even though the pandemic forced more people than ever to work from home in 2020, like vehicle costs, home office expenses are often over-declared and not based on actual costs.

For example, some people improperly include regular home maintenance, like cleaning, snow clearing, or landscaping in their home office expenses.

This year, with so many forced to work from home during the pandemic, the CRA introduced a new temporary flat rate method for tax filers just for 2020. As long as you worked from home more than 50 percent of the time for at least four consecutive weeks, you can claim $2 for each day you worked from home. You can claim a maximum of $400 for the year.


10. Previous tax audits

While it’s not always a guarantee that one audit means you’ll be audited again, if the CRA finds several discrepancies, errors, or omissions the first time you’re audited, you can probably count on repeat audits.

That being said, if it was an issue that is easily resolved or just a few hundred dollars worth of errors, your risk category will be knocked back down, making it less likely you’ll end up getting audited again.

What’s the takeaway here? Always make sure you’re keeping proper documentation, only claiming what you’re eligible for and filing your taxes promptly each year.


Source: Wise Publishing, Inc.


Events & Sponsorship

Talent Kids Event 2017

August 19, 2017 RGB Accounting has proudly sponsored the 2017 Talent Kids event organized by Pecora Events on August 19th. RGB Accounting wants to thank organizers, presenters, judges, and all participants for making this a great event. Here we share some of the...

Los Nocheros USA/Canada Tour 2017

June 02, 2017 Argentina's biggest folkloric phenomenon arrived in Toronto, Canada to celebrate its 30 years trajectory. RGB Accounting was one of the sponsors of the event. More from our blog   Newsletters Events & Sponsorship Articles &...

2nd Latin American Entrepreneur Conference

May 29, 2017 The Entrepreneur Conference was organized by the City of Toronto's Economic Development & Culture department in partnership with the Latin American Bi-Lateral Trade Initiative (LABTI) which consists of the Consulate Generals of Argentina, Brazil,...

Tax Season 2017 at La Liga Indoor Soccer

April 29, 2017 RGB Accounting has been sponsoring social events to promote cultural values in the hispanic community of Toronto and the GTA. The During the last tax season, RGB Accounting helped many individuals and small business owners to prepare their taxes,...

Articles & Publications

Home office expenses for employees

Home office expenses for employees Calculate your expenses To understand the math behind the home office expenses calculation, refer to how the claim is calculated. To use the calculator, select from the options below. A temporary flat rate of $2 for each day you...

Tax impacts of leaving Canada to live elsewhere

Tax impacts of leaving Canada to live elsewhere. You must carefully consider numerous tax impacts before deciding to leave Canada to live elsewhere. Analyzing the termination of your tax residence is a question of fact. Generally, the Canada Revenue Agency will...

Selling your business shares to a family member?

Selling your business shares to a family member?   A new law means significant tax relief when you pass your business on to your kids.   A recent change to Canada’s Income Tax Act (ITA) could reduce the tax sting associated with selling your business shares...

Tax changes in the latest fiscal update.

Tax changes in the latest fiscal update. If you're working from home, you can claim up to $500 for office expenses with the temporary flat rate method There were very few broad-based tax changes in the recently released federal government's fall economic statement....

COVID-19 Update January 2022

COVID-19 Update   Federal   Expanding Access to the Local Lockdown Program (December 22, 2021) The Department of Finance announced that the government intends to expand the Local Lockdown Program eligibility to access the wage and rent subsidies to more...