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.

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.

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.

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

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.

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.

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.