The CRA scrutinizes the tax returns of small businesses especially closely, so Canadians who are self-employed always have a higher risk of being audited than those who are employed by others.
And while there’s no sure-fire way to avoid a CRA audit, you can cut down the odds by avoiding known audit triggers.
If you want to decrease the chances of your small business being audited by the CRA, avoid these attention-drawing triggers on your income tax:
1) Revenue discrepancies.
Be aware that your revenue will be compared across all tax forms, so the revenue you declare on your income tax form will be compared with the revenue declared on your HST tax return, your spouse’s tax return, and “information on tax returns with information provided by employers, financial institutions, and other third parties”. If they don’t match, it’s audit time.
2) Being an outlier.
Declaring business income that’s significantly higher or lower than the norm in your industry will also immediately draw interest. The CRA has extensive information about the profit margins and incomes for various industries and will compare your income to what’s “usual” for such a business.
3) Deducting large business expenses.
While being able to deduct business expenses from your income tax is one of the big tax advantages of operating a business, you need to be cautious about it. Advertising and promotion, meals and entertainment, travel, miscellaneous and interest expenses are of particular interest to the CRA, according to G&R CPA in Halifax.
Learn the ins and outs of claiming meals and entertainment expenses.
4) Changes in shareholder loans and large balances.
Corporate business owners also need to take heed that changes in shareholder loans or debit balances are red flags too. The CRA looks for personal expenses recorded as business expenses and loans taken from a company.
5) Having family on the payroll.
There’s nothing wrong with having your spouse or child work as an employee in your business; this kind of income splitting is perfectly legitimate – as long as you follow the rules. The problem is that many small businesses don’t, making small businesses that put their spouse or child on the payroll an easy target.
The family member must be active in the business, maintain employee records and salary be comparable to an outside person doing the same job.