The Type of Business That Is Most Likely to Receive a CRA Audit
The first thing you must be aware of is that if you own a small business, the CRA will be watching you closely. According to the Canada Revenue Agency Annual Report, 54% of the CRA’s resources are directed toward performing CRA audits on small businesses.
Here are my top 5 tips to avoid getting a CRA audit.
1. Don’t Claim Everything as a Business Deductible
One of the most significant advantages of owning a small business is the ability to deduct business expenses from your income tax—a word of caution to those doing this in excess.
Business expense deductibles are one of the first things the CRA will look for when they begin sniffing around your company’s finances. If you’re racking up business expense deductibles on entertainment, travel, meals, and other miscellaneous purchases, your chances of getting a CRA audit skyrocket.
2. Get Organized if You Own a Cash-Intensive Business
Do you own a cash-intensive business? If you do, a CRA audit could be coming. This applies to restaurants, barbershops, home improvement contractors, and retail businesses. Unfortunately, you cannot do much to prevent these CRA audits, but you can be prepared. Avoid using handwritten receipts and opt for print receipts instead. Also, consider hiring a tax accountant professional to keep track of your books or invest in tax software if you’re tech-savvy.
3. Avoid Claiming 100% Business Use of a Vehicle
Claiming 100% business use of a vehicle is like shooting a solar flare up in the air and telling the CRA to find you. The CRA knows that most people will not use a vehicle for business matters 100% of the time. If you do use a vehicle strictly for business, make sure you keep the required records. Keep a written or electronic log of your miles, the dates you used the car, where you were going, and why.
4. Use Your Home Office Exclusively for Work
I’ve seen people fall into the home office deduction trap repeatedly. After all, who wouldn’t want to deduct a portion of their real estate taxes, rent, phone bill, and utility insurance? The part that usually gets people in a bind is the fine print that states you can only use a home office workspace to earn business income. The CRA knows that many people won’t use their space exclusively for business and thus target them for audits.
5. Try Not to Report Multiple Losses
Most businesses will inevitably have ups and downs. Reporting a single business loss isn’t cause for alarm, but doing it yearly could result in a CRA audit. Remember, to qualify as a business; there has to be a reasonable expectation for profit. Don’t leave it up to the CRA to decide what’s reasonable and what’s not.
Bottom Line
Hiring a tax audit accountant or CPA bookkeeper can significantly decrease your chances of getting audited. Knowing your exact numbers allows you to maximize savings, find profitable opportunities, and avoid long-term mistakes.
Disclaimer – This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please seek for professional advice to discuss these matters in the context of your particular circumstances. Aura Finance Inc., its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.