The Canada Revenue Agency (CRA) uses tax audits to make sure that your tax return correctly reflects the taxes you are required to pay to the government. There are two degrees of seriousness associated with tax audits that a Canadian business may experience. One is a desk audit, in which the Canada Revenue Agency just wants to investigate one section of a tax return that could seem dubious. Another option is a thorough audit.
A taxpayer may occasionally be chosen at random for an audit. There is nothing you can do to change it; it's like hitting the very worst prize there is. Apart from a random tax audit, however, the likelihood of being the subject of an audit depends on several risk factors. A Canadian income tax return is reviewed by both computers and humans when it is submitted to the CRA. Then, certain deductions could be noted, leading to an information request. This process is a verification rather than an audit, but it might lead to a tax audit of the return.
What are Tax Audits?
A tax audit is a tax law set by the government in which the Canada Revenue Agency (CRA) inspects the taxpayer to determine whether their books and financial records are correctly fulfilled and submitted to the law-making agency. This helps the Canada Revenue Agency (CRA) to distribute benefits and refunds that they deserve.
Moreover, the Canada Revenue Agency (CRA) audits someone for up to four to five years after the tax duties are documented and registered. But in the case of suspicion and fraud, the Canada Revenue Agency (CRA) can reassess and check again.
How does the Canadian Revenue Agency choose which companies to audit?
The Canada Revenue Agency (CRA) usually targets those industries and companies which show trends of non-compliance. Doing this sets a specimen to stop fraud and unfavourable tax documentation habits. Likewise, Canada Revenue Agency (CRA) computer software picks certain firms to be investigated more. They could carry out an audit response to a tip, obtain information from a third party, or analyze the investigation. Furthermore, the Canada Revenue Agency (CRA)can also choose a company to audit that has an unfavourable association. Even if another company is connected or has any links together, then that company will be investigated by CRA as well.
Now let's look at ways to avoid a Tax Audit.
- Unjustified Cost Claims
- Rounding up the figures
- Not Including T-slip
- Tax Fraud
- Registered as self-employed
- Overpayment to family members
- Businesses operate at a loss year after year.
Unjustified Cost Claims
The Canada Revenue Agency (CRA) might start to get suspicious if there are extra or unjustified expenses. So the company needs to make sure all of its spending expenses can be broken down and justified, especially when compared to the income received or the costs of other organizations with a comparable business model.
Taxpayer data is matched and compared by the Canada Revenue Agency (CRA) computer. A taxpayer might anticipate an audit if they stand out. A warning would be reported to the company, and an investigation would take place.
For instance, if you document that the cost of transportation of the product and material is $10,000 and sales of that product are $90,000, CRA will investigate and check records and books. Doing this will help them understand the calculation and confirm the truth of the statement.
Rounding up the figures
The Canada Revenue Agency (CRA) wants an amount documented and written down to the proper cent. Rounding up the figures produces poor record keeping and gives the impression that you are providing an estimation. This thing will give the Canada Revenue Agency (CRA) a bad impression, and they might suspect the lack of receipts for the cost you’ve claimed. CRA audits want the companies to provide the exact amount instead of rounding it off. For example, instead of submitting the amount of $9800, you should write the exact number of $98,852.23.
Not Including T-slip
The T Slip is an important document that many people fail or forget to attach to their documents. The Canada Revenue Agency (CRA) has matching software that will find the missing T slips. However, there is a 10% penalty for the first offence and a 20% penalty for consecutive offences.
Additionally, committing several offences raises the possibility of a Canada Revenue Agency (CRA) tax audit since it starts to appear less like an oversight and more like a calculator to avoid disclosing your income. To be sure you have not overlooked anything, T1 compares everything from the previous year.
Tax Fraud
Taxes must be paid on all business earnings. This point applies to both legal and illegal commercial activities. According to the Canada Revenue Agency (CRA), you must pay all your taxes if you have a source of income. Therefore, CRA will frequently audit a taxpayer for taxes on the proceeds of fraud, whether or not the person still has such earnings, if the taxpayer is charged with or found guilty of fraud.
Registered as self-employed
If you are registered as self-employed, your registered income will be received as T4 income. Taxpayers with T4 income tend to be low-risk and often get refunds or exemptions. The Canada Revenue Agency (CRA) prefers low-risk taxpayers and often concentrates its efforts on these individuals. However, some employees could be looking for unlawful loopholes. The CRA performs these assessments to verify your status as an individual contractor and the accuracy of your claimed income. Being self-employed is, therefore, a significant audit risk element.
Overpayment to family members
Your spouse or kid should be paid if they work for the family business. However, if an auditor suspects overpayment for services and a lack of supporting paperwork for the claimed work, a CRA tax audit is likely to occur. So it is really important to not give excess payments to family members so your company can avoid this tax audit.
Businesses operate at a loss year after year
The Canada Revenue Agency might suspect you if your statement shows continuous losses. The CRA will ultimately contact a taxpayer whose firm has consistently displayed a loss, especially if this loss was used to offset other profits or revenues. The taxpayer may have all of their costs disallowed if they are unable to convince the CRA that they had a "reasonable expectation of profit."
Significant wage differences for your sector and community
Your reported income tax return is compared to the average for your sector and region by the CRA. This implies that certain costs may prompt the CRA to question how you manage to maintain a lifestyle above and beyond your claimed income.
The risk-assessment programs of the CRA assist in identifying tax returns with a high risk of non-compliance. When an auditor flags a tax return as high-risk, the CRA will review the data from several sources to determine if an audit is required given the potential hazards.
For example, if you’re declaring $20,000 a year in income and you live in a neighbourhood where the average reported income is $100,000, that is a very noticeable difference.
Conclusion
The tax audit in which the Canada Revenue Agency just wants to investigate one section of a tax return could seem dubious. Therefore, CRA will frequently audit a taxpayer for taxes on the proceeds of fraud, whether or not the person still has such earnings, if the taxpayer is charged with or found guilty of fraud. The business operates at a loss year after year. The Canada Revenue Agency might suspect you if your statement shows continuous losses.
So this blog highlights the ways in which you can avoid tax audits because once CRA suspects you, the game becomes dirty.