10 factors that may trigger a CRA audit

We’re often asked, “what triggers a tax audit?”  As tax payers we all dread the thought of being contacted by the CRA for information.  After all, getting our taxes done is work and expense enough, right?  The stress of being subjected to a more thorough review is something we’d all like to avoid.  We’ll list the factors that can increase the likelihood of an audit, selection methods typically used by the CRA and things you can do to make sure you are prepared.   We hope you find the information helpful.

There are generally ten factors that can trigger a tax audit:

1. self-employed or a business with a higher volume of cash transactions –  sole proprietors or businesses in the construction, retail or restaurant sectors
2. large changes from year-to-year
3. losses for two or three years in a row
4. differences when compared to the norm for your industry, location, etc.
5. home office expenses higher than typical or area designated as work space greater than 15%
6. vehicle use for business purposes higher than the norm
7. large expenses such as moving or child care
8. aggressive tax planning such as tax shelters or donation schemes
9. inaccurate or incomplete tax return
10. late filing or payment

While being aware of the audit triggers is important, CRA uses a number of methods when determining who to audit and an individual or business may be selected without any of the triggers.  In addition to random selection, CRA typically uses four ways to choose who to audit:

• computer generated list
• targeted group based on a history of non-compliance
• based on information from other audits, investigations or outside sources
• association with other files (i.e., your business partner is being audited so your return may be as well)

What does this all mean?  There are a lot of reasons why you may be selected for a tax audit.   While knowledge of the triggers and selection process is good, many are beyond your control.  So, as the saying goes, don’t worry about what you can’t control, focus on what you can.  In keeping with that, let’s focus on what can be done to ensure you are prepared in the event of an inquiry from the CRA.

In general, the CRA wants to ensure that all income is reported and deductions are legitimate (ie., for the purpose of earning business income).  Makes sense, but what can you do?  Good record keeping along with bookkeeping and accounting, is the answer.  So what does that really mean?

• record your receipts and invoices in numeric order – this will create an audit trail, ensuring there are no gaps left unreported. When cheques, receipts or invoice numbers need to be voided, those numbers should be noted.
• use a business bank account and credit card to keep business and personal transactions separate.
• reconcile your business bank account and credit card.
• keep all documents to support your business activities. Revenues should be recorded on invoices or cash sales receipts and further support by a bank statement. Expenses should be evidenced by receipts, or invoices and further support by bank or credit card statements.

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