10 Red Flags That May Get Your Business a CRA Audit
Some behaviours are more likely to trigger a CRA audit than others. Here’s a summary of what might put you on the CRA watch list.
The Canada Revenue Agency (CRA) continues to pursue cases against those that would evade taxes. Of course, everyone wants to obey the law and pay taxes as required. However, different business structures allow for different tax rates. For that reason, the CRA also has the ability to audit to make sure that all taxes are paid as they should be.
Here are 10 things in particular that raise a red flag that encourage the CRA to take a closer look at your finances.
1. Inconsistent Revenue Numbers
The most obvious issue is when revenue numbers are not consistent upon all tax forms. This immediately begs the question of where there is a variance.
2. Being Extremely Unusual, Financially
Companies that have unusual profit or loss margins in an industry might warrant additional scrutiny. For example, in 2007 when oil was over $150 a barrel if any oil companies report a net loss that would be very strange.
3. Unusually Large Business Expense Deductions
The use of deductions is standard practice. However, this may get out of hand and be too large to be compliant with accounting standards.
4. Home Office Deduction
A home office can be legitimate, but it is often exaggerated compared to the size of space actually used. This is easy for the CRA to disprove simply by coming to your home and measuring your work space.
5. 100% Business Use of Your Car or Vehicle
Of course, everyone takes personal trips in their car at home. Claiming it as a business vehicle exclusively is not a wise move.
6. Shareholder Loans with Large Balances
Shareholder loans have a specific purpose that has to do with driving the business forward. Using these funds for personal expenses is prohibited. This is also easy for the CRA to identify.
7. Cash Intensive Businesses
All cash businesses including restaurants, car washes, hair salon, bars, auto mechanics, landscapers and others can easily hide income because it does not run through a bank or credit card system. These businesses are more like to try to evade taxes and are good targets for the CRA.
8. Recurring Losses
Businesses can simply not survive for very long if they have year after year of losses. Unless they are a high-flying tech company that can get unlimited investment capital, businesses must generate positive cash flow. Firms that don’t generate income are thus suspicious.
9. Large Charitable Donations
Although charitable donations are encouraged, if they are consistent and large they may be a means to avoid taxes. The CRA will look into this.
10. Family Employees
A family member’s pay could easily be manipulated because they may receive perks from the owner like room and board or other under the table payments. This is also cause for further inquiry.
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