Paying taxes is a sure thing. But did you know that being audited can be a sure thing too if you do particular things that the Canada Revenue Agency sees as red flags?
Avoid Flipping The Examination Switch (The Front Runner, Presley & Partners Chartered Accountants) presents ten red flags that are likely to trigger a tax audit according to Canada Revenue Agency (CRA) documents. Of these, I would say the ones most likely to be pitfalls for to small businesses are:
- Revenue discrepancies - The article points out 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 GST 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.
- Deducting large business expenses - Advertising and promotion, travel, miscellaneous and interest expenses are of particular interest to the CRA. Presley & Partners recommends separating meal and entertainment expenses and allocating expenses individually rather than using "miscellaneous."
- Changes in shareholder loans and large balances - Changes in shareholder loans or debit balances are red flags for those holding stock in a corporation. "The CRA is looking for personal expenses recorded as business expenses and loans taken from a company."
As well, the article mentions common business practice errors such as claiming low income over many years, claiming unusual home office expenses, and having a gross profit margin is lower than direct competitors.
You'll definitely want to have a look as the article also presents advice for avoiding each of the red flags they mention - advice well worth following if you'd rather not go through the audit process.
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