One of the most common questions that people ask is “why the CRA chose me?”, and one of the most common answers you may expect from an auditor is that it was based on “random selection”. Is it really random? And you are just lucky enough to be “the one”? Probably not. The CRA selects its audit targets based on a number of criteria. There are many factors that can increase your chances of getting a CRA audit.
- You are self-employed – CRA audits self-employed taxpayers far more frequently than those who receive straight T4 income. If you are in a cash business such as the retail and construction sector, or if you operate a restaurant or a hair salon, your chances of being selected for an audit are quite high. Sometimes CRA selects a specific target group, such as real estate agents, or health care professionals, since these self-employed sectors are considered as “high risk”.
- You claimed higher-than-average deductions – CRA compiles information for the same industry over multiple years. If your write-offs of the gifts, promotions, and meals and entertainment expenses exceed the statistical norm for the same industry, the CRA may want to take a closer look. Be sure to keep all your supporting documentation.
- You claimed continuous losses over years – It is normal to incur some losses during the early stages of your business as you start up. But if you have claimed losses for several years already and you are still operating at a loss, CRA may wonder why a reasonably prudent person allows himself to run the business at loss for many years in a row rather than close it. Is there an intent for profit, or is it just a hobby? The CRA expects you to make more income over time while you trim your losses.
- You split your income with family members – Income splitting is a popular mechanism for reducing tax because the person you split your income with is usually taxed at a lower tax rate. CRA is very sensitive when you pay your spouse or minor children money that is not reasonable and fair. Be sure to let your family members provide some services to your business and pay them the fair market rate as if you hired an unrelated person for the same services.
- You transferred large funds from your home country – Since 2013, information on international wire transfers of above $10,000 will be automatically sent to CRA. If you have funds or properties where the cost is over $100,000 in your home country, you are required to disclose the details using the form T1135 (foreign income verification statement).If you have not disclose this information, and you transfer the funds to Canada, CRA will mostly likely want to challenge you the source of the funds.
- You amended your tax return after filing – If you made a mistake or realized an omission after you filed the income tax or GST/HST return, you may want to amend it. Even though it is necessary and desirable to do the amendment, CRA may wonder if there are any other mistakes or omissions on the return, therefore you are high on their radar screen for an audit.
When a CRA tax auditor comes calling, it is usually because of one of the above noted factors. If you’ve received the call and want to protect yourself, especially if you know that you will owe or are behind, call Tax Solutions Canada today at 1-888-868-1400.