Top 5 Ways to Avoid a CRA Audit
June 8, 2022 Andrew AdolphAudits
A CRA audit is perhaps the most feared letter a business can receive…
But how can you avoid getting one in the first place? I’ve been a tax accountant for over a decade and have formerly worked for the CRA. Follow my 5 simple tips, and I guarantee you can decrease your chances or at least be prepared to deal with an audit 90% of the time.
The Type of Business That Is Most Likely to Receive a CRA Audit
The first thing you must be aware of is that if you own a small business, the CRA will be watching you closely. According to the Canada Revenue Agency Annual Report, 54% of the CRA’s resources are directed toward performing CRA audits on small businesses.
Here are my top 5 tips to avoid getting a CRA audit.
1. Don’t Claim Everything as a Business Deductible
One of the most significant advantages of owning a small business is the ability to deduct business expenses from your income tax—a word of caution to those doing this in excess.
Business expense deductibles are one of the first things the CRA will look for when they begin sniffing around your company’s finances. If you’re racking up business expense deductibles on entertainment, travel, meals, and other miscellaneous purchases, your chances of getting a CRA audit skyrocket.
2. Get Organized if You Own a Cash-Intensive Business
Do you own a cash-intensive business? If you do, a CRA audit could be coming. This applies to restaurants, barbershops, home improvement contractors, and retail businesses. Unfortunately, you cannot do much to prevent these CRA audits, but you can be prepared. Avoid using handwritten receipts and opt for print receipts instead. Also, consider hiring a tax accountant professional to keep track of your books or invest in tax software if you’re tech-savvy.
3. Avoid Claiming 100% Business Use of a Vehicle
Claiming 100% business use of a vehicle is like shooting a solar flare up in the air and telling the CRA to find you. The CRA knows that most people will not use a vehicle for business matters 100% of the time. If you do use a vehicle strictly for business, make sure you keep the required records. Keep a written or electronic log of your miles, the dates you used the car, where you were going, and why.
4. Use Your Home Office Exclusively for Work
I’ve seen people fall into the home office deduction trap repeatedly. After all, who wouldn’t want to deduct a portion of their real estate taxes, rent, phone bill, and utility insurance? The part that usually gets people in a bind is the fine print that states you can only use a home office workspace to earn business income. The CRA knows that many people won’t use their space exclusively for business and thus target them for audits.
5. Try Not to Report Multiple Losses
Most businesses will inevitably have ups and downs. Reporting a single business loss isn’t cause for alarm, but doing it yearly could result in a CRA audit. Remember, to qualify as a business; there has to be a reasonable expectation for profit. Don’t leave it up to the CRA to decide what’s reasonable and what’s not.
Hiring a tax audit accountant or CPA bookkeeper can significantly decrease your chances of getting audited. Knowing your exact numbers allows you to maximize savings, find profitable opportunities, and avoid long-term mistakes.
Are you a small business owner or freelancer looking to grow and sustain your business?
To book a free meeting, call 604-240-6173 or email me at email@example.com. I can answer any financial or tax-related questions and help you set a profitable financial plan. You can also visit the Blog for additional tax-related resources.
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Andrew Adolph is a CPA and former CRA auditor with 25 Years of experience. He helps businesses to not par any more in sales taxs than the law says they must and acts as an advocate for you if you are being audited, so you can fous on your business.