Top 10 CRA Red Flags And How To Avoid Them
December 4, 2023 Andrew AdolphAudits
As a former CRA auditor, I know how stressful an audit can be, especially if you are unprepared. Luckily, I know the CRA red flags that you want to be aware of to avoid that dreaded audit call.
1. Large Fluctuations in Income
The first thing I would do when I was given an audit file was to look for fluctuations in income from year to year, and to compare what you reported on your GST returns compared to income reported on your income tax return. If the GST you report isn’t 5% of sales, why not?
2. High Business Expenses
High business expenses are one of the most obvious CRA red flags. CRA knows what the gross profit should be in your industry, including how much it costs to run a company. I never really performed this step because I was usually on a pretty hot trail already with Step 1.
Automobile is often an area that gets scrutinized because it is an area of high abuse.
3. Frequent Business Losses
Consistent business losses can raise questions about your enterprise’s sustainability. One year of losses is typically not a big deal in the CRA’s eyes, but if it becomes repetitive, you will draw attention to yourself.
A good thing to have is a robust business plan that outlines your strategies for achieving profitability, providing a roadmap for sustainability.
4. High Charitable Donations
Why do athletes and celebrities all have a charity? I’m not pointing any fingers, but sometimes it may not be what it seems. While generosity is commendable, excessive charitable donations may raise some CRA red flags. If you are making a donation in kind and value is not easily ascertainable, you will need to hire a chartered valuator if your donated memoirs really are worth $125,000.
5. Unreported Income
Failing to report all sources of income can lead to serious consequences and raise serious CRA red flags. Some audits assignments come about as the result of the audits of others. If they know of a business transaction and it is in a certain industry, such as one that uses unlicensed trades, they may audit your company to see if you reported the income. This type of audit adjustment usually comes with additional penalties.
6. Offshore Accounts and Transactions
Given the increased scrutiny of offshore dealings, understanding and complying with all reporting requirements for foreign accounts is imperative. Seeking professional advice to navigate the complexities of international tax laws and disclosure obligations is a proactive approach to ensure compliance and avoid unwanted attention.
If you’re a freelancer or an individual working overseas, this becomes even more complicated. Consider checking out my blog on freelancer taxes for more info.
7. Missing Returns
Missing returns are a symptom of inadequate record-keeping. At CRA, this type of thing gets assigned to human beings whose job it is to get you to file up to date. Once you do, they refer you to the BIQA division for a decision to audit or not. You will be rated for audit potential, and if they see some, they may very well create an audit assignment. One way to avoid being scored by BIQA (Business Intelligence and Quality Assurance) is to have a skookum compliance profile and being all filed up to date.
8. Unusual Tax Credits or Deductions
Claiming atypical credits or deductions might raise eyebrows at the CRA. Travel is one of those, especially if you like to paint the town wherever you go. If you travel with a spouse, what does the spouse do in the business?
9. Incomplete Records
Inadequate record-keeping makes it challenging to support claims during an audit. Establishing a comprehensive record-keeping system, including detailed transaction records and receipts, is crucial. Regularly auditing and updating records maintains accuracy and completeness, enhancing your ability to navigate an audit smoothly.
10. Rapid Asset Accumulation
A significant increase in assets without corresponding reported income may attract the CRA’s scrutiny. Documenting the legitimate sources behind your asset accumulation provides a clear and legitimate narrative. CRA wants to know how much money you made. If you get audited, they want to know what the source of your income is. People who like to show off their wealth: somebody might call in a tip about you to the CRA.
CRA Red Flags: How many can YOU eliminate?
Strategies for avoiding these red flags involve a combination of transparent communication, meticulous record-keeping, and staying informed about tax regulations.
If you’re doing those things, then you have nothing to worry about, but if not, it would be wise to hire a professional before things get out of hand. Be sure to check out the CRA’s official website for official tax rules.
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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.