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Thoughts and ideas from Leonard tam
How to Avoid a Small Business Audit
August 19, 2019 at 8:00 AM
by Leonard tam
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10 Red Flags

No one wants an audit for either personal or business taxes from the Canada Revenue Agency (CRA).

Business audits, particularly, are to be avoided. So, pay attention for ten tips that can help keep you under the radar. Over half the audits are applied to small and medium businesses, and that category could include you.

1) Revenue Discrepancies

All tax forms must agree, so that the revenues from your personal income, your wife’s income, your business income and those declared on your GST/HST returns must correlate correctly. Information from employers and other parties will be applied to yours. Differences will spark an audit.

2) Being an Exception or Exceptional

CRA is aware of the patterns on returns from your profession or business. If your claims are significantly higher or lower for profit margins and incomes than the norms in your industry, red flags will be raised. CRA has statistics at its fingertips.

3) Large Business Deductions

The areas that will be under close observation by CRA will be advertising and promotion, meals and entertainment, travel, miscellaneous and interest expenses. Good advice is to be accurate with documentation in these areas. Excesses draw attention; there are guidelines to follow.

4) Deducting the Home Office

Deductions in these areas are effected in percentages: rent, real estate taxes, utilities, phone bills, insurance and other costs. The areas of your home must be dedicated as and used only for the earning of income and be used for business meetings, conferences or consultations. Most small businesses do not qualify. Do not use this deduction with Canada Revenue Agency unless all the stipulations apply.

5) Vehicle Deduction

The use of a vehicle as a 100% percent deduction is extremely rare, so be judicious in assigning credit to yourself. Also, a strict log book of expenses and mileage will corroborate the accurate claim you make. This is an easy one for CRA to nab.

6) Corporate business owners must note that changes in shareholder loans or debit balances are red flags too. The CRA examines personal expenses recorded as business expenses and loans taken from the company.

7) Businesses that deal in cash transactions are especially vulnerable to auditing since there may be a temptation not to report earnings. Those businesses may be expected to be under scrutiny.

8) Recurring Losses

Losses in a single year may not be a red flag, but successive losses will trigger attention especially when those losses may be used to offset other income. There is an expectation on the part of CRA for your business to make a profit.

9) Charitable Deductions

Large charitable deductions fall outside the norm for small businesses. Again, CRA will apply statistics to determine norms as to how much the income earner at your level might contribute. Unusually large amounts may be a trigger for review.

10) Family payroll

Having a spouse or children on the payroll is not unusual, and the income splitting is legitimate. The rules, however, must be followed.

Self-employment

Inform yourself on the tax rules for self-employment, being aware of the advantages and the pitfalls. You don’t want to be denied the status of self-employed if the terms and conditions are not followed.

Prudence

Two rules: strict documentation with accurate record keeping and scrupulous honesty are the best ways to be free of the stress of being audited.