A great article that gives you some input as to how CRA thinks: Top Ten CRA Audit Flags
Some of these are specific to corporations, some to individuals and some apply to both.
1) Inconsistencies between third party information and taxpayer’s filing position
“The CRA’s “matching” program compares information from third parties, employers, financial institutions and other sources with taxpayer’s filing positions to confirm filing accuracy. “
Forget an audit, if you miss a slip in two out of the last four tax years, they can hit you with a 20% penalty on the gross amount of the slip. Miss a $20,000 T4 = $4,000 penalty.
2) Employer compliance
“The CRA continues to aggressively pursue a range of issues pertaining to employer compliance, including the timely remittance of source deductions, the status of workers as either independent contractors or employees, taxable benefits and relocation costs. “
This important: even if the individual agrees in writing to be treated as a subcontractor, they can still go back to employment standards, after the fact, and appeal. If an employer-employee relationship did exist, employment standards will charge the employer with both the employees and employers portion of the required payroll deductions (CPP&EI). I’ve seen this happen on a number of occasions.
3) Not complying with CRA requests for information:
“Supplying information to the CRA should be carefully managed, to ensure that the CRA’s requirements are fulfilled without over-disclosing information, including protecting documents and information that would be subject to privilege.”
Great blunt advice.
4) Requests to amend income tax or GST/HST returns
“While amendments to returns or account closures may be necessary or desirable, these steps may attract audit scrutiny.”
Mistakes happen – no one is perfect. The point here is that repeated mistakes undermine the confidence the CRA has in your or your bookkeeper/accountants abilities.
5) Unusual or notable changes in deductions or credits
“The CRA compiles information about deductions and credits claimed by taxpayers over multiple years and significant changes from one year to another may attract CRA enquiries. Taxpayers with a viable explanation for significant changes need not worry. However, taxpayers who become involved in aggressive tax strategies may be flagged for audit.”
Always plan for an audit.
6) Participating in aggressive or high risk tax strategies
7) Discrepancies between tax filing position and filing positions for similarly situated taxpayers or private corporations
“The CRA may compare: corporate tax returns amongst similar businesses; the relationship of purchases, sales and GST/HST remitted to other businesses in the same industry to ascertain whether remittances are reasonable; and tax returns of shareholders of a private corporation to the corporation’s tax filings.”
On every corporate tax return and on every personal tax return’s business schedule, you are required to state the industry you are in based on the North American Industry Classification System (NAICS).
8) Reported income low compared to residents in same neighbourhood
“This suggests that an individual may have unreported income. “
This may be removed from this list in time as a growing number of adult children are living with their parents.
9) Not using fair market value for residential real estate rentals
“Where real estate rentals yield no income or losses, the CRA may suspect that the property is being rented for less than market-value rent to a non-arm’s length person.”
Where businesses that have persistent losses are denied due to “no reasonable expectation of profit”, rentals are denied due to “less than market-value rent”.
“The CRA may commence an audit based on information obtained during the audit of a third party.”
If you are working for cash, are you confident the person paying you isn’t deducting the expense and listing you as the recipient?