CRA Audit Triggers and How to Avoid Them

If you want to avoid the stress, inconvenience and intrusion of a CRA audit, steering clear of the following triggers will tilt the odds in your favour.

While an audit may appear to be an arbitrary and unfair punishment from the universe, there are actual justifications for why one company or person is chosen over another. According to their official line, the Canada Revenue Agency (CRA) employs a sophisticated evaluation system that operates in the background rather than drawing names at random.

The CRA can identify returns that appear to be erroneous, incomplete, exaggerated, or otherwise suspicious using tools and programmes that were specifically designed for this purpose. The CRA pays attention to these anomalies because they pose a “high risk.”

While there is no way to guarantee you will never be audited, avoiding the following behaviors and ‘tax audit triggers’ can increase your chances of avoiding the aggravation, inconvenience, and intrusion of a CRA audit.

Forgetting To Report All of Your Income

Not declaring your T-slip revenue is never a good idea. This is due to the fact that every employer you have will give you a T4 and send a copy to the CRA. The CRA will find out if you don’t declare all of your T4 income.

While most people do the right thing and report their regular income, it’s easy to forget a bonus, or an additional payment, yet it may still appear on a T-slip and thus come to the attention of the CRA. By documenting every transaction between you and your employer – especially if it involves a cash payment, a Christmas bonus perhaps—and remembering to claim it when the time comes—you can avoid making this error.

On top of all this, in today’s diverse economy, many individuals have multiple sources of income beyond their primary employment. This can include selling goods online, freelance work, or other gig jobs. Just as it’s crucial to report all income from traditional employment, it’s equally important to declare earnings from these additional sources.

Reporting Income from Online Sales and Gig Jobs

• Online Sales: If you’re selling goods or services online, whether through an e-commerce platform, a personal website, or social media, this income must be reported. The nature of online transactions makes them traceable, and the Canada Revenue Agency (CRA) has ways to track these activities.
• Gig Economy Income: Income from gig jobs, whether it’s ride-sharing, freelance writing, or any other side job, is taxable. Even if these earnings are infrequent or seem insignificant, they contribute to your total annual income and must be declared.

Documenting Miscellaneous Income

• Keep Records: Maintain thorough records of all transactions, including invoices, receipts, and proof of payment. This documentation is crucial for accurate tax reporting.
• Understand Tax Slips: For some types of miscellaneous income, you may receive a tax slip, such as a T4A. However, not all side income generates official tax documents. It’s your responsibility to report these earnings.
• Deducting Expenses: Often, you can deduct certain expenses related to earning this additional income. For example, if you’re using a personal vehicle for a ride-sharing service, you can claim related expenses like fuel and maintenance.

Claiming Unusually High Deductions or Credits

Even if you’re self-employed or managing a small business, the CRA looks for consistency in your tax returns. Your return might be highlighted for examination if, in a particular year, there is a sharp increase in your income (or in your credits and deductions).

This may, of course, all be perfectly above board, especially if you have found a better-paying job, received a good raise at work, or all of your hard work put into building your own business is finally paying off.

However, as you may still be selected for an audit, the key is to make sure that you have all of the documentation needed to back up your claims for credits and deductions for the CRA to see should they decide to ask you to do so.

Home Office Deductions That Don’t Seem Reasonable

It appears reasonable to have a home office that occupies 10% of your home’s floor area. It sounds unreasonable to have a home office that occupies half of your four-bedroom house and could lead to an audit.

Be precise, reasonable, and, most importantly, adhere to the CRA’s rules for deducting home offices when determining the proportion of your house that is used for your business or WFH office space. Not sure what those are? The CRA documents them extensively here, or, for a shorter, easier-to-understand explanation in your unique case, ask an accountant!

Writing of 100% of Personal Vehicle Use

If you buy a snowplough and own a parking garage, the CRA might not object if you deduct the entire cost as a business expense. However, the CRA might have a difficult time accepting that you don’t utilise the family sedan for both professional and personal activities if you try to write off 100% of it.

The same reasoning that applies to home office expenses also applies to vehicle-related expenses: be specific, be reasonable, and abide by the rules.

Overusing Tax Shelters

The CRA will never object to legitimate tax shelters like RRSPs or TFSAs because they are entirely acceptable. But when they stumble across a non-profit they’ve never heard of, alarm bells start to ring. This is due to the fact that fraudulent non-profit organisations and their dubious receipts, which are infamous for inflating donation numbers, cause thousands of audits to be triggered every year.

Make sure your preferred charity is listed on the “official” CRA list of charities before making a donation. especially if you plan to deduct your donation from your taxable income.

Rental Properties That Consistently Lose Money

Do you rent out the basement apartment in your house or own rental properties like condos? Your expenses could outpace your rental revenue. For instance, reporting a loss during a year of significant renovations or a protracted vacant period is appropriate.

But if losses continue for several years, the CRA will probably pay attention. As a result, always be prepared to support your claim with a thorough accounting of your costs.

3 Top Tips to Keep in Mind

Still fearful that fate is conspiring against you and that you will end up being subject to an audit? Here are three last tips for ultimate peace of mind:

Learn to Love Record-keeping.

Just because the CRA audits you does not mean that you have done anything wrong; it just means that they think your tax situation merits a closer look. And by closer look, we mean they will want to see the documentation and receipts behind the claims made on your returns.

This means that you need to keep excellent records, especially if you are self-employed or running a small business. This does not mean you need to maintain lots of paper-filled file cabinets; the CRA is fine with digital proofs of most things, but you should get into the habit of making better record-keeping a priority.

Create a My CRA Account

By housing all your tax information and account balances in one place, this feature dramatically reduces the odds of having an inaccurate or incomplete return, which in turn greatly reduces the odds of being audited. A total game-changer.

Consult a Professional

One of the biggest reasons to hire an accountant is because of the savings they offer you in terms of time and accuracy at tax time. It could take you many hours to do your own taxes but an accountant has a process he/she repeat hundreds of times during tax season. The tax laws and tax-savings opportunities are fresh in their minds because it’s their primary focus—all year.

Yes, we can help with your taxes and help you (legally) avoid making mistakes that might trigger a CRA audit. But our expertise and experience can be a pivotal asset in optimizing your financial health year-round. Here’s why partnering with us can be one of the best investments you make:

1. Efficiency and Accuracy: With our streamlined processes and extensive experience, we handle your taxes efficiently and accurately. Our familiarity with tax laws and dedication to staying current mean we can navigate complex tax situations with ease, saving you countless hours and reducing the risk of errors.
2. Year-Round Tax Planning: Tax planning isn’t just for tax season. We provide ongoing advice to help you understand and take advantage of tax-saving opportunities throughout the year. Whether it’s understanding gift taxes, leveraging tax incentives for eco-friendly investments, or planning major financial decisions, we’re here to guide you.
3. Financial Advisory: Beyond taxes, we serve as your financial advisors. Our expertise covers a range of areas, from structuring small business finances to personal wealth management strategies. We’re equipped to answer your questions and provide insights tailored to your unique financial situation.
4. Proactive Approach: We don’t just respond to your queries; we proactively seek ways to enhance your financial position. This includes identifying potential tax deductions, advising on investment strategies, and helping you navigate financial changes and challenges.
5. Building Long-Term Relationships: At K.K. Chartered Professional Accountant, we believe in building lasting relationships with our clients. We take the time to understand your personal and business goals, enabling us to offer customized advice that aligns with your long-term objectives.
6. Peace of Mind: Knowing you have a team of professionals dedicated to managing your financial affairs allows you to focus on what you do best. With us, you can have peace of mind knowing that your financial matters are in expert hands.

Whether you’re an individual, a small business owner, or managing a complex financial portfolio, K.K. Chartered Professional Accountant is here to help you navigate the financial landscape with confidence. Contact us today to learn more about our services and how we can make a difference in your financial journey.