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  • Canada Revenue Agency, Small Business Accounting

5 Common Reasons the CRA may Audit You

Imagine this scenario: You’ve spent time and money putting together your tax return and are eagerly awaiting your notice of assessment so you can finally put the previous tax year to bed and focus on moving ahead. However, you receive that dreaded notification that you are the subject of a Canada Revenue Agency (CRA) audit. Why you? What did you do that has resulted in the CRA choosing your return to audit?

 

How the CRA Chooses a File for an Audit

The CRA chooses a file for an audit based on a risk assessment. The assessment looks at a number of factors, such as the likelihood or frequency of errors in tax returns or whether there are indications of non-compliance with tax obligations. The CRA also looks at the information it has on file for the taxpayer and may compare that information to similar files or consider information from other audits or investigations.

 

What are some common reasons that your risk assessment will be high enough to warrant an audit?

 

  1. Income and HST Discrepancies
    • The CRA will compare the sales reported on your tax return to what was reported on Line 101 of your HST return from the same period.  If these lines do not match, the CRA will want to investigate whether sales have been under-reported for either your income tax or HST.
    • The CRA will also check if your HST collected aligns with your reported sales.

 

  1. Vehicle Expense Claims
    • If you claim a high percentage of your vehicle expenses for business purposes, the CRA is going to want to look into this claim further. They know it’s unlikely that you never use your car for personal use (remember that driving your car to commute to work is considered personal use, not business!)
    • The CRA will want to see your records showing your kilometre logs, including date and purpose of each trip.

 

  1.   Buying and Selling Real Estate
    • Have you been bitten by the HGTV bug or tempted by the thought of house flipping to make some money? The CRA will commonly audit real-estate related claims including HST rebates, pre-sale condos, new home construction, and principal exemptions.  

 

  1.   Claiming Home Office Expenses
    • More people than ever have claimed home office expenses due to the COVID-19 pandemic. The increase in the number of people working from home even prompted the CRA to offer a simplified flat-rate method to claim these expenses in 2020 – perhaps in part because they know that home office expenses are often over-declared!
    • If you are claiming the detailed method for your home office expenses (as many people are better off doing so), make sure you keep complete and accurate records as to every item you claim.

 

  1.     You’ve been the recipient of previous Tax Audits
    • If you were audited in the past, it may be more likely that you will be audited again in the future – especially if the CRA found errors or omissions the first time you were audited.

 

In general, you have nothing to fear from a CRA Audit. The audit will go much smoother and faster if your records are complete and organized. Depending on the complexity of the audit, you may also wish to connect with professionals to help you through the process to help ensure that everything goes smoothly and you do not receive unwarranted penalties! Feel free to contact us at Stonehenge Accounting if this is something you are looking for support with.