Most people blanch at the thought of an audit, and for good reason. Catching the attention of the Canada Revenue Agency (CRA) enough for them to send an auditor is a serious matter. After all, an unfavourable outcome has significant consequences. An audit can be highly stressful, even if you don’t think you did anything wrong.
Additionally, the CRA can go back to returns filed four years prior. What you filed that far back can come back to haunt you. If the CRA suspects misrepresentation or fraud, there is no limit to how far back they can go. Generally, you should keep records for at least six or seven years.
However, the CRA does not pick out people to audit on a whim. They usually have solid reasons for ordering an audit based on a complex assessment system. A few audits may be random, but the CRA generally focuses its attention on high-risk outliers. These include payers who submit incomplete or overblown returns.
Most audits aim to determine whether the taxpayer paid enough tax. However, if the CRA suspects fraud or tax evasion, its Criminal Investigations Program (CIP) may conduct a criminal investigation.
To avoid the stress and worry of an audit, stay on the good side of the CRA. The best way to do that is not to engage in the following behaviours:
Failing To Report All Your Income
Holding back some of the money you earn to keep your taxes low might be tempting, but it’s not smart. Employers must issue employees a T4 for remuneration, and they must send the CRA a copy. The CRA will notice if you don’t report all of your T4 income.
What about freelance income? You must also report any money you receive as an independent contractor as taxable income. You might be able to get away with not including it, but you’re taking a considerable risk. The CRA pays more attention to self-employed individuals. If the CRA notices it, you could face a personal tax audit or, worse, a criminal investigation for tax evasion or fraud.
Breaking a Trend
Inconsistencies in your returns are a red flag for the CRA. The agency will take notice if there is a sudden change in your income or deductions for any given year. It is not an automatic trigger for an audit, but the CRA may flag your return for a review. You must be able to justify the break in the trend with records and documents as evidence.
Ignoring Requests for Information
The fastest way to get on the wrong side of the CRA is to play coy. If the agency contacts you requesting additional information about your return, you must respond promptly. Provide the CRA with what it needs to clear up any questions and alleviate concerns. Unfortunately, there is no saying what records and documents you may need to present. The intelligent thing would be to keep several years’ worth available, just in case.
Suppose you don’t comply with the request. At best, the agency will reassess the taxes you owe and pile on interest and penalties. At worst, you will be subject to further review and a possible audit.
Claiming Unrealistic Deductions
Many people claim expenses to lower their tax obligations. A popular way to do this is to claim that you use a portion of your home for work. If you are eligible, the CRA allows home office deductions for a reasonable portion of your utilities, maintenance, and rent.
The operative word here is “reasonable.” While the CRA does not specify what that means, you should use common sense. Claiming 10 percent of your rent as a deduction is realistic, while 50 percent can trigger suspicion.
If you are self-employed, you can claim vehicle expenses in your deductions if you use it for your business. These include fuel, registration fees, insurance, maintenance, and interest on a car loan. You can claim them on line 9281 of your Form T2125. However, you may not write off the purchase price of a passenger vehicle. Additionally, you can only claim a portion of your expenses if it is also for personal use.
The key to keeping a low profile with the CRA regarding deductions is to keep them reasonable. That applies to all expenses and credits you claim for each return.
Misusing Tax Shelters
Tax-advantaged instruments like a Registered Retirement Savings Plan (RRSP) or Tax-Free Savings Accounts (TFSAs) will not set off the CRA alarms. However, claiming a deduction for contributions to non-profit organizations not on the CRA’s list of charities will. Fake non-profit organizations and their sketchy receipts trigger thousands of audits yearly.
While your claim might be in good faith, meaning you really did donate to the organization, it might still land you in hot water. Before donating to any cause, check if it is on the CRA list if you want to claim it as a tax deduction.
What happens during a CRA tax audit?
During an audit, the auditor will look at all pertinent records, including those at your workplace. The auditor will mainly focus on receipts, T4s, and other financial documents. It can take a few days to several months, depending on the circumstances.
After the audit, the auditor could recommend adjustments to the submitted return. These proposed adjustments must be made in writing, and the auditor must discuss them with you.
If dissatisfied with the proposals, you can advance a new proposal based on additional information supplied to the auditor. Fast action is necessary to protect your interests during a CRA tax audit.
Tips To Avoid a Personal Tax Audit
Aside from avoiding the above behaviours, there are some things you can do to keep the CRA happy. These include the following tips:
Keep several years of complete and accurate records, especially if you are self-employed.
Register for a My Account on the CRA website, where you can upload and store all your tax information and account balances. The online service significantly reduces the likelihood of filing an erroneous or incomplete tax return.
Amend your return as soon as you notice an error. Do not wait for the CRA to call your attention to it. The Voluntary Disclosure Program may provide you with relief from interest and penalties if warranted.
Lastly, consider consulting a tax expert in Canada. They can ensure your personal or professional finances are in order, helping you avoid a personal tax audit. In any case, it is better to be proactive than reactive when it comes to your tax obligations.
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