By: jnawali
Bookkeeping Services
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What is CRA Audit?
During an audit, the CRA closely examines the books and records to confirm whether they are fulfilling their tax obligations, following tax laws correctly, and receiving the benefits and refunds they are entitled to. Most taxpayers comply with the tax laws in Canada. When the Canada Revenue Agency (CRA) audits a business, it closely examines the business’ books and records to make sure they support the amounts as filed in tax returns, which in turn ensures the company pays the appropriate amount of taxes and receives any payments to which it is entitled. However, there is a high level of compliance. Around 20,000 letters are sent for Audit a year, and there is no sure-magic ball to avoid a CRA Audit. You can only minimize it or prevent it by keeping your records professionally.
Running a small business means you have to do a lot of work, from sales to services and everything in between. Keeping track of your finances is not an easy job for small business owners, so everyone avoids a tax audit. A tax audit is the last thing that an owner does not needs. Unfortunately, there is no such magic ball to stop this. Still, suppose the business owner follows certain norms and guidelines prescribed by standard accounting principles. In that case, you can avoid it, or the business owner does not have to suffer from it.
Approximately 55 out of 100 audits done by CRA fall under small to medium business (SMEs in a year. Though there are no such rules, if you follow the following steps and get audited, you can deal with them and avoid the stress of paying huge fines and penalties. The main mantra is to record everything, file the correct forms, keep the book straight and clean.
Report all Business Income
Since the CRA is always interested in business income, it is essential to produce all income-related documents. It means business should record entire revenue, whether cash, bank, credit cards or another mode. If the income is not listed accordingly, it is supposed to be, and then it could trigger CRA. Always take the exact number while filing the tax. Self-employed people should be careful while reporting their income and filling the tax form. CRA constantly compares income across all tax forms, GST/HST, and tries to match revenue with expenses. If a businessman is taking an extended vacation, drives a luxury car and owns a big house, trigger CRA. Lifestyle should match with the business income.
Claiming Business Expenses
Everyone wants to pay less tax, so most small businesses try to claim more business expenses if you did not separate the personal portion of business expenses and claim the total amount. It could trigger CRA. When CRA asks for support for all these types of expenses, it is difficult to support claims like advertising and promotion, mileage for cars, fuel expenses, repair & maintenance, meals and entertainment, travel, miscellaneous and interest expenses to the CRA. It is suggested not to claim a significant amount in these categories.
Shareholders Loan Balance
Always keep in mind that any draw from the company by the shareholders is an advance trigger to CRA. When they see debit balance in shareholders account triggers a Red Flag. In this situation, you have to explain and preset the support to them. Usually, withdrawal means salary or dividend payment. If not both, it creates a loan from the corporation to the shareholder. CRA might treat this amount as an income of shareholders. It means double taxation. If there is a shareholder loan, it is better not to put it on the balance sheet for more than a year.
Recurring Losses
(do not report loss every year)
If you are running a business in the loss for several years in a row will trigger the CRA. Although, in a usual scenario, no one would run the company in a loss position for many years. If the loss is recurring for many years, there could be a tax planning to save taxes. The family could be claiming personal expenses to the business and not keeping income to the company. Remember, to qualify as a business, there has to be a reasonable expectation of profit, and the CRA’s idea of what’s reasonable may differ substantially from yours.
The Family Member in Payroll
(Don’t Pay Overly High Salaries to Employees Who are Shareholders)
As per law, no one can restrict to put family members on the company payroll. But you have to follow the rules, so putting spouse and child on the payroll of the small business trigger CRA. Putting family members on payroll is the most popular way to reduce tax. So always be careful to answer the questions asked by CRA auditor.
Large Charitable Donations
CRA knows how much taxpayers at your income level usually give to charity, so a red flag pops up when your charitable donations exceed that number. Donations involving capital property are especially likely to be reviewed.
Accurate Record Keeping
(Keep Good Records and Report Income and Expenses Accurately)
Record keeping in a proper way is the basics of small business. The records should be detailed with all income and every expense. It is essential to keep actual clean records of everything that comes and goes on in your business. The recommended time for a business to file and maintain records is seven years if your business is audited, you should be able to present documents to CRA. One can buy accounting software or use MS Excel spreadsheets to keep track of records for a business.
Proper bookkeeping rules should be followed by businessman, to keep the record professionally, it is better to hire professional so do not have to suffer when flagged by CRA. All the income, expenses, accounts receivable and payable, and capital expenditure should record in detail so anytime they asked can be presented.
Never Mix
Never mix your personal and business transactions. For example, for any claim or deduction, such as computers and office equipment, a vehicle is used for the company, then the mileage. If a business trip is taken, it is acceptable to bring family and make it a vacation; however, only money spent for the use of the business associated costs may be deducted. If there is a cross-over in this area, it could trigger an audit and be costly to the business owner.
GST/HST
All the income-expenditure which attracts GST/HST should be appropriately accounted. Always be careful about claiming HST refund. If you are claiming GST/HST refund for a long time from the government, it attracts CRA auditors. Sales Invoices, Sales return, purchase and purchase return adjustments should be made correctly. When they audit, they can disallow the HST claim, which means you have to pay a hefty fine and interest. So be careful with GST/HST. If the revenue discrepancies in T2 and HST return immediately trigger CRA audit. Cash-intensive business-like restaurants, construction, transportation and repair shops, and other retail businesses should be careful filing and claiming HST refunds.
Previous Tax Audits
While auditing, if CRA finds the number of discrepancies, errors or omissions the first time, in this case, there is a high chance of audited again. So it is investable for small business to keep their financial records properly with professionals to avoid it.
Audit of related Party
There is a chance of Audit if the related part is being audited. In most cases, family members or shareholders of closely held corporations are audited in the course of the Audit of the corporation. Suppose one person has many businesses and has vast intercompany transactions, which triggers to Audit of these other subsidiaries. In some cases, supply chain business can be audited; sometimes, payroll issues company gets audited.
Low income and higher expenses
CRA always matches and compares the information of taxpayers. If the small business is showing very low income and high expenses than the similar business in the same category and same area, it might trigger an Audit.
Final Opinion
Small business owners should be consistent with record-keeping and filing forms. Do not underestimate; always hire a professional to do your accounting. Do not hide income and increase the expenses. If you are caught, you will be flagged for a lifetime.
We are helping small businesses to get their business goal by providing bookkeeping and accounting services, year-end services, controllership services, and tax services. If you are looking for small business bookkeeping services for your company to corporate year-end, tax filing services, please contact us info@apexaccounting.ca