Any of us may be subject at an audit at one time or another. That being said, there are ways of reducing your chances of being audited. We all have heard of red flags. Being aware of red flags can lessen the chance you’ll be selected for audit by the CRA. Avoid these red flags:
1. Large expense fluctuations (inconsistency) caused by meals and entertainment, conference fees, vehicle costs-or changes in the categorization of your expenses from one year to the next can raise a red flag for the CRA. The same applies to noticeable fluctuations in income. Be sure to compare amounts reported in previous years on a line-by-line basis. Be consistent and make sure to keep all supporting documentation.
2. Return filed late or with errors
There is a direct and clear link between late filing the being selected for an audit. Moreover, if your return includes mistakes, your file may be flagged.
3. Income reporting discrepancies
One of the basic, yet commonly seen triggers, is discrepancies that result from miss reporting tax slips. For example, when your employer issues your T4, it is issued in three copies. One copy goes to you, the second copy stays with your employer and the third one goes to the CRA. If you make any errors reporting that T4, it will be easily caught by the CRA. CRA matching programs cross-reference information slips (e.g., T4A) from issuers against income reported on individuals’ tax returns. . If the slip is not included in the return, the CRA will view the stipend income as not reported. This can result in reassessments, “failure to report income” penalties and additional tax, not to mention added professional fees and frustration.
4. Improper recording of foreign income
The Government of Canada is cracking down on foreign-generated income and investments for a few reasons. Canadian taxpayers are required to report foreign property with a cost base of CDN $100,000 or more, as well as the foreign income earned on the property, on a Foreign Income Verification Statement (T1135). This is a separate form not to be mistaken for an income tax return. It must be filed with the CRA on or before your income tax return’s due date.
Currently, there are 41,000 transactions in review by the CRA that are worth over $12 billion dollars. I will writing about this in a separate article.
5. Claiming unreasonable home-office deductions
Running a home-based business does not mean you can write off half of the costs of running your four-room house, unless you really want to invite a CRA auditor to your house. To be able to exercise this deduction, you must use the space exclusively and regularly as your principal place of business.
6. Claiming 100% business use of a vehicle
It is not reasonable to claim that you never use your company car for personal use. This is another red flag that invites CRA auditor to investigate your car usage. Even driving from home to the workplace is considered personal use. So, detailed record-keeping is essential when using an employer-supplied vehicle.
7. Recurring losses from a rental property
The CRA knows that rental businesses, like all businesses, can take several years to turn a profit. But for losses to be allowed there must be a reasonable expectation of profit down the line. It is not reasonable to show negative cash-flow for ten years in a row. The CRA is quite aggressive in targeting rental loss deductions.
8. Being self-employed
Self-employment or “a business on the side” is one of the areas that are constantly on the radar of the CRA. The tax department "has tools to investigate and gather information about your industry. If your numbers don't fit the typical profile, then chances are greater that you will be audited
sources: CRA ,moneysense & CBC