1. Discrepancies between your income and HST
One of the first things the CRA will do with your return is run a sales or revenue comparison. The agency will compare the sales reported on your corporate or personal income tax return to what was reported on Line 101 of your HST return from the same period.
If they notice a difference in the amounts, it raises a flag for the CRA that maybe sales have been under-reported for either your income tax or HST.
They’ll also take a closer look at your HST by comparing what you owe (13% of your reported sales) and how much was actually collected. If there’s a discrepancy, the CRA will ask you to clarify it.
You can run these calculations yourself in advance and get your supporting documentation prepared in case the CRA comes back with questions.
2. Living large
If you’re living in a $3-million-dollar home, travelling most of the year on your personal yacht and collecting vintage cars, but reporting a $35,000 annual income, the CRA is not just going to assume you’re great at budgeting.
On whatever scale you’re living, if it seems out of step with what you’re earning, it’s going to draw interest from the CRA.
That being said, some people who are legitimately good at budgeting and stretching a dollar may be flagged through this approach. Before you get audited, the CRA will simply ask for clarification on what they see as questionable. All you’ll need to do is prove how you manage your money so well.
3. Being self-employed
Unfortunately, if you don’t receive a T4, you’re much more likely to be audited at some point in your career. That’s because when you receive a T4, it’s likely that sufficient tax has been withheld by your employer, so the CRA views you as low risk.
When it comes to auditing, the tax agency prefers to spend their time and energy on higher risk taxpayers.
And when you’re self-employed, your taxes are not withheld at the source so that ups the likelihood that what you owe may be incorrectly reported.
If you run your own business or work as a freelancer, or there’s not much you can do to prevent being targeted by the CRA for audit. Your best option is to set aside plenty of your earnings throughout the year (25% to 30%), keep all your documentation and work with a tax professional or file with a reliable software program to ensure you claim everything appropriately.
4. Car claims
Even if you use your car for work, the CRA knows it’s unlikely you never use it for personal use. So if you’re claiming 100% of your vehicle expenses for business purposes, the CRA is going to be a little suspicious — especially since driving from home to work is technically considered personal use.
If you want to claim some of your car expenses on your taxes, what you should do is keep a detailed record of your kilometres, including the date, address and purpose of each trip.
5. Running a cash business
Cash may be king, but it also causes plenty of trouble from its throne.
When your business involves a lot of cash transactions, it’s harder to trace those funds. And if you’re dealing in cash, it can be tempting (and oh so easy) to under-report how much money is actually passing through the business.
Knowing that, the CRA often assumes there are more opportunities to recover taxes from undeclared cash income from this type of business.
If you’re running a restaurant, hair salon or contracting business (or anything else that deals often in cash), keep accurate and detailed records in case you ever get flagged.
Be aware that the CRA will compare your business with others in your industry. So if you’re reporting 18% cash sales but all the other restaurants in your neighbourhood are declaring around 30%, you’re way more likely to be flagged.
And always avoid working for cash under the table. If you ever get audited, you’ll face major penalties and some hefty interest charges.
6. House flipping
With how much money you can make through buying and selling real estate, it’s something the CRA likes to keep a close eye on.
Common real-estate related audits are: HST rebates, pre-sale condo flips, new home construction, principal residence exemptions and other less common real-estate transactions.
If you’re getting into house flipping, or just involved in a number of home purchases and sales, you should expect to eventually get audited.
The CRA has an audit project dedicated to these real-estate transactions. It has been monitoring new builds, keeping track of purchasers and whether they live in their units or end up selling them. The issue for the tax agency is that condo flippers often incorrectly categorize their taxable income, qualifying for lower tax rates by claiming capital gains treatment instead of income treatment.
7. The family business
The family that works together often gets audited together. If you’ve got family members on the payroll or you work closely with them, if one of you is getting audited, that probably means you all are.
That’s especially true if one of you is on the payroll as a contractor, which unfortunately may not be fishy in your case, but is often a way for families to favour certain members and reduce their income tax liability.
And if you’re involved in multiple businesses at the same time, expect the flags to multiply as well.
As with all the other freelancing, self-employment or contractor situations, it’s just a matter of taking great care to maintain detailed and accurate records
8. Large charitable donations
There are plenty of causes that need the help this year, and it doesn’t hurt that you can write-off that good deed, too.
But if your charitable donation is abnormally high compared to your income, it’s a red flag for the CRA.
Another thing the tax agency is on the lookout for is donations to organizations they suspect are involved in tax schemes.
Remember, you can only claim donations to registered charitable organizations, and if you’re asked, you’ll need to be able to present an official tax receipt. Don’t claim anything you can’t get a receipt for.
9. Home office expenses
It’s time to finally expense all those new home office products you bought last year, right?
Even though the pandemic forced more people than ever to work from home in 2020, like vehicle costs, home office expenses are often over-declared and not based on actual costs.
For example, some people improperly include regular home maintenance, like cleaning, snow clearing or landscaping in their home office expenses.
This year, with so many forced to work from home during the pandemic, the CRA introduced a new temporary flat rate method for tax filers just for 2020. As long as you worked from home more than 50% of the time for at least four consecutive weeks, you can claim $2 for each day you worked from home. You can claim a maximum of $400 for the year.
If you are looking for some ways to save money on property-related expenses, you could consider refinancing your mortgage to help reduce your monthly payments.
10. Previous tax audits
While it’s not always a guarantee that one audit means you’ll be audited again, if the CRA finds a number of discrepancies, errors or omissions the first time you’re audited, you can probably count on repeat audits.
That being said, if it was an issue that was easily resolved or just a few hundred dollars’ worth of errors, your risk category will be knocked back down, making it less likely you’ll end up getting audited again.
What’s the takeaway here? Always make sure you’re keeping proper documentation, only claiming what you’re eligible for and filing your taxes promptly each year.