The CRA watches self-employed, small business owners more closely. If you are self-employed, it is best practice to ensure that all of your tax documents are gathered and properly filed for both your personal and business affairs. Meticulous record-keeping and an honest approach will not only help speed up the audit but may help to prevent another in the future.
It is also crucial to ensure that you are complying with all tax laws; if there is any concern, it is best to seek professional advice. During the audit itself, it is essential to understand that there are certain red flags that CRA will focus on, if possible, it is best to explain any of the following:
- Be careful with year-over-year variances in income, expenses, and tax deductions – the CRA will examine years’ worth of information, for your business, your family/partners, and for yourself, using sophisticated variance analysis tools. Any unusual change should try and be explained.
- Declaring business income which is significantly higher or lower than others in your industry.
- If your business is cash-intensive.
- Recurring losses, year over year.
- Large charitable deductions.
- Income splitting.
- Large business expenses – in particular, those related to promotion, travel, or entertainment.
- Revenue discrepancies – especially those related to GST/HST tax returns.