The CRA has a risk-assessment system to identify tax returns at high risk for non-compliance. When the system detects an abnormality, it is sent to an officer for review. They review the information to determine whether an audit is needed to address the identified risks. To avoid unnecessary stress, it’s essential you file your taxes on time yearly, keep the proper documentation, and claim what you’re eligible to claim.
However, no one institution or person is infallible, and mistakes are made. That’s why we’ve provided Canadians with expert tax law legal counsel for over 20 years. So remember to book a consultation with us if you find yourself the target of investigations by the CRA.
Here is a list of the significant audit triggers the CRA will watch out for;
- Self-employed. Self-employed people have a more complicated tax situation than employees submitting a T-4. A more complex tax situation means the likelihood of errors related to certain credits, deductions, or instances of unreported income is higher. So more needs to be examined and evaluated.
- High-risk industries. Heavily cash-based businesses such as construction, retail, salons, spas, or restaurants have historically higher rates of tax evasion or fraud and are more closely monitored than others businesses.
- Family businesses. Suppose family members are on the payroll or work as contractors, and one of you is audited. In that case, there’s a higher likelihood that any family member associated with the business will also get audited. The CRA may see families have more incentive to collude on reducing tax liability for their own family members.
- Consistent business losses. Individuals or businesses that consistently report significant business losses will begin to attract the attention of the CRA. Taking such losses will lead them to wonder how they’re staying in business and to ensure it’s not a ploy to avoid paying taxes.
- Excessive home office expenses. Home office expenses are often over-declared and rife with unjustified claims. For example, some people will include regular home maintenance or landscaping in their home office expenses, which is unacceptable.
- Significant income fluctuations. Drastic swings in income, especially for self-employed people, will attract more attention.
- Random selection. The element of random choice is still a factor, and combined with the CRA’s computer monitoring systems analyzing irregularities could trigger a closer look.
- Excessive car claims. If you use your car for work and claim 100% of all your vehicle expenses for business purposes, the CRA can become suspicious as personal use of your vehicle is highly likely. Keeping a detailed record of your kilometres, including the date, address and purpose of each trip, is good practice.
- Large overseas transfers. Financial institutions must report to the CRA all international electronic fund transfers of $10,000 or more. If you receive consistent transfers from abroad without good reason or don’t report the transfers, the CRA will be more inclined to investigate why.
- Focus on specific sectors. The CRA may have an ongoing project focussing on particular sectors of the economy, such as house flipping or the trade of precious metals that can be seen as higher-risk businesses regarding tax evasion, fraud, or tax scams.
- Lifestyle discrepancies. Suppose your income doesn’t match your lifestyle or where you live. Are you making significantly less than the average of your neighbourhood? Do you own a mansion and vacation 12 weeks a year but only report $35,000 in yearly income? The CRA could start to investigate how you can afford such a lifestyle.
- Anonymous tips. If the CRA is alerted to investigate, say from tips from individuals through the CRA leads program.
- Offshore assets. Owning a significant amount of assets abroad could also attract unwanted scrutiny from the CRA.