Four ways small-business owners can trigger an audit
This article looks at four common ways of triggering a CRA tax audit for small- and medium-business owners.
Small and medium businesses are a big target for the Canada Revenue Agency’s (CRA) auditors. After all, as the Globe and Mail points out, small-business owners are seen as being more likely than large businesses to make a mistake on their tax returns. Getting audited can be a scary process and may even lead to a dispute about taxes owed to the CRA. However, there are many myths and misconceptions surrounding the auditing process and understanding how audits often get triggered can better help business owners deal with them if and when they happen.
Tax-filing deadlines for business owners can be complicated. Self-employed people, incorporated businesses and active businesses are all subject to different deadlines and extensions concerning filing and payment. Failing to file a tax return, which is a criminal offence, invites scrutiny.
Some industries are seen as being at greater risk for tax improprieties than others, especially those where cash transactions are common (such as the restaurant industry). Real estate and construction are two other industries that the CRA tends to focus on. However, as the Financial Post points out, high-income professionals, like doctors and consultants, are also favourite targets for CRA’s auditors. Keep in mind, however, that many audits are random, so not belonging to a targeted industry is no protection against actually being audited.
Mixing business and personal life
Many small-business owners put a great deal of their lives into their companies, which can make it difficult to draw a clear line between one’s personal and professional life. When it comes to things like expenses, however, it is a good idea to not start using business accounts in order to pay for items that the CRA would likely consider strictly personal. CRA’s auditors have the authority to look into a business owner’s personal and business expenses in order to find discrepancies. Likewise, owners need to consider themselves employees and file T4 slips for themselves accordingly and the same applies to any family members who may be working for the company.
In some cases, such as when records are unavailable, estimating some figures on a tax return cannot be avoided. However, expenses that are rounded up or down tend to look suspicious and may attract the eye of a CRA auditor, especially if those figures fall outside the industry average. Likewise, trying to claim a large number of “Other Expenses” on the T2125 form can also lead to unwanted CRA attention.
Tax dispute advice
Taxes are complicated for everyone, but especially so for business owners. When a tax dispute arises with the CRA, it can be a frightening time for business owners, especially if the money the CRA is demanding is more than a business can afford. The CRA, however, makes mistakes just like everyone else. Business owners who are faced with the prospect of an even larger tax bill than they anticipated should contact a tax lawyer as soon as possible to discuss their problem and hopefully identify potential solutions.