At some point in the life of your small business, you should expect to be audited by the Canada Revenue Agency (CRA). This is a normal part of the Canadian tax system — as long as you have been filing your taxes diligently there should be nothing to worry about. That being said, an audit is not a pleasant or productive part of your business, and you’ll want to avoid them as much as possible. Here are some common mistakes to steer away from to keep the CRA happy.
The Numbers Don’t Match
For the CRA, one of the key indicators that there may be something wrong with your taxes is when the numbers on your various returns don’t match. For example, the amount of sales declared for GST/HST purposes should be the same as those for income tax purposes. There may be small differences due to accounting practices, but if there is a large discrepancy then the CRA will want to know why.
The same is true of your T4 Summary returns that you need to file annually. These indicate the amounts what you pay to each employee for salaries and payroll taxes. The CRA uses these to match up what your employees declare as income, but also what you deduct as a business expense.
A recent Tax court of Canada (Restaurant Giannina Pizzeria Inc v. MNR) highlighted a simple mistake made by an otherwise honest taxpayer that triggered a long and painful audit. In this case, a government auditor, while on vacation, stopped by a local restaurant and ordered a take-out pizza. Out of habit, he asked for a receipt and, instead of printing one from the cash register the cashier handed him a handwritten one from a pad. This triggered doubts in the auditor’s mind about undeclared revenue. Upon returning to work, he launched a full audit of the restaurant and the case ended up in court.
That particular case worked out well for the taxpayer — who was refunded $196 in overpaid taxes — but the administrative and legal costs of a full scale audit are high. The lesson to learn is that you should use quality accounting software that can clearly demonstrate your income and expenses.
CRA’s Favorite Clients
If you are in a cash intensive business such as hair salons, garages, restaurants or even construction, you are already high on the CRA’s priority list. From time to time, the CRA identifies certain sectors of the economy as vulnerable to tax evasion and audits these businesses systematically.
If that is your case, you really can’t do much to avoid at least a basic audit, but you can prepare yourself in order to make it as quick and painless as possible. Keep good books and records and reply promptly and politely to requests for information from the CRA. If you do, it is likely that you will quickly be taken off this list.