At some point in the life of your small business, it’s safe to expect an audit from the Canada Revenue Agency. This is a normal part of the Canadian tax system — as long as you file your taxes diligently, you usually have no reason for concern. That being said, avoiding CRA audits when possible gives you more time and energy to focus on your small business. By avoiding common mistakes and CRA red flags, you can keep the CRA happy and reduce your chances of an audit.
Mismatched Returns and Small Business Audits
When you file taxes, your numbers should match across each return. For the CRA, mismatched numbers prove a key indicator that something might be wrong. For example, the amount of sales you declare for GST/HST purposes should match the sales you declare for income tax purposes. Small differences due to accounting practices are normal, but if you have a large discrepancy, expect to justify it to the CRA during a business audit.
The same holds true of your annual T4 Summary returns. These returns indicate the amounts you pay to each employee for salaries and payroll taxes. The CRA uses T4s to match up what your employees declare as income. They also compare them to your business expense deductions to ensure they match.
Handwritten Receipts Can Trigger a CRA Business Audit
If your business uses handwritten receipts, it might set off a red flag for the CRA. Consider the Restaurant Giannina Pizzeria Inc v. MNR case in the tax court of Canada. In this instance, a simple taxpayer mistake triggered a long and painful audit. A government auditor on vacation stopped by a local restaurant and ordered a take-out pizza. Out of habit, he asked for a receipt. Instead of printing one from the cash register, the cashier handed him a handwritten one from a pad. Seeing the handwritten receipt, the auditor began to wonder about undeclared revenue. Upon returning to work, he launched a full audit of the restaurant and the case ended up in court.
Although this particular case worked out well for the taxpayer, who received a $196 refund in overpaid taxes, it serves as a valuable lesson for all business owners. A full-scale audit comes with high administrative and legal costs — if your finances can’t take the hit, it’s a good idea to pair your handwritten receipts with quality accounting software that clearly demonstrates your income and expenses. If you’re serious about preventing a tax audit, you may also want to consider switching to conventional printed receipts.
CRA Audits on Cash-Intensive Businesses
From time to time, the CRA identifies certain sectors of the economy as vulnerable to tax evasion. It then systematically audits these businesses. Cash-intensive companies, such as hair salons, garages, and restaurants, often sit high on the CRA small business audit priority list. If you run this type of business, you can’t do much to prevent a basic audit. You can, however, prepare for a CRA audit to make the process quick and painless. Be sure to keep accurate, organized books and respond promptly and politely to the CRA’s requests for information. If you do, the CRA may take your name off of its list.
By taking steps to avoid these CRA red flags, you can help your company avoid a tax audit. Great accounting software provides lots of help — it makes it easier to track sales and expenses while letting you run business and tax reports. In addition, QuickBooks Online can help you maximize your tax deductions. Keep more of what you earn today.