The Canada Revenue Agency (CRA) performs audits on various types of businesses for tax compliance each year, even if there’s nothing suspicious about their returns, so there’s no way to completely audit-proof your business. Even if you follow best accounting practices, you may still end up getting audited because the CRA selects a number of returns for businesses similar to yours. The CRA also audits returns that raise red flags when reviewed, and you can protect yourself from this kind of targeted audit by making your returns as accurate as possible and keeping them free of suspicious entries.
Keep a Clear Audit Trail
A clear audit trail shows the path of money in all transactions for your business. The first step in creating an audit trail is to ensure there can’t be any confusion as to which money belongs to the business and which money belongs to you personally. Make this easier by setting up a separate business bank account and getting a separate credit card for your business. Then you need to be religious about paying your business expenses from the right account or on the right card and putting your business income into the right account so you always have a trail that proves which money belongs where.
Don’t Claim Unusual Expenses
You want to maximize your deductions on your taxes as much as possible to save money, but trying to get too creative or pushing the limits with what you claim can hurt you. All of your tax deductions for business expenses should be relevant and normal. Unusual expenses are expenses that look out of line in terms of your industry, your income, or your tax history. For instance, if you’re operating a retail business and have a large amount of meals and entertainment expenses, the CRA may want to know why. Things such as claiming 90% of your house as home business expenses or claiming a large amount of miscellaneous expenses are surefire ways of getting the CRA to take a much closer look at your tax return.
Avoid Revenue Discrepancies
Your revenue is a fixed number, not a variable one, so make sure it’s the same no matter where you report it. The CRA compares the revenue you report on your tax return with the revenue declared on your GST tax return, your spouse’s tax return, and tax return information submitted by employers, financial institutions, and other related parties. If those numbers don’t match, it’s audit time.
Claim Losses Carefully
The CRA is always on the hunt for people who claim they’re running businesses when they’re actually not. To qualify as a business owner, you must conduct an activity for profit or with a reasonable expectation of profit. Claiming a business loss automatically triggers the question of whether or not there was any reasonable expectation of profit in what you were doing. If you’re planning to claim a loss, it’s important that you can prove that you had a reasonable expectation of profit.
Declare All of Your Income
Taking cash under the table, forgetting to record particular transactions that produce revenue, fudging the numbers, or otherwise trying to hide income from the CRA is not only illegal, it may also send up a red flag that leads to an audit. Suspiciously low income or income that doesn’t match with other tax and financial documents often triggers an audit. Plus, falsifying a tax return is a crime, and you could end up going to jail as well as paying fines.
Even though you can’t completely safeguard your business from an audit, you can reduce your chances with accurate record keeping and honesty. They make doing business easier, too. QuickBooks Online can help you maximize your tax deductions. Keep more of what you earn today.