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Taxation

Four Ways Small Business Owners Can Trigger an Audit

Clock5 min. read
byVexxit Staff onNovember 23, 2020

Getting audited is uncomfortable, inconvenient and under some circumstances downright scary. While there is no sure-fire way to prevent a tax audit, you can minimize your risk of being audited by avoiding the following four triggers:

No small business owner wants to receive a call or an audit commencement letter from the Canada Revenue Agency (CRA). However, as a small business owner you are at a greater risk of being audited by CRA. The reason for this extra attention is because CRA auditors believe small business owners are likelier than larger businesses to make mistakes on their tax returns. According to the Canada Revenue Agency Annual Report to Parliament, the CRA dedicates the bulk of its resources to scrutinizing small to medium-sized business tax returns for tax compliance issues.

Getting audited is uncomfortable, inconvenient and under some circumstances downright scary. While there is no sure-fire way to prevent a tax audit, you can minimize your risk of being audited by avoiding the following four triggers: 

1. Revenue discrepancies

The CRA will compare your revenue across all tax forms you submit. Auditors are looking for discrepancies. If the revenue you declared on your income tax form is different than the revenue declared on other tax forms submitted or you’ve recorded significant changes in deductions or income, get ready to be audited.

2. Deducting large business expenses or rounding estimates

Although you are able to deduct business expenses from your income tax, be careful. Deductions for travel, meals, promotions, interest expenses, or other miscellaneous expenses pique a CRA auditor’s interest. Large deduction claims in any of these areas, claiming 100% of your vehicle expenses or estimating expenses can all increase your audit risk.

3. Mixing business with personal life

As small business owners, we spend a lot of time and effort on our companies, which can sometimes blur the line between our personal and business life. It can get a little muddy if you start using business accounts to pay for expenses or items that the CRA would clearly consider as personal expenses. If you’ve blurred the lines between your business and personal life, saddle up for a CRA audit.

4. Cryptocurrency (Digital Currency)

If your small business trades or invests in cryptocurrency (i.e., bitcoin) or you’ve purchased goods using cryptocurrency, the CRA is going to take a special interest in you. While cryptocurrency has been around for some time, only recently has the CRA begun auditing cryptocurrency transactions. If you’ve profited from cryptocurrency transactions, the CRA expects you to report your earnings.

There are other potential audit triggers beyond the four we have listed in this article, such as missing tax filing deadlines or failing to report all income earned. Business taxes are complicated, especially for a small business owner. You can equip yourself to better navigate the complexities of Canada Revenue Agency business tax rules by staying informed and up-to-date on any changes in current taxation laws. But, if you happen to be one of those lucky small business taxpayers to receive a call or letter from the CRA, do not panic. As soon as you receive notification of a pending audit, contact your tax professional and arrange for representation during the audit.

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