Every year tax revenue agency send letters to a number of Canadian individuals or business professionals letting them know about being audited, due to some or other suspectful reason. It is not random to be chosen for tax audit as you think.
Here are a few common mistakes you can avoid when filling a tax to reduce your chances to get audit invitation.
1. Inconsistency between your income and filing tax return (HST)
The first thing that CRA will do is run or compare the revenue of your return. They will check and compare the sales reported on your income tax to what actually was reported on Line 101 of your tax return. If any difference gets noticed in the amount, then it’s red flag for you that CRA will do tax audit for underreported income tax or HST.
To avoid this situation, make sure to do the advance calculations and keep your supporting documents ready to give clarification to the CRA audit.
2. High living and show minimum earning
When you report a minimum annual income to avoid high tax payments but live in a million dollars of home, traveling a lot with huge expenses, you will definitely be suspected by CRA as they just not going to just assume that you are great at managing a budget. It seems out of step with your income than whatever scale you are living.
Such a negative smart strategy can lead to a tax audit where you will be questioned by CRA for clarification. In such circumstances, you need to prove your expenses with valid receipts and invoices.
3. Inaccurate car claims
When you are claiming 100 percent of your vehicle expenses for work purposes, make sure to keep the record of gas receipts, kilometers, and purpose of trip with date and address as CRA knows it unlikely that you are not going to use car for your personal purpose. This will suspect CRA for audit and can question you for proof of expenses.
4. Running a cash business
It is difficult to trace the funds when your business involves in case transaction. It can be so easy to underreport the budget of your business when dealing with cash. However, CRA knows, there are more chances to recover taxes from such unreported cash type businesses.
If you are running a business that often deals with cash like a restaurant, salon, contracting, or renovation business, then keep the records up to date, save yourself from being flagged for audit. Always avoid to working with cash businesses, if you get caught then might face a major penalty.
5. Charity Donations
It does not hurt if you write off a good deed by donating to charity. However, if your charitable donation is unrepresentative high than your income, it's a red flag for CRA to inspect you.
If a tax agency finds your donations to a charity involved in tax schemes then they will look out for you. Make sure to claim donations to registered organizations, so when you are audited you’ll be able to present an official tax receipt.