How do I avoid audit triggers? Why do businesses get audited?

If you’ve ever been audited, you know that it’s a very unpleasant surprise. It’s a stressful process that can drain you of time and money you can’t afford to spend. But what if who the CRA chooses to audit isn’t actually a surprise? 

The Canadian Government states that the CRA selects files to audit based on a “risk assessment” of “a number of factors.” Whether or not your business gets audited, and how smoothly that process goes if it does happen, is largely in your control. By understanding what factors in your business might flag you to the CRA, you can take steps to avoid an audit and better prepare for one if it does come. 

You’re an outlier 

According to the Canadian Government, when deciding whether to audit a file the CRA will compare it to other “similar” files they have on record. One of the ways they do this is by comparing your records to other businesses in your industry.

If, for example, you have significantly higher cost of goods sold compared to the average in  your industry, or are declaring a significantly higher or lower business income, you may be flagged for an audit. You can find your industry averages on the Statistics Canada website.

Your industry is commonly audited 

Sometimes, simply being in a certain type of industry can trigger an audit. In some cases this is due to certain businesses historically having a higher rate of errors. The CRA also frequently audits cash heavy businesses like restaurants, taxis, and some construction businesses. Cash heavy businesses are commonly suspected to not be reporting their full income, and because of this the CRA is now aggressively investigating many of them. 

You have uncommon business expenses 

Claiming business expenses is an important part of filing your tax returns, but expenses of a certain scale or type may flag you to the CRA for an audit.

For example, there’s currently a CRA audit project examining class 10 automobile expenses in corporations. The CRA knows that it’s extremely uncommon for a vehicle to be used solely and exclusively for business, especially if you don’t own an additional personal vehicle. If you attempt to claim 100% of your vehicle usage as a business expense, you’ll likely be flagged for an audit. 

This is why it’s vital that you keep mileage logs on your business trips and record all of your fuel, maintenance, and insurance expenses. 

You’re reporting repeated losses 

Losses aren’t uncommon, and a single reported loss won’t be enough to flag you for an audit. However, repeated losses, especially if they’re used to offset other income, will draw the attention of the CRA.

You’ve taken shareholder loans 

A shareholder loan is money given by a corporation to a shareholder. If certain conditions are not met  – like the loan being repaid within a year of the fiscal year end – then the loan amount will be considered part of your income and will be subject to tax.

Your forms have discrepancies 

Discrepancies between documents submitted for you or your business can also trigger an audit. Remember, the CRA will compare the information provided across numerous documents, like your HST return, T2, payroll taxes, T4, and even your spouse’s tax return. Even an accidental discrepancy across all these forms could end up triggering a long, costly audit of your business.

Preparation is the best prevention 

As you can see from all of these examples, the best way to avoid an audit is through meticulous record keeping. Whether it’s carefully tracking your cost of goods sold to account for an industry discrepancy, accurately recording your income as a cash heavy business, or ensuring you have all the proper information for your expenses, good record keeping is the number one way to avoid unwanted attention from the CRA. 

At the same time, you’re an ambitious business owner who’s busy planning for the future. You don’t have time to be slowed down by the financial side of your business and risk missing opportunities for growth. That’s where Titanium comes in. We don’t just “help out” – we make a real difference in your business by setting up the right systems, processes, and foundations you need to excel. 

Read more about how we can help you avoid an audit and grant you freedom through discipline here.