We have all heard how much fun being audited by Canada Revenue Agency (CRA) can be. Yet, I see people in my practice every day doing things that are most likely going to get them audited.
So, if you really want that pleasant visit from CRA, here are some things you can do.
1. Tell all your friends about your tax situation
CRA relies on informants to tip them off about unreported income and excessive deductions. The more people who know your tax details, the higher the chance of being audited, so be careful of what you share with friends, co-workers, and significant others – it may come back to haunt you in the event of dissolution of the relationship.
2. Keep bad records
During an audit, it’s your responsibility to prove the deductibility of expenses. Keeping bad records or no records at all helps CRA deny your expenses. CRA loves seeing you mix business and personal expenses together. Remember that credit card statements are not records. You must have the original receipt.
3. Be in a ‘project’ industry
If you are in an industry which CRA perceives as ‘suspect,’ you are likely to get audited.
CRA has admitted that they do almost no random audits anymore. Taxpayers are identified on tax returns by the industry they are in. Construction and renovation businesses have been targeted in the past due to the possibility of cash payments.
4. Contribute to “Too-good-to-be-true” tax shelters
Tax shelters in which you get back more in tax than you contributed are a great way to attract the attention of the CRA. If it sounds too good to be true, CRA will also probably think as well. Don’t listen to anyone who says you can beat the system with their scheme.
5. Be self-employed
Reporting self-employment income on your tax return is a great way to invite CRA to look at your books. Employees are not interesting to CRA because they have few deductions. The self-employed always have deductions to deny. This is another reason to consider incorporating your business.
6. Don’t file tax returns at all.
CRA has a non-filers division that likes to find people who have not filed. Once you are in this department, expect special attention from CRA. If you start filing on-time, they will leave you alone.
7. Take cash payments and don’t report them.
CRA has an underground economy division, which focuses on industries in which cash payments are possible and probable. This could result in the best kind of audit – a net worth audit, in which CRA reverse-engineers your income based on your assets.
8. Deduct everything possible, and then some.
Certain categories of expenses are more likely to get you audited. Meals and entertainment, memberships, insurance and donations are looked at more closely by CRA. CRA knows the industry you are in, and runs regression analysis to determine outlying expenses. For example, a physician with $20,000 of meals and entertainment expenses would be a red flag for CRA.
9. Report losses on passive income.
For example, rental property losses are currently being examined by CRA. CRA likes to look at repairs and maintenance on a rental property. They will take the position that all expenditures are improvements and therefore not deductible. Successive rental losses year after year will invite an audit.
10. File poor and live rich.
Reporting very little income on your tax returns but having a lot of things will eventually lead to an audit. Low income earners tend not to have boats, snowmobiles, cottages or Corvettes. Remember that CRA snitch line? Jealous neighbours can use it too.