Webster’s Dictionary describes an audit as “
Some of the reasons the CRA will flag you for an audit is if you have discrepancies between the revenue you submitted to them and the revenue you show in your books. Additionally, a claim of income that is significantly higher or lower than others in your field will send up a red flag. Errors in tax returns may also result in an audit. Corporate business owners must be aware of changes to shareholder loans as the CRA will look for any large changes and ask why. When they ask these questions you must be able to provide them with proof!
Keeping books and records
Out of all the money allotted to CRA audits, 54% of that is dedicated to auditing small and medium businesses. That means over half of the people getting audited are people just like you and me. It is imperative that our books are impeccable. The reason we keep books and records is so we can prove our claims to the CRA. If you can not prove your income, revenue, losses or expenses as you had claimed through the year, you could face penalties.
Rules to follow
The CRA has a set of strict rules business owners must follow. Among those are maintaining proper records for motor vehicle expenses. The CRA has been cracking down on those who claim vehicle expenses. If you claim your vehicle is used solely for business purposes, chances are you will get audited. Most of the time, your vehicle is not used 100% for your business. For example, the drive to and from your office is personal time. Stopping by the grocery store is personal use. Picking up your kids from school is also personal.
If you get audited for such claims, you must be able to provide the government with receipts for gas and maintenance. In addition you must keep a vehicle log that states the date, how many kilometres were driven, to a certain location, and for a certain purpose.
If you claim to use your vehicle only some of the time for business purposes, you still need to maintain a logbook, however, you can choose to use the simplified version which is discussed further on the CRA website. If you would like to learn more about accurately keeping a logbook for business purposes, please click here.
What will CRA need from my business?
Canada Revenue Agency can request various documents, records and books. They can ask for both your business and personal records, as well as records from other people you have relations with (i.e. spouse, corporations, partners, family members, etc.). They may contact your bookkeeper, accountant or an employee who maintains your records. They can go back as far as four years after the date of your tax assessment to audit your return. This is referred to as the CRA Statue of limitations. However, if the CRA suspects fraud, these limitations do not apply. The CRA can go back as far as the records allow.
How to avoid an Audit
There is no sure fire way to avoid an audit. Sometimes things completely legitimate get questioned. If you had an exceptionally good year revenue wise the government may question this. If you claim more expenses than you have in previous years, you may get questioned. However, you can minimize the stress in several ways.
Keeping receipts for EVERY BUSINESS RELATED EXPENSE is the number one way to ensure an audit goes smoothly. When you’re claiming expenses you have to be able to back up your claim. A paper trail, if you will. Some will tell you using a bank or credit card statement will suffice. This is NOT true. You could buy $30 worth of scratch tickets at a gas station, and it would only show that you spent $30 at a gas station. We must be able to prove that you spent that $30 for fuel and not tickets. If you need help organizing your receipts, check out our previous blog post about this subject!
Another way to ensure your CRA audits goes smoothly is to hire a bookkeeper. As bookkeepers, it is our job to guarantee your books are legal, compliant, complete and organized. In the event you get audited, a CRA agent will speak to your bookkeeper and gather any necessary documents from them. This will lessen the headache on your part. You can continue to run your business while your bookkeeper handles the audit.
You can find out more information on how the CRA conducts audits by clicking here.