CRA & Revenu Québec

8 Tips for Avoiding Being Audited

When it comes to filing your taxes, few things are more panic-inducing than the thought of being audited. Fortunately, most people will never experience an audit, especially if you are using a trusted software that walks you through your taxes step-by-step.

We’ve compiled our top 8 tips for avoiding being audited, and avoid potential interest and penalties.

1) Unusual Tax Return Changes

The CRA looks for consistency in your tax returns from year to year, especially if you file as self-employed or a small business owner. If you have massive changes in deductions or income, the CRA may flag your return for a review. Make sure that you can clearly document and support all changes.

2) Failing to Report Income From T-Slips

The CRA automatically checks all the T-slips it receives with the individual tax returns it receives. Remember to file all of the information from all of the slips you receive. If the CRA notes a discrepancy, it reassesses your return and may request more information.

3) Refusing to Provide More Information

If the CRA becomes curious about a certain aspect of your return, provide the receipts, logs, schedules or any other information requested. Failure to provide this information can result in the CRA issuing a reassessment or auditing your return.

Ignoring a request for information does not make it go away. However, providing the requested information does not inoculate you from an audit either.

4) Unrealistic Home Office Deductions

The CRA offers home office deductions to employees who have work space at home, and to self-employed individuals and small business owners who use their homes for business. To qualify for either of these deductions, the CRA sets requirements about how often you use the space and whether you use it for personal use.

Be accurate and reasonable in calculating business-use-of-home office space.

If your claims seem excessive, the CRA may decide to audit your return. For example, a home office that takes up 10 percent of your home’s floor space likely seems reasonable. In contrast, a home office that takes up half of your six-bedroom home seems unrealistic and may trigger an audit.

5) Writing Off All of Your Vehicle

The CRA allows you to write off expenses related to using your car for your job or your business. However, the CRA knows that most people do not have vehicles used exclusively for work.

You may not claim the entire portion of vehicle-related expenses if that vehicle is also for personal use.

If you attempt to write off 100 percent of your vehicle expenses as work or business expenses, that claim may trigger an audit.

For example, if you buy a snow plow and you own a parking garage, the CRA may not raise an eyebrow at claiming all of this expense as a business expense. However, if you have a family sedan that you use for work, the CRA may become suspicious if you claim that you use it exclusively for work.

6) Hiding Cash Income

The CRA requires you to report all income, including any cash or trade that you receive in exchange for services.

The CRA has a number of techniques to determine the likelihood that you are collecting cash but failing to report it. In the midst of an audit, the CRA may look at your lifestyle and property and compare those elements to the amount of income you declare on your tax return. Additionally, the agency may collect information from informants.

When simply looking at your tax return, the CRA may compare your income and your neighbour’s incomes. For example, if you live in an area full of millionaires but you only report a few thousand dollars in income, the CRA may notice that and start to reassess your tax return.

7) Aggressive Use of Tax Shelters

When you make an investment or donation that isn’t taxed, you are using a tax shelter.

If the CRA feels you have an excessive use of tax shelters on your return, that can trigger an audit. In some cases, taxpayers who do their financial planning with the exclusive goal of lowering their tax rate use tax shelters excessively; in other cases, taxpayers are lured into frauds related to tax shelters.

In one common fraud, fake non-profit organizations elicit donations from taxpayers in exchange for receipts showing three times the actual donation. However, these charity groups are not real. When the CRA assesses these tax returns, the victims end up owing taxes. If you are donating money, avoid the tax-shelter-audit trigger by checking the non-profit status of the charity with the CRA’s charity listings.

8) Repetitive Rental Losses

In some years, your rental property may suffer a loss. However, if you claim repeated losses, the CRA may get suspicious. Avoid this risk by only declaring rental income if you are trying to make a profit.

For example, if you rent part of your home at lower-than-market rates to a relative, you do not have to claim that income, but you also cannot claim related expenses. This is viewed as a cost-sharing agreement not an income-generating venture. As you are clearly not trying to turn a profit, you cannot claim a loss.

TurboTax has been helping Canadians get their taxes done right for more than 20 years. If you would like added confidence, you can get a tax pro on your side with Audit Defense.