When verifying income tax returns, one of the tools that the Canada Revenue Agency (CRA) has at their disposal is a risk-assessment system which helps them identify which returns they might want to audit. Through systems such as the risk assessments system, or programs like the Matching Program, the CRA is in a better position to identify returns which have missing information, or containing information which need proof of, or verification.
There are some common triggers, which if you know them, you can reduce your risk of being audited.
Unusual Changes in Deductions or Credits
If you claim significantly more credits or deductions than you have in previous years, it increases the likelihood the CRA will flag your return for an audit. However, as long as you have the records to prove the claims were correct, the auditor will close the case and issue you a letter of completion.
Excessive Business Expense Claims
If you are self-employed or own a small business, excessive business expense claims can trigger an audit as well. While the CRA may find a small home office reasonable, it may raise red flags if you claim that your office takes up 50 or 60 percent of your home.
Similarly, if you claim 100 percent of your vehicle expenses as business expenses, that also raises suspicion. The agency assumes that you likely use most vehicles for personal use at least once in awhile.
In fact, when completing your return, be as accurate as possible and ensure that you have records to back up all of your claims, as being self-employed can increase your risk of being audited.
If you work for an employer, they will issue you a T4 and send the CRA a copy. If you don’t report all of your T4 income, the CRA’s computer system typically picks that up.
Additionally, if you report significantly less income than your neighbours, the CRA may initiate an audit. In cases where it suspects involvement with the underground economy or running an under-the-table business, the agency has a range of methods to create a financial picture and assess a higher tax bill.
Recurring Losses From a Rental Property
The CRA allows you to write off losses from a rental property. However, it also assumes you bought the property to earn money, and if you are repeatedly reporting losses, it may want to look at your records.
If you have legitimate losses, you need the records to support them. In particular, the agency wants to see that you have done your due diligence with regards to finding renters and charging market-rate rents.
If you rent your property to a relative for less than fair market value, you cannot claim a loss.