No business or individual wants to be put through an audit by the Canada Revenue Agency (CRA). But, regardless of how well you conduct your business, receiving tax audit information can be overwhelming. Entrepreneurs may have described the process as unpleasant and complicated.
Hence it is always best to avoid being audited by the CRA. There are a number of factors that the CRA looks at when evaluating businesses and individuals for risk of non-compliance. Below are several proactive tips to help reduce your company’s CRA tax audit risk.
4 proactive tips to reduce your company’s CRA tax audit risk
1. Be Reasonable About Expense Claims
cut of business expenses One of the benefits of owning a business is your income tax. But claiming an unreasonable amount is a sure way to raise red flags and attract the attention of a CRA auditor.
Make sure the amount of your company’s expenses is reasonable, especially when compared to revenue and other similar businesses. It can be helpful to review the costs you’ve claimed in previous years.
If there is a substantial increase, the CRA may conduct an audit. Limit expenses that are as important to your business as possible. hiring a professional tax audit services It’s also a good idea to make sure you have enough documentation to support your claims.
2. Beware of Any Tax Discrepancies
Comparing sales or revenue The CRA will work with your return first. The information you declare on your tax return will be compared across all tax forms.
Make sure the income you report GST/HST Returns Your income tax return is consistent with the information. Be as diligent as possible when filing your business taxes to avoid discrepancies that could provoke an audit. Otherwise, the CRA may come back to you with questions if they find any significant difference.
3. Minimize reporting of multiple losses
Most companies make losses. While reporting a loss for a single business isn’t dangerous, doing so for consecutive years is likely to trigger an audit from the CRA. They may think that your business is just a hobby. Note that your company must have a reasonable expectation of profit for it to qualify as a business.
If possible, minimize reporting multiple losses, especially if they are only small. Although you are required to report all of your income, you are not required to do so with your expenses. You can exclude costs that result in only a small net profit for the year.
4. Declare All Your Business Income
Incorrect reporting or repeated failure to report your business income is a major red flag for the CRA. If you default on your tax return, the CRA will make assumptions about how you are leading a lifestyle that exceeds your expected income.
Remember that the CRA will compare your reported earnings to your industry and location average figures. Be sure to declare all of your business income. It is also a good practice to report the exact amount to avoid the doubts of CRA auditors.
Be proactive on your business tax return
There is no way to eliminate your risks of being fully audited by the CRA. But being more proactive in planning and filing your taxes can help reduce the chances of a tax audit. You can also work with an experienced tax professional to ensure accurate reporting on your tax return and justification to support your claims.