Every taxpayer in Canada dreads receiving the Tax audit advisory from the CRA. The tax audit is a lengthy process which may drag anywhere from a couple of months to years. Facing a tax investigation audit involves a lot of time and money. The taxpayer has to pay for all the costs incurred during the procedure, which results in huge financial burden on him.
While the CRA can select any individual or business for an audit, here are the ten factors that might increase the risk. It is advisable to cover yourself or your company with an investigation insurance or tax audit protection to protect yourself from the huge financial strain of tax audit. The insurance cover pays for all the professional costs incurred during the process of the audit.
- The CRA may pick up businesses and taxpayers with revenue discrepancies in different tax forms. They compare the revenue in income tax form with that in the GST or HST returns, with information provided on employee’s tax returns and information provided to banks and financial institutions. If there are any discrepancies in the revenue. The CRA may initiate an investigation. Business are advised to buy sufficient investigation insurance to cover all the professional costs involved in the process of tax audit.
- Declaring higher or lower income than the industry average may attract the attention of the CRA. The agency has lots of information about the average profit/loss margin for different industries. Any return which does not match the criterion might be picked up for investigation.
- Claiming huge deductions for office expenses is a sure shot way to draw the interest of the CRA. While there are many deductions allowed by the CRA for operating a business, like advertising and promotion expenses, travel expenses, meals and entertainment expenses etc. any huge deductions will immediately raise a red flag.
- Reporting business losses for consecutive years and using them for offsetting other incomes will attract the CRA audit.
- Cash-incentive businesses are under constant scrutiny by the CRA. If you own any of the cash incentive business like construction, hotels, salons, restaurants etc. speak to your accountant about the investigation insurance to cover all the professional costs of a tax audit.