We’re oftentimes asked how the CRA chooses taxpayers subject to audit. With experience we know specific taxpayers, specific claims and specific industries tend to trigger audits. With this in mind, we’ll list here what we’ve seen and how we think the Canada Revenue Agency chooses specific businesses and individuals for audit.
Reasons that are specific to individuals
We see more desk audits (data requests regarding specific deductions claimed) than full blown CRA audits for individuals. It’s possible to expect an inquiry if you claim any of these:
- a substantial interest cost
- a permittable business investment loss (typically if you held shares inside a bankrupt private Canadian business)
- tuition from a university that is outside of Canada (usually the parent and child are tied together as the majority of kids transfer $5,000 of their tuition claim over to their parents),
- child care claim for nannies; even if you’ve filed a T4 for nannies with CRA. Why the CRA can’t crosscheck their records is confusing.
In all of the aforementioned cases you’re just offering back-up details, these aren’t audits.
Within past years individuals who bought any tax shelter other than an oil and gas or mineral flow through were audited. But in most instances the Canada Revenue Agency is auditing the tax shelter itself and all individual investors simply get personally reassessed.
A full-blown audit seems to happen with regularity concerning individuals who make self-employment income or commission income and claim costs against that income. In these cases, the Canada Revenue Agency gravitates to car cost claims, and requests logs books they know 1 in 100 individuals actually keep, and ad and promotion costs they think are personal in nature.
Reasons that are specific to corporations
Corporations tend to be chosen for three reasons.
They have a business that is the Canada Revenue Agency’s flavor of the year; some previous flavors have been contractors and real estate sector, pharmacies and any additional industry the Canada Revenue Agency feels is a “cash is king” field.
Corporations file a GIFI. These details provide a comparative yearly summary of expenses and income. It’s suspected by most accountants that the CRA utilizes these details to review annual income and expense variances of the filing corporation, as well as to additionally compare corporations inside a similar sector to identify the ones outside of the standard ratios; however, we do not know that for sure.
The last reason is that it’s simply your bad luck. I don’t have any knowledge of this, yet it seems as if the CRA merely selects at random.
In all instances it’s important that you keep your source documents to offer to the auditor; the CRA now more than ever asks for source documents. It also is important if you, and not the accountant, are meeting with your auditor, that you keep your cool.
For more information on being selected for a CRA audit contact the efficient Winnipeg accountant services of Compass Accounting today!