When year-end comes around, make sure that your taxes have been filed accurately by avoiding common mistakes that will trigger an audit.
During a tax audit, the CRA examines your records and books to determine whether or not you’ve paid all the taxes you owe. After an audit, the Canada Revenue Agency gives recommendations about the tax adjustments that will ensure total compliance with our tax laws.
Here are 8 common flags that bring about CRA audit adjustments:
1. Inaccurate or Incomplete T slips
Unreported payments include any bonuses, commissions and cash payments to employees and/or fees for services paid to independent contractors. They must be included on a T4/T4A slip
2. Vehicle Expenses
Do you work in different locations or use your vehicle for work-related reasons? It’s important to keep proper logbooks for business driving to calculate the benefit correctly. If you make vehicle deductions without meeting the recommended criteria that will be a red flag that can trigger an audit. There’s some great tech that makes keeping accurate mileage reports so much easier, including Everlance, MileIQ, and QuickBooks Self-Employed. These apps are CRA compliant; however the default settings may be for the U.S., so check to see if you need to make some minor changes.
3. Vehicle Allowances
When employers provide a work vehicle, but don’t include it as a taxable benefit with their payroll? That’s a flag. This includes gas cards, reimbursements and cash allowances.
4. Employer-Provided Parking
If the parking provided benefits the employer, then employees do not have to be taxed. If the parking provided does not benefit the employer, then it is a taxable benefit for the employees. Employers may not report the true market value of this benefit, which will trigger an adjustment.
5. Reclassification of Employment Status
When someone works full time for a company, should be treated as an employee, but instead is listed as a self-employed contractor? That’s a red flag.
6. Security/Stock Options
This has become a common practice for compensating employees, which provides them with a financial benefit as well as a sense of ownership of the company. These taxable benefits are not being reported when stock options are exercised, which can bring about a company audit.
7. Travel Expenses and Allowances
Did you really have important meetings down at that all-inclusive resort in the Caribbean? In order to be treated as non-taxable, your travel expenses and allowances must be reasonable business expenses that primarily benefit your company, not your stress level.
8. Personal and Living Expenses
Many business owners look at this type of expense as personal drawings and do not report it as taxable income. They may also commandeer corporate assets for personal use. Some employees may agree to have their personal living expenses paid for by the employer, as part of their compensation. But, unless these fall under a specific exemption, it would be considered taxable income.
When in doubt, especially in “grey area” type situations, it makes sense for everyone — business owners, employees and the self-employed — to seek advice from tax professionals, ideally before being confronted with CRA tax adjustments.
Need help preparing for an audit or a second look at returns before an audit is scheduled? Contact us, we’re here to help.