Learning that you are going to be audited by the Canada Revenue Agency can be very stressful. But understanding expectations and communicating thoughtfully can go a long way in mitigating unnecessary obstacles. This blog post will help you to prepare, should you be audited, and will arm you with the some of the information you will need for a successful and smooth process.
What is an audit?
An audit of your small business involves the review of your records, by the CRA, to determine that your tax returns properly reflect the taxes that are owed by your business. An audit also serves to ensure that you are meeting all of your filing and payment obligations. Along these lines, the CRA may decide to audit:
- Income taxes
- Harmonized Sales Tax
- Employer compliance related to Canada Pension Plan, Employment Insurance, tax withholding and taxable benefit reporting
The CRA is well within its rights to audit records at your place of business or to review records at your accountant’s office.
Avoid audit triggers
Even before you know that you are going to be audited, there are practical things you can do to diminish the likelihood. Some common audit triggers include:
- Large charitable donations
- Lifestyle that doesn’t match income level
- Consecutive years of reported losses
- High expense claims relative to revenue
- Unreported income
- Excessive home office deductions
Being aware of these triggers can help you to avoid an audit.
Make sure your records are in order
You should assume that CRA is going to want to review your records – in detail.
The better you maintain your records, the greater the likelihood that your audit will go smoothly. More than any other consideration, the CRA tends to scrutinize business deductions that may actually be personal expenses. With that in mind, it is probably wise to keep your business and personal affairs completely separate, and make sure you keep receipts for all expenses that you claim.
While you don’t have to babysit an audit, you should ask questions that will help you to support the CRA’s work in a constructive manner. Determine which taxation years are being audited, and if you have more than one business, make sure to confirm which one is being audited.
If the auditor is exploring things that do not make sense to you, or if he/she asks questions that you do not understand, you have every right to speak up and ask for clarification. You can also pull in your book keeper or professional accountant to help address any concerns that arise.
Work with a professional accountant
An accountant can help you to prepare for the possibility of an audit, and in the event that you are in fact audited, can help streamline the process and mitigate challenges.
For more information on how we can support you, contact Miller Bernstein today.