Nobody wants to get that dreaded letter from the Canada Revenue Agency (CRA) saying their tax return is under review. While tax audits aren’t always avoidable, some red flags make it more likely that the CRA will look closely at your filings.
Some issues come from honest mistakes, while others stem from deliberate attempts to game the system. Either way, knowing what catches their attention can help you avoid unnecessary trouble. Read for more.
Large Charitable Donations
Donating to charity is commendable, but claiming significantly higher contributions than your income level suggests can raise eyebrows. The CRA cross-checks claims with registered charities. If your numbers seem unrealistic, you may have to provide proof of your generosity.
Repeated Losses on a Business
If your business reports losses year after year, the CRA might suspect it’s more of a hobby than a legitimate venture. According to TurboTax, the IRS does the same. They may request documentation proving that you’re operating with a genuine profit motive and not just using losses to reduce taxable income.
Claiming 100% Business Use of a Vehicle
If you claim your vehicle is used exclusively for business, the CRA will likely want to see detailed logs. Most companies require some personal use of their cars, so a complete write-off without supporting records raises suspicions.
Large Home Office Deductions
Working from home can qualify you for deductions, but claiming a substantial portion of your home as office space can trigger a review. The CRA expects home office claims to be reasonable and proportional to the work conducted.
Excessive Business Expenses
Self-employed individuals and business owners often write off expenses, but claiming too much can raise suspicion. The CRA knows the typical expense ranges for different industries. They may ask for receipts and documentation to justify your claims if your numbers seem inflated.
Overstating Medical Expenses
Medical expenses can be deductible, but the CRA scrutinizes unusually high claims. If your total exceeds the typical range for your income, expect them to ask for receipts, prescriptions, and proof of payment.
Frequent Changes in Tax Filings
Amending your tax return multiple times in a short period can raise concerns. According to TurboTax Canada, you can refile for up to 4 years or file an amendment for up to 10 years. While corrections are sometimes necessary, frequent adjustments may suggest errors or attempts to manipulate refunds, prompting closer scrutiny.
Claiming a Spouse or Dependent Who Doesn’t Qualify
Some taxpayers mistakenly or intentionally claim dependents for which they are not eligible. The CRA verifies these claims and may request additional documentation, such as proof of residency or financial support, to confirm eligibility.
Cash-Heavy Businesses with Low Reported Income
Businesses dealing primarily in cash, such as restaurants or salons, often face higher scrutiny. If your reported income appears suspiciously low compared to industry standards, the CRA may investigate whether you’re underreporting earnings.
Offshore Assets and Foreign Income
According to Ford Keast LLP, failure to report your foreign income can attract a minimum penalty of $100 and $25 for each day of delay up to a maximum of $2,500. The CRA shares information with other countries, and penalties can be severe if they discover unreported offshore accounts. Transparency is key to staying out of trouble.
Unreported Income
Leaving income off your tax return is one of the fastest ways to get flagged. The CRA receives information from employers, financial institutions, and third-party sources like payment processors. If what you report doesn’t match their records, they’ll take notice and may request further details.
Rental Income Discrepancies
If you earn rental income, the CRA expects accurate reporting. According to McCay Duff LLP, underreporting rent, inflating expenses, or failing to disclose short-term rental earnings from platforms like Airbnb can lead to an audit.
Claiming Employment Expenses Without Supporting Documentation
According to the Canadian Revenue Agency, employees who deduct work-related expenses need employer approval and receipts. If the CRA sees high claims without a clear explanation, they will likely ask for records to confirm your deductions are legitimate.
Disclaimer – The Finance Key does not provide and does not intend to provide financial, investment, tax, or legal advice. Information contained in this article is for informational and educational purposes only. This list is solely the author’s opinion based on research and publicly available information. The inclusion of links to third-party content is not an endorsement by The Finance Key of such content or services. Please do your due diligence and use your discretion.
You Might Also Like:
How To Stick To Your Holiday Budget and Avoid Debt: With the holiday season in full swing, many find themselves facing high expenses. The anticipation of gift-giving, coupled with the desire to create unforgettable moments, often leads to the common tradition of seasonal spending, with the average holiday budget reaching a considerable sum.
