If every business owner in the world were asked to name one thing that gives them sleepless nights, we bet most of them would say tax season. But what if we tell you there’s something even scarier than tax filing? Yes, there is — an audit by the Canada Revenue Agency (CRA)!
Tax season is stressful enough for individuals, and it’s even more so for small business owners who are constantly on their feet, juggling various responsibilities and doing their best to grow their businesses. But it’s all the more frustrating when, after successfully filing your taxes and getting the tax tension out of the way, the CRA comes knocking with queries.
You can’t ignore a CRA audit, of course, but there are ways you can try and reduce its possibility in the first place. After all, prevention is better than a cure. So, let’s get started.
Main Reasons for a CRA Audit
Before we get into how to avoid a visit from the CRA, it’s essential to understand the different reasons for which the taxman could initiate an audit against your small business. A CRA audit is usually triggered by non-compliance with tax laws. These could include:
- Not filing your taxes before the due date
- Underreporting your business income
- Overstating expenses or stating personal expenses as business expenses
- Improper or missing documentation
- Erroneous calculation or payment of goods and service tax/ harmonized sales tax (GST/HST)
- Suspiciously high cash transactions
- Continual losses or exceedingly high profits over the years
While there are many more intricate reasons that can trigger an audit, these are the major red flags the CRA looks out for while assessing your annual tax returns.
5 Good Business Practices to Lower the Risk of a CRA Audit
As scary as they might look, avoiding these red flags is easy with a proper organizational system in place, a regular monitoring policy, and a little technological assistance.
Trustworthy Accounting System
Gone are the days of handwritten ledgers and reliance on mental arithmetic to tally numbers! Thanks to the advancement in technology, we now have several basic and advanced accounting applications and systems available to help you maintain your books of accounts. These systems enable you to automate everyday tasks, such as tracking income and expenses, invoicing, payroll management, and more.
They also help organize, analyze, and generate financial reports more efficiently and quickly. Such automation of accounting tasks not only enhances accuracy but also saves time, which can be used for growth activities. Fewer mistakes mean less risk of the CRA finding faults in your business figures.
Maintaining Proper Records
Every transaction your small business conducts must be supported by proper documentary evidence. Whether it’s expenses, employee salaries, payments to vendors, or even filling up the company vehicle with gas, receipts, bills, and invoices for all transactions have to be duly maintained in case of scrutiny. The CRA cross-checks each of these, and any discrepancies or missing papers can trigger an audit.
Many applications enable you to take pictures of receipts or bills, which are then automatically categorized by date and time, stored, and securely uploaded to the cloud as a backup. Easily accessible and time-saving, this can help eliminate the risk of losing papers or relying on human memory to recall where a particular document is located, in case the CRA requests it.
Separating Business from Personal
Always – and we mean always – keep your personal and business financial transactions separate, even if you run your business from your house. Consider opening a separate bank account for business transactions. If the CRA finds any personal expenses disguised as business expenses, you could face a hefty fine.
Business-related expenses, such as treating a potential client or investor to a meal or a baseball game, or filling up the company vehicle with gas, can be paid using your business account. However, make sure you collect the bills and store them properly. Apart from saving you from a CRA audit, this can help you claim tax deductions on business expenses.
Controlled Cash Transactions
While cash transactions are a part of any business, too many and too frequent cash dealings involving high amounts could catch the attention of the CRA. If the nature of your business involves a high number of cash transactions, such as in hospitality and retail, ensure you keep all necessary documentation and records.
It’s a good idea to record digital notes of the transactions in your accounting system, just like all other transactions. That way, you will have a record of all transactions ready for the CRA’s scrutiny if such an occasion arises.
Transparency
The most important thing to avoid a CRA audit is to maintain transparency in all your business dealings, records, and filings right from the beginning. Keep in mind that the CRA collects information from every business and individual in the country who earns a living. Attempts to hide financial data will come to light when the CRA cross-checks your data against that of your vendors, customers, and other connected people. Also, if your business has alternate sources of income, such as returns on investments done by the business, report it to the CRA rather than have them ask you about it.
Any donations to charities and even remittance of GST/HST filings should be duly and accurately reported. Do not fall prey to the temptation of classifying your employees as vendors or contractors or overpaying any family members connected to the business to evade taxes. Such tactics, if discovered, can result in penalties and more severe consequences. Remember, being transparent in business is the best armour you can have against any audit.
While CRA audits can be worrisome, it is essential to deal with them with composure and confidence. Following these five practices regularly and sincerely can give you the confidence you need.
Contact Ford Keast LLP in London to Help You Prepare Your Business for a CRA Audit
Consulting a professional accountant to set up your accounting and record-keeping system is a great starting point. They can guide you in conducting cash transactions and charity donations in a CRA-compliant way. At Ford Keast LLP, our accountants and bookkeepers offer services including record-keeping, preparing financial statements, and tax filing. To learn more about how Ford Keast LLP can provide you with the best accounting expertise, contact us online or call us at 519-679-9330.
