If there is one thing that is worse than paying taxes it is getting audited for not paying taxes. A notice from the CRA can send a chill down your spine and have your stomach doing flip-flops. Hopefully, you'll never have to be exposed to that anxiety inducing type of situation. While there is no hundred percent guarantee that your business will forever be spared an audit, there are some proactive steps you can take to avoid that process.
Here are the top triggers for a possible CRA tax audit:
Trigger #1: Mixing Business and Personal Expenses
When it comes to your business accounts and personal expenses, it is best to keep them separate. You should already be filing individual tax returns along with your business returns. Therefore it's not a stretch to keep those items separate. In the real world, the lines between what you spend for your business and your personal life can get blurred. Try to keep them in focus for the purpose of your tax returns.
Trigger #2: Paying Your Living Expenses Out of Business Profits
This is related to "trigger #1." As far as the CRA is concerned you're an employee of your company on par with all the other employees. As a result of that employment you should be getting a salary. Out of that salary you pay for your living expenses. You can't pay your mortgage out of your business profits.
Trigger #3: Failing to Make Payroll Deductions
Sometimes we employ our family members and friends to help with our start up business. There is nothing wrong with that but that doesn't mean those employees can skate on the payroll deductions. You need to treat every employee the same and that means keeping accurate records of payments and deductions.
Trigger #4: Cross Border Taxes
If you do business in the U.S. then their IRS agency will be looking over your shoulder along with the CRA to make sure everyone is getting their fair share of taxes.
Trigger #5: Invoicing Amounts Greater Than $30,000 Annually
$30,000 is the threshold that will trigger the need to register and file HST/GST/PST. If you overlook those filings you can anticipate an audit.
Trigger #6: Multiple Businesses
Your goal should be to expand your business into different regions but that can be complicated with the variant tax codes. The way around that is to set up separate companies that are region specific. That makes smart business sense but it can also draw attention from the CRA who want to make sure all those regions are being paid.
Trigger #7: Being a Success
It might seem odd that success would trigger an audit but the more personal income you accumulate the more it is thought that you'll be trying to shelter that income from taxes. The CRA is always watching!
The most important thing you can do is keep accurate records and follow the rules. That way if you are called in for a routine audit you'll have your defenses ready.