Every business or individual dreads a letter from the CRA notifying them about being subject to an audit. While there is no way to avoid CRA audits, you can surely cut down by paying attention to the top red flags that will increase your small business audit risk:
1. Inconsistencies reported on your tax filings
Information declared on the tax return will be compared across all other tax forms such as GST/HST report and “information on tax returns with the information provided by employers, financial institutions, and other third parties”. If tax filing information reported is inconsistent with the information provided by third parties, it is a big red flag.
2. Comparatives to industry standards
The CRA usually has information about profit margins for various industries and therefore, will compare income reported to the industry standards. Declaring business income that is significantly higher or lower than the norm in your industry will draw immediate attention for an audit. In addition, the CRA has strategies for figuring out the probability that a corporation is incurring revenues but not reporting it.