You want your start up to stand out from the crowd, but not so much that you’ll draw unnecessary attention from an auditor at tax time.
You keep all of your receipts and your books are in good order, so either way, you’re covered, but it’s still smart business to avoid these seven common trip-ups that can trigger an audit.
In no particular order, here are your lucky 7 tips to avoid the auditor:
- Sweet ride: if you are claiming a vehicle as a 100% business expense, you’re basically inviting a team of auditors to inspect your records. Keep in mind that a simple trip from an office to your home is considered personal use by the CRA, so don’t claim 100% unless you can prove it.
- Home sweet home: claiming a deduction for a home office is a common audit trigger, especially if you claim a deduction for both a home office space and a commercial space.
- Going against the grain: if you file a tax return from an area code that is flush with six-figure earners and you claim only $30,000 in income, you are inviting the tax auditor to validate your claim.
- Consistency is key: if you have been submitting business expenses of a consistent amount over the past five years, then you claim significantly higher expenses without a corresponding jump in revenues, it’s likely to raise a flag. The same principle is at play with reporting consecutive yearly losses.
- Timing is everything: submitting your tax return or payment late is a good way to incur the wrath of the auditor. Take good care to submit an accurate and complete filing.
- Know your competition: if the industry standard for spending on advertising is only 5% of income, but you are spending 30%, this discrepancy will attract attention.
- When you lie with dogs, you get fleas: sometimes you are only as good as the company you keep. If your business associates with an entity that has caught the attention of the Canada Revenue Agency, you might end up guilty by association. For example, if your business makes charitable contributions to a charity that is being audited, its donors will come under scrutiny, as well.
You can always spare yourself potential headaches by giving ample attention to record-keeping. When in doubt, consider the services of a reputable accountant to help you steer clear of tax troubles.