Eight things that can trigger a tax audit by CRA

If you’re self-employed, your tax filing deadline is just around the corner on June 15 (unless you have a balance owing from 2015, in which case you missed your deadline of April 30—uh oh!).

You’re busy enough at this time of year, so the last thing you need is the Canada Revenue Agency (CRA) wrapping you up in its auditing tentacles.

Thankfully, you may be able to avoid an audit entirely if you play it safe and smart.

In this blog, tax expert David J. Rotfleisch shows you a few areas that are likely to raise a red flag with the CRA.

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auditor“Help! I’m being audited,” are dreaded words uttered by Canadians. They are especially dreaded by business owners because an audit means extra work and extra accounting costs.

Have you ever wondered what triggers a tax audit by the CRA in the first place?

Once an income tax return has been filed, it is subject to both computer and human review. Some tax returns will be audited on a random basis, but most audits are caused by what is in the tax return: the information you supplied and the way you supplied it.

Here is a list of eight “red flags” that are likely to trigger an audit by the CRA.

  1. Claim unreasonable expenses
    The best way to ensure an audit is to be greedy with expenses claimed. The amount of any category of expense has to be reasonable, both compared to revenues and compared to other similar businesses. Claiming $10,000 in car expenses against $50,000 in sales will likely trigger an audit. Don’t claim such a high percentage unless you supply a mileage log and you’re willing to be audited.Another basic CRA review technique is to compare expenses claimed to the amount deducted in previous years. Any discrepancy will be flagged for audit. So, if travel expenses increased from $3,000 to $12,000, expect questions and very possibly an audit.
  2. Use all “rounded-off” numbers in your tax return
    The CRA likes to see exact amounts in both the dollars and cents columns. Rounded-off numbers (for example, $2,500 or $10,000) signal to the CRA that you have likely not been keeping accurate records and are estimating everything at the end of the year. It also tells CRA that you are not likely to have receipts. Put in exact amounts, such as $2,486.32 and $9,742.56, and you are less likely to trigger an audit.
  3. Forget to include a T-slip
    It’s easy to forget a T-slip, but the CRA has a matching program that will pick up any missing slips and will charge you a 10% penalty for the first time, rising to 20% for subsequent occurrences. And you will increase your audit risk:  was it inadvertent, or are you not reporting all of your income?A tax return preparation tip: compare everything on this year’s tax return to last year’s T1, to ensure that you haven’t missed anything.
  4. Certain sectors are on the CRA’s watchlist
    Restaurants, construction, and small retail outlets have been identified as part of the “cash economy” and stand a good chance of being audited.
  5. Being self-employed or an independent contractor
    If you own a business or are an independent contractor, you increase the chance that CRA will audit, either to make sure you are declaring all of your income, or that you are, in fact, an independent contractor and not an employee looking for more tax breaks.
  6. Over-paying salaries to spouse and children
    Paying spousal or child salaries is proper for services rendered and if the amount charged is market rate. But expect a CRA audit to check for services not rendered, overpaying for services that were provided, and not documenting amounts paid. This is an especially tricky area because the audit reassessment will deny the expense (or part of it) for the taxpayer, but it remains taxable to the recipient resulting in double taxation.
  7. Reporting business losses for years and years
    Small business owners can expect the CRA to come knocking if they report losses for several consecutive years in a row — why would anyone continue to operate an unprofitable business?
  8. Big discrepancies in income for your industry, neighbourhood
    The CRA compares what you report on your income tax return to the statistics for your industry, your profession, and your neighbourhood.For example, if you’re declaring $50,000 a year in income and you live in a neighborhood where the average reported is $130,000, that is a noticeable difference. CRA is going to audit to see how you can continue living beyond your means.

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David J Rotfleisch, CPA and JD, is the founding tax lawyer of Rotfleisch & Samulovitch, P.C. a Toronto-based boutique tax law firm. With over 30 years of experience as both a lawyer and chartered professional accountant, he has helped start-up businesses, resident and non-resident business owners and corporations with their tax planning, will and estate planning, voluntary disclosures, and tax dispute resolution including tax litigation. www.Taxpage.com and david@taxpage.com


Payroll DIY? Why, when Payworks can do it for you?

Payworks_3CWhen you’re just starting out, you can get used to wearing many hats. Do-it-yourself is bound to come into play when you have a staff of seven. CEO/Creative Director? Webmaster/Tech Support/Receptionist? Thankfully, that needn’t apply to paying your staff, especially if you take advantage of My StartUp’s free six-month membership to get industry-leading rates from Payworks.

Whether you have one employee or twenty, Payworks has a paperless, cloud-based payroll solution to fit your needs, and the cost is less than you might expect. When you consider that in a startup business, your time really is money, your business really can’t afford not to use Payworks.

Depending on the current size of your growing business, there is a Payworks payroll solution that’s right for you.

Simple-And-Smart

For simple payroll needs: perfect for a business with fewer than 10 employees on the payroll.

Flexible-And-Affordable

A comprehensive yet straightforward tool for a business with more than 10 employees on the payroll.

Both options include direct deposit, year-end filing and support, records of employment, and online employee self-service. If you have four employees or less, the cost is a flat $7.50 per pay period. If you have a few more employees, the cost per employee is even less.

Simple-And-Smart is so easy and affordable that some self-employed business owners, after they incorporate, use it for just their own pay. Use Simple-And-Smart from the moment you hire your first employee, and you’ll never have to worry about calculating government remittances or preparing T4s. Payworks can do it all!

Maybe math is not your thing, or maybe you just want to remove “Payroll Clerk” from your business card. My StartUp and Payworks make it all possible.


Fun (yes we said fun) and Quick Tax Fact

If you drive a car, I’ll tax the street
If you try to sit, I’ll tax your seat
If you get too cold I’ll tax the heat
If you take a walk, I’ll tax your feet –
The Beatles, Taxman

 

Although they say the only things guaranteed in life are death and taxes, the latter was never really a sure thing for Canadians.

It’s hard to imagine what Canada (or any country, for that matter) might look like without income tax, but such was the case until 1917.

Despite their initial opposition to the very idea of an income tax, the government of Sir Robert Bordon ran up against a growing tab for World War 1 and ultimately imposed a “temporary” income tax to offset the costs.

The rest is history.

Vintage Tax Cartoon

Source: Library and Archives Canada


How to Charge Sales Tax Between Provinces

HST vs GSTDoing business in the information age comes with some territorial considerations about sales tax.

Consider the following scenario, which will sound familiar to many start ups.

You have a business based out of your home in Winnipeg, selling specialty books to customers across Canada. You take orders through a web-based form and send e-books over the web or hard covers via mail to clients in each and every province and territory.

So which sales tax do you calculate for a customer based in Nova Scotia? To whom do you remit these taxes? Do you even need to charge taxes if your business is e-commerce?

First and foremost, be advised that the taxman will get his share (unless your small business brings in less than $30,000 in annual sales, which exempts you from collecting GST/HST). Although the files you sell are not a traditional, physical product, their status in the digital ether does not exempt you from collecting federal and provincial sales tax.

Some quick sales tax facts:

  • If you’ve registered a business with the Canada Revenue Agency to collect GST, you are already registered to collect HST at the rate in place in HST-participating provinces:
    • New Brunswick = 13%
    • Nova Scotia = 15%
    • Newfoundland = 13%
    • Ontario = 13%
    • Prince Edward Island = 14%
  • There are different sales tax rules in Québec, BC, Manitoba and Saskatchewan, and also specific criteria and exemptions on sales tax. Generally, though, online sales to customers based in these provinces will be subject to their provincial sales tax and the federal GST. Alberta, the Northwest Territories, Yukon, and Nunavut do not have provincial sales tax, so only GST is collected.
    • Québec uses a similar system to the HST, except it is administered by Revenue Québec (QST = 9.975%)
    • British Columbia = 7%
    • Manitoba = 8%
    • Saskatchewan = 5%
    • Alberta, Yukon, Northwest Territories, and Nunavut = no provincial sales tax
  • If your business does sales across Canada via the internet, you are required to charge and collect GST/HST at the rate that applies to the province in which the taxable goods are delivered.

In our example, the Winnipeg-based retailer making a digital sale to a customer in Nova Scotia would charge the Nova Scotia HST rate (15%) and remit to the CRA.

The taxman is still playing catch-up in an increasingly borderless world of digital content. The federal government is considering levying a tax on foreign-based digital content used by Canadians (think Netflix). One proposal to make this less burdensome for foreign-based businesses would be to collect and remit sales tax only at a certain revenue threshold. The coming federal budget may reveal the government’s direction.

Much more detailed information on the application of sales tax across Canada is available to help your start up stay in the taxman’s good books.


StartUp Tips: Know what to look for so your tax season isn’t scam season

With tax season now in full swing, you’ll want to make sure your profits are not being siphoned off by scammers.

A 2013 Ipsos Reid poll found that one in five Canadians have been exposed to some kind of tax-related scam.

Media are reporting that the latest tax scam features a phishing text message asking recipients to click on a link to what appears to be a TD Canada Trust e-transfer form. The target of the scam is prompted to confirm financial information so that a tax return can be electronically deposited into the victim’s bank account.

tax scam victim, Canada[Image courtesy of CJAM AM 800.]

These types of scams prey on vulnerable people, particularly newcomers to Canada who may honestly believe that this is how the CRA conducts business. The method of communication is new, yet the underlying scam is the same.

Another recent seasonal tax scam comes by phone, where a caller claiming to represent the CRA tells potential victims they will face arrest for back taxes unless they make an immediate payment.

A similar scam is delivered through an email that takes a victim to a bogus website that resembles the CRA’s website, where victims are prompted to reveal personal and financial information.

Whatever the mode or method, a few common sense strategies can help you avoid compromising the financial security of your start up:

  • Anything that sounds too good to be true usually is.
  • If you haven’t submitted any tax information yet to the CRA, the agency will certainly not contact you to confirm a tax refund (this is similar to when a telemarketer calls you with news that you won a lottery that you didn’t play).
  • The CRA does not request any personal information of any kind by email, nor does it leave any personal information on an answering machine.
  • The CRA does not issue any payments by email money transfer.

You’ll also be reassured to learn that the CRA is now screening volunteers who assist the agency during tax season, after reports emerged that a CRA volunteer convicted of fraud helped prepare tax returns in 2014. Volunteers now need to get police clearance.

For more prevention tips, check out this guide to tax season scams published by the Certified General Accountants of Canada.

My StartUp CFIB members can get reliable, informed advice on dealing with the CRA by calling 1-888-234-2232. If you’re not a MyStartUp member yet, and you’ve been in business less than two years, sign up for My StartUp for free now. If you’ve been in business longer than two years, sign up for CFIB.

To report a scam this tax season, call the RCMP Anti-Fraud Centre at 1-888-495-8501 or through the Anti-Fraud Centre’s online Fraud Reporting System (FRS).


StartUp Tips: Building the Road to Revenue

We have a special guest post today from CFIB member Jennifer Bauldic, President of Jetstream Administration Inc. Learn more about Jennifer and Jetstream Accounting at the end of this article.

Building the Road to Revenue

The early days of running your own business represent a unique time in your life. Everything is new and exciting. All opportunities seem shiny and the sky is the limit! Staying focused on your goals and saving for your future will improve your chances at long term success. These simple tips will help you draw a road map for your business.

  • Stay focused on your expertise.

Having a firm grip on what you are selling and who you are selling to require both discipline and focus. If you are a new entrepreneur – you must already be familiar with that feeling of enthusiasm and I-CAN-DO-ANYTHING attitude. Keep that energy aimed at acquiring and servicing your target clientele. Your job right now is to create the business and build a following of repeat customers. In other words, the main road needs to be so well travelled that it develops grooves (customer loyalty). Make it easy for your customers to stay with you and to refer you to others.

  • Build a reputation of reliability!

Your customers count on you. They rely on you deliver on time, every time – no excuses. Make a list of your client service priorities and review it often. The most frightening story I have ever heard was a business owner telling me how they were planning to miss the deadline of a long-term client in favour of preparing a competitive pitch to a prospect. NEVER risk a relationship. It only takes one moment to give your competition an opportunity that you will regret.

  • Price for the long run.

Setting rates and prices is tricky at the best of times. If possible, consult a professional. If not, ensure you are considering all possible costs and expenses. This means factoring in overhead and general operating expenses as well as the cost of delivering goods and/or services to your customers. The list is long and specific to your business. A few areas you may need to consider:

  1. Repaying debt incurred in starting up (legal fees, personal loans, etc.)
  2. Hiring and training staff
  3. Cost of on-going supplies, software and technology
  4. Marketing and managing your business
  5. Dues, Fees, Professional Development
  • Be prepared for a rainy day.

Sometimes clients leave, suppliers go out of business or technology leaves you behind. Your business needs to be ready for the future. What will you do if that client doesn’t pay or the new supplier doesn’t deliver as promised? The road to success may require you to maneuver around unexpected obstacles. These detours often reveal new opportunities – it can pay to be prepared. By ensuring you set funds aside, you will be able to meet the needs of planned projects as well as those surprise situations.

  • Have fun!

Of course this may seem obvious. And in the early days, it seems silly to even mention it. But the most successful companies that I work with are run by owners who truly enjoy their work. Your positive attitude will be noticed by your customers and they will like working with you. This creates even greater opportunities for continued success!

Jennifer BauldicJennifer Bauldic is the President of Jetstream Administration Inc. With over 20 years of corporate bookkeeping experience, Jennifer specializes in working with entrepreneurs and owner-managed businesses.

Twitter: @jenniferbauldic  www.jetstreamadmin.com  www.facebook.com/jetstreamadmin


How to Prepare Your Small Business for a Tax Audit

small business tax auditYesterday we offered up some tips to avoid the tax auditor. Sometimes, however, no amount of being good can help things from going (temporarily) bad. So what do you do if you get that dreaded phone call?

It’s perfectly understandable that you might feel a little helpless in the face of the CRA but there are simple steps you can take to help the process go as smoothly as possible.

First, calm your nerves. Chances are, even if you’re a little disorganized and you need to collect your thoughts, your small business is probably going to be okay.

Second, get answers to all of those questions swirling around in your mind:

  • What type of records will they want to see? Going how far back?
  • Can I ask for an extension or will that make the situation worse?
  • How do I make my case if I feel the auditor is being unreasonable or even abusive?
  • What do I do if I don’t agree with the auditor’s decision?

Third, learn the tried and true tips to prepare for an audit of your small business. CFIB has compiled the answers to these questions and the steps you should take to prepare for an audit, and you can find them summed up into this one-page document: What to do when the tax auditor arrives.

Fourth, call CFIB’s Small Business Counsellors. As a MyStartUp member you have full access to CFIB services, and we would be more than happy to help you in any way we can. You can reach us by telephone at 1-888-234-2232 or by email at cfib@cfib.ca.

If you are not a MyStartUp member but you are a first-time entrepreneur who has been in business for two years or less, you can join MyStartUp by CFIB for free for a full six months. If you are a small business owner who has been in business for longer than two years, join CFIB here.


Lucky 7 Ways for Small Business to Stay Under the Radar of the Tax Auditor

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.

tax audit small business canadaYou work hard for your money and you want to keep as much of your profit as possible, but not at the expense of raising a red flag during tax season.

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:

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.
  6. 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.
  7. 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.