Tax season is upon us, and so is another chance to make a mistake that may lead to an audit with the Canada Revenue Agency.
Inquiries into tax filings happen at random, meaning there is no guarantee you won’t hear from the CRA. "We compare selected financial information for current and previous years of taxpayers engaged in similar businesses or occupations. From computer-generated lists of returns for potential audit, we then choose specific returns," the CRA's website states.
That being said, there are ways to lower your chances of an audit once you’ve submitted your taxes. Want to stay under the radar of the CRA? Avoid these red flags:
Misstating or understating the amount of income you've made can land you in hot water. The CRA receives copies of all T-slips mailed to Canadians.
“The government does review returns to match up the tax slips you are reporting on your tax returns with the tax slips that they’ve received copies of,” says Cleo Hamel, a senior tax analyst with H&R Block. “They’ll find out if you’ve missed one.”
You are subject to penalties for reporting your income incorrectly, which will be the "greater of $100 and 50 per cent of the understatement of tax and/or the overstatement of credits related to the false statement or omission," the CRA website states.
If you make this mistake twice over a four-year period, the penalties will go up, Hamel says. However, the penalty may be waived if a filer volunteers the correct information to the CRA.
Watch your investments
Remember to include any profits you may have earned with your investment portfolio in your total income for the year. Investment gains and losses need to be included in your filings, as do the contributions you make to your registered retirement savings plan.
Small business losses
Small business owners can also find themselves answering to the CRA if they report losses for four consecutive years in a row. Losses when the company is first starting out are accepted and expected, but if your business isn’t profiting at all, the CRA may disallow all of your business statements, Hamel says.
Leaving the country for an extended period of time, whether you are travelling or working abroad, is another red flag for the CRA.
“Canada tax is based on residency,” says Gabe Hayos, vice-president of taxation with the Canadian Institute of Chartered Accountants. “You don’t necessarily cease to be taxable if you travel.”
The only way to exempt yourself from filing taxes is by declaring non-resident status, which requires an individual cut certain ties to the country. If you maintain a home in Canada, or continue to use your bank account, drivers license or health card while abroad, you are still obligated to file a tax return by the deadline.
If there are any drastic changes in your spending or income, the CRA will most likely take notice. If you’re claiming higher expenses than normal, or if you’ve somehow earned more than what your T4 slip shows for the current tax year, you may have some explaining to do. Proper documentation of your earnings and expenses will ensure you're not flagged for "under-the-table income." Waiting tables while in school? Claim your tips. Cash-only contracting job? Claim it.
Don't avoid the details
Filing taxes is a lengthy, somewhat complicated process, especially when filing without the consultation of a professional. It may seem obvious, but make sure that you understand what you can and can’t claim. For example: Line 220 states child support can be claimed. However, if the support payments were court ordered after May 1, 1997, child support payments are not deductible.
Some deductions lead to more attention
Certain deductions like moving expenses and tuition transfers tend to garner more attention from the tax man, says Hamel. These are reviewed on a regular basis by the CRA.
“Generally, anything that requires a receipt and some kind of back-up and follow-up can be and will be reviewed,” she adds.
Because there is always a chance of being audited, it’s important to keep supporting documentation. Hayos suggests holding onto the information for at least six years, just to be safe.
If you aren’t comfortable filing taxes on your own, seek out an accountant for expert advice. They can help you understand how to complete a tax return or offer assistance if you are audited. The Canada Revenue Agency website offers a wealth of information for Canadian filers with up-to-date resources for the current tax year.