Freelancing? Here are four ways to avoid a tax audit

Canadian’s earning they’re living freelancing or through platforms like Etsy, Airbnb and Uber and failing to report income beware: You could be looking at a tax audit.

“There are certain types of jobs where its obvious you’re self employed,” Robin Taub, a chartered professional accountant and spokesperson for software provider TurboTax told Yahoo Canada. “But with this newer sharing or apps-based economy, some people may not realize that what they’re making is income and they have to report it.”

As of January more than 2.7 million Canadians were self-employed, according to StatsCan and looking forward, global revenues from the sharing economy are expected to rocket from $15 billion in 2013 to $335 billion by 2025.

The government has taken notice, says Taub, pointing to the province of Ontario’s recent announcement to launch a pilot program with Airbnb to ensure hosts are claiming rental income come tax time.

“Every year the [Canada Revenue Agency] will pick an industry – taxi drivers or massage therapists or whatever – and they’ll look into them and audit them,” says Rita Zelikman, a Toronto-based chartered accountant. “Sometimes it’s just luck of the draw.”

But there are also triggers.

Yahoo Canada Finance chatted with Zelikman and Taub to create a cheat sheet for freelancers and self-employed earning their bread and butter from the sharing economy hoping to avoid raising any red flags back at CRA HQ.

Not filing

It seems fairly intuitive but not filing intentionally or accidentally forgetting to declare income owed will certainly draw suspicion from the CRA.

“It’s never illegal to owe them money, you can always work out a payment plan but not filing a return is illegal,” says Zelikman. “They have all kinds of power, they can go into your accounts and do arbitrary assessments on you and take money that they think you owe.”

Freelance contractors also need to recognize that some of their larger clients will be filing their own taxes and including these contractors as expenses.

“If you never file then all CRA has is that information on file so they’ll just assess you based on that information and ignore potential expenses or deductions that you may have,” she adds.

Big swings

Changes in your deduction history could also be noticed.

“If you’re suddenly claiming deductions you’ve never claimed – things like a much larger donation to a charity or larger medical expenses or healthcare costs than you’ve had in the past – that could raise a red flag,” says Taub.

Industry oddity

“They have industry norms,” says Zelikman. “So for real estate agents they know they’re going to be car and expense heavy, same for meals and entertainment with salespeople, wining and dining.”

But if, for instance, you’re a computer programmer who is apt to be in the home office writing software or developing apps, declaring extraordinary meal and entertainment expenses could trigger an audit.

Location, location, location

Zelikman also points to the neighbourhood you’re living in as a potential flag for the taxman.

“They know demographics, if you live in an affluent area and you’re showing zero income or constant business losses they’re going to say ‘Well how do you live in this area if you’re just losing money year over year?’ ”

What if you get audited?

Hang on to all your receipts and paperwork for six year or more, says Taub, adding that business owners are always entitled to claim reasonable expenses, they just need the evidence to substantiate it.

And don’t panic, she says.

“Respond in a timely manner, they’ll usually tell you the time period you have to get back to them,” says Taub. “The worst thing you can do is not open the envelope because you’re scared.”