Are there “Red Flags” at the Canada Revenue Agency (CRA)?
How not to get noticed for the wrong things, this Tax Season.
One of the most commonly asked questions of me is about being “flagged” by the Canada Revenue Agency (CRA) and how to avoid getting flagged, or, what gets your flagged.
I hate to break everyone’s bubble, however, there are no red flags!
For the majority of Canadians who file their taxes year-in, year-out, and who make remittances, make their payments, open businesses, close businesses, make money, lose money, and everything in between, your tax account is just a record of transactions, conversations and payments received and made. Even for those Canadians who should be doing the above and don’t or who fall behind and catch-up on one mass filing, their accounts have a bit more information due to CRA research, however, No flags.
For those engaged in criminal behaviour, however, there are no “flags”, because you are being investigated criminally and whether you know it or not, the CRA knows you and is watching your activities and comparing that to what you file. Your tax account is known because it is being actively worked by someone. There are words or phrases placed in your permanent diary which tell anyone who reviews your account what you are up to, but it certainly doesn’t mean you’ve been red flagged.
So why do people talk about flags?
They’re actually talking about stuations like some described below which catch the attention of the screeners on a case-by-case basis, and could result in them being audited outside of their normal audit review period.
1) When you get your tax returns completed and filed for the year, and there are issues, possibly mistakes, which the CRA catches and in anticipation of getting the solution, have a hard time getting a hold of you.
2) You are suddenly self-employed and you are not sure what to claim, or how much you are entitled to, or you claim things or amounts different from your industry standard. The CRA compiles industry profiles which they use to assign you a “SIC Code” and they compare your returns with the Industry Standard to ensure you fall in line.
3) The dreaded “Net Worth Assessment”. If you appear to the CRA to be unable to afford the lifestyle that you are currently living in, then the CRA can, and will, issue a Net Worth Assessment and force you to prove that you are not hiding income. Yes, this can be a challenge, especially in light of the assessments being done from tax centres outside of the Greater Toronto Area who cannot fathom a million dollar house and a $75,000 income. They don’t take too kindly to the concept of being being helped by family or personal wealth. Just be warned that a tax return showing $1.00 of income for the year and an address in a wealthy neighbourhood is cause for further questioning.
4) Big changes from year-to-year. If there are major changes in your income or expenses whether personal or business-related, are going to draw the attention of the CRA. The CRA wants to make sure that you have not made a mistake, or worse, that you have bought into a tax scheme. Expect questions, so get proof ready!
There are some tax situations that are just automatically looked at closer – each the year the CRA with the help of the Department of Finance choose a sector of industry to look at in closer depth usually because something has been detected in previous years or because there is a lot of cash floating around these business, such as construction, or dentists, doctors, IT consultants…
Home office deductions for example are frequently looked into as this is often a common problem for taxpayers claiming the home office in order to use deductions without actually utilizing their home as their office.
Even if you honestly never ever use your company vehicle for personal use, it will take some hard doing to prove to the CRA that this is true. Just driving back and forth to work in the business vehicle is classed as personal use. Your best protection here is to keep very detailed records concerning the business vehicles.
6) Renting for income: Do not assume that rental losses are going to be accepted at face value by the CRA. While the CRA will give you some grace time to start generating a profit from your rental business, it will still be watched with a close eye based on your industry, location and address(es).
7) Who prepares your return matters!
The CRA is starting to follow the IRS and taking a long hard look at tax accountants and tax preparers to see if there is a pattern among certain firms / indivuduals who either claim deductions they are not allowed to claim on your behalf, or who are missing certain expenses or deductions. The CRA’s hope here is to weed out the bad apples, and educate the current crop to ensure they take advantage of the deductions and tax credits available to each client.
Should be a valuable change to the Canadian tax filing scheme.
But at the end of the day, doing it right, and on time, is the best way to stay out of the CRA’s bad books.
If, however, you have any questions, concerns or comments, please feel free to reach out to me at any time, at email@example.com.