Common Audit Triggers
Audits in Canada are typically assigned randomly. There are, however, some reasons as to why some taxpayers are audited more often that others.
Here are some of the most common factors which may increase the chance of being audited by the CRA, from most common to least:
Screwing around with Trust Funds
Sorry to be so blunt, but there is nothing that raises the ire of the Canada Revenue Agency (CRA) more than finding out, or suspecting that you have been less than honest with Trust Funds – the money taken from employees or customers and held in trust for the CRA.
In these instances, the CRA comes to audit fast, and leave no stone unturned.
The addition of self-employment income, along with or instead of T4 income is an area of significant concern for the CRA.
Earning T4 income, means is likely that the sufficient amounts of tax, CPP and EI have been withheld and remitted to the CRA on your behalf and on behalf of your employer, making it low-risk.
Self-employed individuals, on the other hand, do not, in most cases, have taxes withheld at source, making it more under the scope of the CRA.
The Industry you operate in
This is a two-fold flag because not only are some sectors audited more than others – dentists, real estate agents, restaurants, construction companies, and corner stores that take cash, for example, but the CRA also uses the industry that all businesses / taxpayers operate in, and compares the numbers reported to those of the others in your industry.
If you stand out for one reason or another, expect to be asked why, in the form of an audit.
Additionally, in around November of each year, the CRA computers match and compare many pieces of taxpayer information, looking for slips which were not declared, or for outliers.
3rd Party audits
Often times taxpayers are audited simply because a related party is being audited. Sometimes this means that family members or shareholders of a closely-held corporation are audited in the course of the audit of the corporation. Other times various corporations in a supply chain may be audited because of the audit of one of them. Sometimes contractors are audited because of a payroll audit at the corporate level.
There is nothing that can be done to minimize this risk factor. Unfortunately, the more businesses and taxpayers that a particular taxpayer is involved with, the greater likelihood of a CRA audit.
We represented a construction company which had immaculate books and records, yet were under audit by the CRA for almost a year. It made no sense, because every single item requested by the auditor matched and was reported correctly.
It finally came to light that a customer of this company from 8-years-ago had tried to commit fraud and claim a receipt for services which were never performed by this company (they had changed the date and written “CASH” across the invoice).
After proving the invoice was fraudulent, the audit suddenly ceased and the taxpayer who changed the invoice was charged with fraud.
You just never know!
Informant Leads Line Tips
The Informant Leads Line / or Tips line or Snitch line, has provided way more tax and audit leads that the CRA could have ever imagined – and still does.
In light of the fact that tips relating to offshore tax evasion may yield a reward for the informant, it may never end.
Moral of the story: taxpayers who are cheating the system should not count on staying under CRA’s radar forever. They should also be careful as to who has incriminating evidence which could be reported to the CRA.
Common leads come from; ex-spouses, former employees, and neighbours. So the next time you piss someone off, you might want to make sure they don’t reported you to the CRA.
Living Beyond your means – Net Worth Assessments
Taxpayers who live in a $4 million dollar house, and who report income of $1/year, can expect to have caught the attention of the CRA. The same goes for taxpayers who have debt to the CRA and are unable to pay, yet post publicly on their social media of their travels and lavish expenditures.
Lifestyles which appears to be incongruent with the amount of declared income can expect to be audited.
Using your Vehicle for business / Claiming vehicle expenses
Vehicle expenses are often arbitrarily determined. When preparing their tax return, often times taxpayers and their accountants pick a reasonable number for vehicle expenses based on an estimate of the percentage of the vehicle usage used for business purposes.
Few taxpayers actually keep a log of every trip, yet every one should!
Not having a log, and corresponding calendar means that few taxpayers can prove to the CRA with absolute certainty, the use of a vehicle for business purposes – thus making it easy for the CRA to deny the expenses.
Real estate transaction
Thank you Liberal government and your out of control spending.
As a result of the need for tax revenue to pay down the debt and deficit, the CRA began cracking down on real estate transactions in the past 5-years. Had the Liberals won a majority government in the 2019 Federal election, there would be capital gains taxes on the sale of principal residences. Right now, it is a requirement for Canadians to track and list on their tax returns the sale of their principal residence.
To say that the CRA pays careful attention to real estate transactions would be an understatement. The CRA frequently audits HST rebates, pre-sale condo flips, new home construction, principal residence exemptions, and many other real estate transactions.
Being involved in multiple real estate transactions sharply increases the chance of being audited.
Home office expenses
The CRA loves auditing home office expenses. Home office expenses are often arbitrary and over-declared, along with the percentage of time the home office is actually used, and the percentage of the house used for the purpose of earning income.
Operating a cash business
When there is a lot of cash being received by a merchant, there is more opportunity for the CRA to recover taxes on undeclared cash income. One common trick the CRA will perform involves the deposits going into the business or personal bank account which are significant, repetitive or unsupported. In these instances, they are declared as income, and a 50% gross negligence penalty is applied.
Adjustments / Amending returns
The CRA is on top of the business or taxpayer who declares a little income and then amends their returns after the fact to report the actual, and much higher balance. Not only is the prohibited, but it’s a great way to be audited.
If the amending results in a refund, or a refund is issued and then the correct filing results in a balance outstanding, then – you can expect an audit.
Donations – Large and Tax Shelters
If charitable contributions are suspiciously large and do not seem to be possible or likely within the confines of a taxpayer’s income, such donations or contributions are very likely to be audited.
As well, charitable contributions made to organizations suspected of being involved in tax schemes are even more likely to be subjected to an audit.
As long as there are taxes there will be individuals and organizations selling (and conning) taxpayers into participating in tax schemes to reduce taxes. Some of these schemes are outright frauds, while others have no fraudulent intent, but for one reason or another fail.
The Canada Revenue Agency actively and aggressively audits taxpayers who are involved in a tax shelter, a gifting program, or any other tax scheme.
In many circumstances, taxpayers are able to receive refunds and benefits from these programs for several years prior to the CRA auditing, and then reassessing the donation. Unfortunately, since it can take a bit for the CRA to learn of the scheme, and refunds are issued / debts reduced, the participants often bring in family and friends and get them caught up in the program.
Typically, in these schemes, taxpayer may receive tens or hundreds of thousands of dollars of CRA refunds to which they were never entitled only to have the CRA come back and audit and reassess years later, along with gross negligence penalties and interest. $100,000 in illegitimate refunds can turn into more than $200,000 once penalties and interest and the passage of time have been taken into consideration.
The rule of thumb is that if it appears too good to be true, it is.
Shareholder loans which are not repaid within a year after the year-end of the corporation are often audited, because the CRA suspects they are not legitimate and were simply paper transactions.
Loans where shareholders took revolving loans from the corporation, paying each off just prior to the deadline and then taking a new loan, are also on the CRA’s radar for audit due to their tax benefits.
It shouldn’t need to be said, but taxpayers who are both shareholders and employees of the corporation should be very careful with shareholder home loans, and should have all supporting documentation available.
In order for a home loan to be treated as an employee home loan rather than a shareholder loan, the loan must be made because the person is an employee, rather than because they are a shareholder and should be available to all other employees.
The CRA regularly conducts mini-audits to ensure that parents who claim childcare expenses maintain proper documentation, and that the children actually attend the establishment for child care and not just for playdates. Claiming childcare for children who hang out with their grandparents a few days a week while the parents are not both working out of the home, would prompt an audit.
Employees who are issued a T2200 form by their employer are entitled to deduct certain employment expenses from their income. Perhaps the employee has to pay for their own vehicle to travel to sales calls, or perhaps they have to maintain a home office. As long as the employer requires that the employee pays these expenses in respect of their job, they likely can be deducted from income.
Since this is an abused area (each expense is paid for with pre-tax dollars and reduces the overall tax paid by the taxpayer) the CRA audits many employees with the T2200 to ensure that a) their form is properly completed and may be used to deduct the expenses in question and b) each of the expenses claimed was legitimate and for the purposes of their employment, as outlined in the T2200.
If the CRA keeps coming back and auditing and re-auditing every aspect of a business – and if they keep finding issues – that business or taxpayer can expect to be on the audit list for each and every year.
All business profits are subject to taxes. This includes both legitimate and illegal businesses. As far as the CRA is concerned, if you are earning income you should pay taxes. Period.
So if a taxpayer is accused of or convicted of a crime and the CRA learns about the illegal business which was taking place, they often audit and reassess the taxpayer for taxes on the proceeds of crime – whether or not the taxpayer still has such proceeds. Often times, criminal activity is weeded out during an audit, as opposed to the CRA knowing there is an illegal business and pretending that it is legitimate.
These audits usually require the supporting documentation to justify expenses, and often there are none provided resulting in extremely large assessments.
Keep your records together by year, and expect to be audited each and every year. When you are not, be thankful.
The Canada Revenue Agency (CRA) has announced on their website that a Winnipeg-based insulation company has been fined after underreporting its taxable income by more than $1 million.
The CRA’s Investigators found irregularities in the books and records of Thermo Applicators Inc., such as, that the company’s president included personal expenses in the company’s books, including construction costs for a cabin near Kenora, Ont. and a vacation home in Mexico, as well as a fly-in fishing trip. None of these are eligible tax deductions.
Thermo pleaded guilty in Manitoba provincial court on May 21 to two counts of making false or deceptive statements in the 2009-14 tax years. The court found $1,139,000 million in taxable income went unreported, in addition to the claiming of ineligible expenses.
As a result, the company is being ordered to pay $190,142 in income tax and $47,611 of sales tax that should have been withheld. In addition to paying the taxes, the company was fined $237,753.
Once penalties and interest are added to the debt dating back to 2009 the balance will shoot up well over $500,000.
This conviction is a clear reminder that failing to declare income and claiming false expenses can be very costly should the CRA perform and audit and find it.
Keep good records, report all income and claim eligible expenses.
A Coaldale, Alberta man has been arrested for fraud after allegedly being one of the central figures in a so-called “gifting” scheme which has taken in about 500 individuals across the province of Alberta.
Gifting schemes have been under the microscope at the Canada Revenue Agency for over a decade, and in all cases, the CRA have rejected these schemes, and denied the donation receipts of the contributors.
While these cases play out in Tax Court, the participants are left to fend for themselves, often accruing penalties and interest which far exceed the amount of their contribution or their tax benefit.
In this specific scheme, Steele Cameron Tolman, 57, was charged with fraud over $5,000 and possession of the proceeds of crime over $5,000. He is scheduled to appear in court in Lethbridge on May 17 to answer LPS charges he is a “main presenter” or “promoter” of a gifting circle fraud which began in September 2018.
These schemes – and this scheme specifically – operate under false pretences, whereby people are recruited by telling them that if they contribute $5,000 they will eventually receive $40,000 with no risk.
The fraud occurs when that $5,000 is used to payout the $40,000 to one of the earlier members which means new members must be recruited in order to continue paying out members.
If this scheme was promoted out of a parking lot, and some guy’s back of their van, they are going to say this scheme was completely ridiculous, however, this was promoted by friends and family who received the $40,000 payout which added additional legitimacy to the scheme.
The fraud is criminal in nature because the recruitment of new members occurs under the false pretense of “no risk. Those who participated and received their $40,000, are in receipt of the proceeds of crime, which is illegal, and those who received their payouts must declare that income to the Canada Revenue Agency.
What is truly amazing is that people who participate in schemes and scams like these can claim that they did so thinking it was legal, and have used that argument in conversations with the police and the CRA.
If you give someone $5,000 and they give you back $40,000 – which seems too good to be true… Means it is too good to be true.
Much in the same way that someone donating $1,000 to a “charity” and receives a tax receipt for a donation of $2500. It’s illegal, and you’re going to get caught and the penalties and interest will far exceed the amount of benefit received.
Be careful with your hard earned money. There are no fast and easy ways to make a buck. Don’t fall for scams and schemes and get left with a tax debt, or worse.
The Canada Revenue Agency have announced that they have charged a member of Nova Scotia’s Millbrook First Nation with evading $2.2 million in GST/HST.
The CRA charged Lisa L. Marshall who was the operator of the Traditional Trading Post, a convenience store, located on the Cole Harbour reserve of the Millbrook First Nation using the Excise Tax Act with wilfully evading or attempting to evade compliance with that Act.
The CRA alleges that between July 1, 2010, and June 30, 2015, the store failed to collect or remit $2,284,144.72 in Goods and Services Tax (GST) and Harmonized Sales Tax (HST) related to the sale of tobacco products to non-Aboriginals.
The agency says people who fail to remit tax owing are liable not only for the full amount, but also to penalties and interest, and if convicted, the court can levy a fine of up to 200% of the tax evaded and also impose a prison term of up to 5 years.
The moral of the story here, is that if you are required to charge, collect and remit GST or HST, you should. The CRA treats Trust Funds – money taken by registrants and held in trust until they are remitted to the Crown – very seriously, and those who misuse Trust Funds are dealt with swiftly and to the full extent of the law allowed to be used by the CRA.
A Superior Court judge has dismissed the application of a former Canada Revenue Agency (CRA) employee requesting the CRA produce various third-party records for use in his defence.
Christopher Casola of Sudbury faces charges including breach of trust by accessing taxpayer information other than for the public good, fraudulently accessing a CRA computer, as well as two counts that allege that the breach of trust and unauthorized use of a computer were done for the benefit of The Bacchus Motorcycle Club, and he faces eight counts involving several weapons offences, including possession of an SKS assault rifle, alleged to have occurred in 2016.
The CRA will fire, and prosecute those who access information which they are not entitled to, and because the CRA’s computer system tracks all accesses (including date, time, and how long they were there) it can be a very easy case to make.
Oddly, in his defense, the accused requested access to various CRA records, including the mainframe computer that contains the records of all individuals who have filed a tax return; the CRA Matching Action Review System (MARS) database accessible on servers between March 26, 2014, and Jan. 7, 2015; a data dump of the entire Notepad option in the MARS database; as well as what is referred to as the “entire CRA workload audit trail” in connection with the review of the accused’s work that was undertaken by the CRA after security concerns became known.
In a decision delivered July 11, Justice Dan Cornell wrote that the applicant had stated the records were necessary to duplicate the CRA’s internal review, which allegedly indicated Casola, a former assessment processing clerk in the electronic processing and records division at the Sudbury Tax Centre, had accessed the files of several individuals with alleged connections to another motorcycle club, thereby contravening the agency’s code of ethics and conduct.
Justice Cornell accepted the Crown’s argument, however, that the applicant did not articulate why they required entries for dates other that those when the alleged unauthorized access occurred.
“Despite being asked on more than one occasion to provide a reason for the requests that have been made, the only answer that was given is that the accused ‘wants to recreate the CRA process to double check the results to see if the results are accurate’,” the justice wrote. “This is not sufficient to establish that the information that is being sought is likely relevant to an issue that may arise at trial.
“The applicant did not provide an expert report, or for that matter, outline any possible concerns about the accuracy of the information that was provided or to raise questions about the process that was followed by the CRA during the review of the CRA records. In the end, all that was put forward in support of the request for the production of third party records were vague assertions that there was a problem with the results of the searches that had been undertaken.”
Those “vague assertions” amount to nothing more than “sheer speculation,” Cornell wrote, and “fall far short of satisfying the onus that lies upon the applicant to establish that such third party records should be produced in order to permit the accused to make full answer and defence.”
“In view of the fact that I have determined that the information sought is not likely relevant to an issue at trial or the competence of a witness to testify, I need not attempt to balance competing privacy interests of those who would be affected by disclosure against the accused’s right to be able to make full answer and defence.”
The accused could have requested a trail of his accesses through the Access to Information program available to all CRA employees and every Canadian Citizen.
If you would like, you can read the full decision, here; www.canlii.ca/t/hszmv.
In what is either a case of the CRA acting in an unusual manner, or a business has misplayed their hand – and is being charged with tax evasion under the Income Tax Act (ITA) and the Excise Tax Act (ETA).
Time will tell who is in the wrong.
The CBC has reported that a St. John’s car dealership and a director of the dealership, are being accused of tax evasion and making false and deceptive statements on tax returns by the Canada Revenue Agency (CRA).
The CRA filed charges under the ITA and the ETA against Cabot Ford Lincoln Sales Limited and director Frank Clarke, for the 2009-2011 taxation years.
The CRA has alleged in their court documents that Cabot Ford overstated their expenses in those 3-year by more than $240,000 in order to evade taxes owing by around $45,000 and on the GST side, they underpaid around $14,000 in GST through “false or deceptive statements” provided on their GST returns.
The director, is accused of personally evading more than $76,000 in taxes by failing to declare more than $270,000 in income over that same three-year period.
What I find really unusual, is that this case is not yet before the courts, so just by reading this, we are automatically coming to the conclusion that this company and director have done something illegal, however, that might not be true. The director told the CBC that they are “still trying to understand everything ourselves, especially since the Canada Revenue Agency has not yet informed us of all details of the situation.”
If that is the case, having this go public is the worst case scenario for the business if the CRA’s claims turn out to be true.
On the other hand, if the CRA’s claims turn out to be false, then this would be another case where the CRA have stepped beyond their means to force an issue which was incorrect or inaccurate.
The director believes that the investigation is still underway, when he told the CBC that he [has] “been in touch with the CRA during their investigation and will continue to co-operate with them as this all moves forward.”
The charges were filed last week, and the matter is scheduled to be back at provincial court in St. John’s on March 26th.
We will be watching to see if this gets resolved ahead of time and what the long-term repercussions of this position taken by the business and by the CRA will be.
I would like to say that I would never let the CRA issue a press release about a client of mine which could do harm to their day-to-day viability – these issues can always be worked out in advance, however, not knowing all the details, it’s hard to say why this was done and who pushed for it.
If you have tax troubles with the CRA, or need them to stand down or back off, you need to contact inTAXicating Tax Services! Visit our website at www.intaxicating.ca, or email us at firstname.lastname@example.org
Former CRA Collections expertise to help resolve a CRA Collections problem.