Canada Revenue Agency video explains why they perform audits…but what can you do to reduce the risk of being audited?
In early 2015, 33,000 lucky taxpayers will receive a letter from Canada Revenue Agency according to an announcement issued by the Agency to tax professionals on December 8, 2014.
No one wants to be audited! There is a commonly held perception that if you have an accountant you’ll be shielded from a CRA audit. Not so! Canada’s tax system is a self assessing system which means that each of us may, at one time or another, be audited. Being aware of “red flags” or triggers can help reduce the chances that you’ll be audited. As a health professional, the nature of your income (i.e. professional income) increases your audit risk. In addition to earning professional income, certain types of investment activities can also increase your risk of a tax audit; rental income, for example. “Red flags” include the following:
Late filed returns
Beside the interest and penalties that might be incurred there are several other reasons why you should avoid filing your tax returns late. One of them is the risk of a tax audit.
Mistakes contained in your return might attract CRA’s attention leading your file being flagged for audit. For example, there’s a big difference between $24720 and $2472 claimed for meals and entertainment; the difference being an extra zero, entered in error. Check for mistakes before filing your return to reduce the risk of error and audit.
Losses claimed for several years
Losses can occur in the early stages of your career as you build your practice. Or, perhaps you own a rental property which is highly leveraged resulting in losses for many years. Losses reported and claimed year after year can attract audit attention from CRA.
Use the same categories for expenses used in previous year’s returns. Compare your expenses (reported on form T2125) on a line by line basis for consistency year over year. Large fluctuations in amounts reported or changes in the categorization of expenses can attract CRA’s interest and trigger an audit.
This consistently remains on Canada Revenue Agency’s radar for self employed health professionals. Some might be so concerned about attracting CRA’s attention that they don’t claim vehicle expenses. However, this is a legitimate, tax-deductible expense. So, recognizing that vehicle expenses attract CRA’s attention, ensure that you maintain a log of your trips, distances travelled in the couse of your work, the purpose of the trips and the destination’s name as well as total kilometres travelled (business and personal) to support your vehicle expense claim. Keep all receipts (not just credit card statements) as evidence of the vehicle expenses claimed on your return.
Meals & entertainment
This consistently remains an item of attention by the CRA. Expenses incurred while entertaining professional colleagues, advisors and meetings relating to your professional should be kept on file in support of your claim. Note the name of the individual(s) you entertained on the receipt itself for ease of reference in the future.
What is a tax shelter? And, who wouldn’t want one, right? Well, watch out! Canada Revenue Agency closely monitors tax shelter schemes. According to their definition, “a tax shelter includes either a gifting arrangement or the acquisition of property, where it is represented to the purchaser or donor that the tax benefits and deductions arising from the arrangement or acquisition will equal or exceed the net costs of entering into the arrangement or the property…[or] a gifting arrangement where the donor incurs a limited recourse debt related to the gift will be a tax shelter.” [SOURCE: Canada Revenue Agency website]. In short, tax shelters are those dodgy schemes that appear too good to be true. They have a long history of being audited and litigated successfully by the Agency. So, invest in these at your own risk.
If you happen to be one of those lucky taxpayers to receive an “educational or intent-to-audit” letter from Canada Revenue Agency, contact your healthcare accountant immediately and provide them with a copy of the letter. There are deadlines for responding that need to be adherred to. If you don’t have a healthcare accountant, contact us for assistance.