Last updated: Dec. 29, 2023
Filing taxes can be taxing, even for small business owners who love numbers. That’s because Canada’s tax laws are always in a state of flux and changing from year-to-year.
The Canada Revenue Agency (CRA) plays a vital role in ensuring the accuracy and compliance of tax filings. However, there are several common myths surrounding CRA audits that can create confusion and uncertainty among taxpayers.
In this blog post, we will debunk some of the top Canadian tax audit myths so you can tell tax audit fact from fiction.
Myth 1: Claiming deductions increases the chances of the CRA auditing you
A common misconception about tax filing is that claiming deductions automatically invites CRA audits. In reality, the CRA doesn’t frown upon legitimate deductions supported by proper documentation.
Failing to claim deductions that you, as a small business owner, are entitled to you could mean paying more taxes than you should. Deductions and eligible business expenses significantly reduce taxable income, ensuring you’re not overpaying taxes. The key lies in substantiating these deductions with proper documentation.
Understanding which deductions align with your business activities and having the proper documentation to support them is critical.
You’re not trying to avoid legitimate deductions. As long as you follow the CRA’s guidelines, you should claim what you’re entitled to.
With the guidance of a tax specialist, you can identify eligible deductions and business expenses to ensure you’re compliant.
Myth 2: Amending your taxes leads to an audit
If you’ve already filed but discovered an error, inputted information incorrectly, or omitted details, consider filing a tax amendment.
Some taxpayers fear triggering an audit and avoid amendments.
However, any submitted amendment undergoes scrutiny similar to the initial filing, possibly receiving slightly closer attention. Correcting errors with a detailed explanation through an amendment is preferable to leaving them unaddressed. In fact, the likelihood of an audit increases by not rectifying errors compared to proactively amending them.
Addressing mistakes promptly through an amendment is wiser than risking potential repercussions by ignoring them.
Myth 3: Getting audited means you did something illegal
The misconception that an audit equates to guilt is common. However, suspicion or wrongdoing doesn’t always trigger an audit. They can occur randomly or because of specific criteria set by the CRA. Importantly, undergoing an audit doesn’t automatically imply any wrongdoing on your part.
The CRA selects individuals or companies for audits using various methods. These methods include random selection, comparing data to industry standards, and targeting areas with errors or non-compliance.
Audits are more about the CRA’s effort to ensure that everyone is fulfilling their tax obligations accurately. There is no assumption of guilt based solely on an audit selection.
Working with experienced tax specialists who have extensive experience working with others in your industry is helpful.
Myth 4: The CRA audits only individuals and businesses with high income
The CRA focuses on income tax compliance and evasion, but it doesn’t only target wealthy individuals and businesses. Any taxpayer can be subject to an audit, regardless of their financial situation.
The agency’s objective extends beyond income levels, aiming to uphold tax law adherence uniformly across all taxpayers. The CRA audits individuals and businesses of all income levels. The purpose is to ensure that everyone follows tax rules fairly. This applies to everyone, regardless of their financial situation.
Myth 5: Providing receipts is enough to avoid an audit
Some think that merely keeping receipts is sufficient to bypass an audit. While proper record-keeping is crucial, audits delve deeper into financial details beyond receipts, examining various documents and transactions.
Receipts are a fundamental part of financial record keeping, but they’re only one piece of the puzzle. While receipts provide evidence of transactions, audits conducted by the CRA entail a more comprehensive review.
To ensure everything is accurate and compliant, the CRA examines different financial documents and transactions. Bank statements, invoices, contracts, payroll records, expense reports, and other financial documentation play crucial roles during an audit. These documents help prove expenses, income sources, and deductions are legitimate.
CRA auditors scrutinize more than just receipts; they make sure everything is consistent and coherent. Discrepancies or inconsistencies between books and records could raise flags during an audit. Receipts are important, but maintaining a comprehensive and organized set of financial records is just as important.
Myth 6: All audits lead to penalties
People commonly believe that once you’re under audit, you will inevitably face penalties or legal consequences. However, audits don’t always end with penalties or legal actions. In fact, audits can wrap up without any changes or repercussions if your tax information aligns with the regulations.
The primary goal of audits is compliance with tax laws, rather than imposing penalties.
Understanding that an audit doesn’t automatically equate to fines or legal actions is important. It can help alleviate a significant amount of stress in facing an audit.
Myth 7: The CRA will automatically settle any disputes
The CRA does not engage in automatic settlements of tax disputes.
The agency’s role is to assess tax compliance and potential liabilities based on the information provided in your tax return and other financial records. If you disagree with the CRA’s assessment, you can request a review or challenge the decision through an appeal process.
Remaining cooperative and providing any necessary documentation to the CRA throughout the audit process is important.
Myth 8: The CRA will audit every tax return
It is incorrect to assume that every tax return will be audited by the CRA.
The CRA has limited resources and prioritizes audits based on risk. Factors such as the size of the tax return, the nature of the income, and any reported discrepancies can lead to an audit.
Additionally, the CRA uses automated processes to identify potential errors and may issue notices or reassessments to rectify issues.
What leads to a CRA audit?
Learn more in our blog that uncovers some common CRA audit triggers. From subtle discrepancies to specific red flags, explore the key factors that can elevate your audit risk.
We also include information on what to do if the CRA does select you for an audit. Read more to be better equipped to protect your business and navigate the audit process.
How to protect yourself against fake CRA scams and fraud
As tax season approaches, so does the emergence of fraudulent schemes targeting unsuspecting individuals and businesses. In this blog post, we review tactics from phishing emails to fake calls impersonating CRA representatives. Learn how to identify legitimate CRA communications from fraudulent attempts, and protect your finances and personal information.
[Free Download] You’ve done the work, you’ve filed your taxes, so what happens now?
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Understanding the truth behind common CRA audit myths can help you approach the process with confidence. Remember, the CRA’s objective is to ensure compliance with tax laws and that everyone is paying their fair share of taxes.
While there’s no guarantee you will never face an audit, one of the best ways to minimize your risk is to work with tax specialists that understand the CRA and your specific industry. We’ve been working with small business owners, farmers and independent contractors for more than 70 years.
We help you with everything related to taxes, from planning to optimizing your return and will support you if the CRA audits you – all for one fee.
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