Wasseem Dirani Explains What You Need to Know About Canadian Tax Audits
Tax audits can be a horrible and debilitating thing for Canadian citizens. That is why you must understand the reasons the CRA is more likely to audit someone. Once you know these basic rules, you will be in a much better place to avoid audits and live a sound and successful financial life. Wasseem Dirani from Hamilton, Ontario, explains how these things have a profound impact on your quality of life and mental well-being.
The first thing you need to know is that compliance is crucial. Your business needs to be running as smoothly as possible, not to trip any sensors. When it comes to audits, you are essentially skating between that fine line to ensure that the government has no reasons to audit you. You should be conservative when doing your taxes, as this could be a potential problem for you going down the road. The CRA is doing its job, ensuring that the system is fair and just for everyone.
How the CRA Determines Whether You Are a Risk for Audit?
As with anything in life, there are telltale signs of something happening. The CRA uses telltale signs to figure out whether a business or person is worth auditing. It is usually because they are a high-risk individual, and the CRA believes that they are more likely to do something bad with their taxes. For example, if you ran a cash-based business and reported low income, yet lived the life of a king, your actions would raise several flags and you would be audited. It is crucial that you do nothing to raise suspicions, which is why people get caught when doing something unethical.
Self-Employed People Should Beware
By its nature, self-employed individuals are more likely to be audited. The nature of self-improvement means that you will not be reporting everything to the government, and you might miss something once in a while. There are also many dishonest people running businesses, making the risk pool larger for honest people. As a self-employed person, you do not receive a T-4 slip. It means your taxes are not withheld, and you have to make other payments and file the returns yourself. It makes it a lot easier to cause errors, which is something that the government takes into consideration.
Cash Businesses Get Audited More
Your cash business is putting you at risk for potential audits. If you have such a business, you must have as detailed records as possible. You should strive to report all of your income, no matter if it is in cash or not. You should keep the most detailed records possible, as the risk of you getting audited is tremendous.
Lifestyle vs. Your Business Financials
Matching your lifestyle with your reported income is also crucial. When the CRA notices that your income is low, but your lifestyle looks like you are wealthy, it will become suspicious. You shouldn’t be driving around in expensive sports cars if you have a really low reported income. It will send off a lot of warning flags, which will trigger an audit for you.
Donations are also a crucial part of the auditing process, says Wasseem Dirani. If you are making large donations to charities, it might send up warning flags about why you are doing this. You are more likely to be audited when doing things like this, and it should be avoided if you don’t want to get in trouble. People could misrepresent their donations and use them to write off income, which is why this is such a common practice to audit for. However, once you do these things well, you will minimize your chance of being audited.