How to Avoid CRA HST Audit Triggers and Red Flags

In the previous article, we highlighted various aspects that business owners and new HST/GST registrants must know regarding the HST/GST, tax filing, how and when to charge HST, what are taxable supplies, zero-rated and exempt supplies, and many other related questions. If you have any questions about HST/GST, it is worth reading our article. 

In this article, we will discuss the common triggers for the CRA audit and how to avoid them. 

Can CRA Audit a Company for HST/GST? 

The CRA has the authority to audit any business or specific area of business, such as HST, corporate taxes, payroll, or other financial matters. Due to limited resources, the CRA can only audit limited taxpayers each year. Accordingly, it selects a small percentage of taxpayers for audit each year.

While some businesses are randomly selected for audits, many audits are triggered by errors, non-compliance, or discrepancies in the information provided, raising red flags. In other words, CRA has sophisticated tools and techniques to focus its efforts on business returns (corporate tax, HST return, or self-employed) or individual returns that are or seem inaccurate, incomplete, fishy, or out of the norm.  

This means in many cases; you can reduce the possibility of being audited by the CRA considerably. However, no one can completely eliminate the chances of being audited, even if everything is perfect.

How to Stay Off the Radar of the CRA Audit

As mentioned earlier, while CRA audits can be random, many are initiated due to errors or non-compliance. When CRA assigns an auditor to your case, they typically conduct an extensive review, often visiting your office, and may expand their investigation beyond HST matters. They usually request various documents, invoices, and records related to other aspects of your business, such as payroll and corporate tax filings. Furthermore, these audits can extend back several years. Moreover, the CRA has the authority to review for an even more extended period if they find discrepancies.

As a business owner, you want to focus your efforts and energy on your business development rather than dealing with the CRA auditors. An audit means extra cost, stress, and time spent on handling an audit, which ultimately will add no business value for you, even if you come out clearly from the audit. Hence, the first defense against the CRA audit is to reduce the chances of being audited.

Here are some essential tips and recommendations to minimize the likelihood of a CRA audit.

1. Timely Submission of Returns: Submit your returns promptly within the time stipulated by the CRA. Delays can raise red flags.
2. Report All Income: Make sure your income matches tax slips such as T4As, etc. Not reporting income or not completely reporting income is one of the major causes of triggering an audit. Ensure to report everything correctly. Taxpayers often forget to report income or report income that does not match with T4As. The CRA has a matching program, and its system will catch if your return and T4s do not match.
3. Claiming Too Many Expenses or ITC: Claiming too many expenses or ITC may raise red flags with the CRA. As a business owner, it is hard to curb the temptation to claim maximum expenses or ITC. But remember that the CRA has a mechanism to monitor, and soon, they will catch you. 
4. Claiming Expenses, or ITC: Numbers that fluctuate too much year over year are another red flag for audit, especially where expense, or ITC claim, has increased significantly without matching the increase in revenue. 
5. ITC or Expenses not in Line With Industry Trends: The CRA’s robust database compares your reported income and expenses with similar businesses in the neighborhood. Anything out of the context will be quickly detected and will invite the CRA’s audit.
6. Continuous Refund Claims: While it’s expected to claim HST refunds for zero-rated supplies or as a new business, consistent refund claims might attract CRA attention. Be cautious about frequent refund requests.
7. Proper Record-Keeping and Accounting: Maintain accurate records of HST collected and paid. Keep all relevant documents, including receipts.
8. Good Accounting Software: Consider using accounting software like QuickBooks Online or QuickBooks Desktop to facilitate efficient financial reporting. There are other accounting software such as FreshBooks, Wave, Sage, and Xero. Whichever software you select, ensure it caters to your current and future business needs.
9. Conduct Reasonability Checks: Ensure your reporting aligns with your business’s activities. Verify that the sales reported in the HST return match your corporate filings and that the HST collected corresponds to the applicable HST rate in your province.
10. Timely Payments: Make payments on time to avoid interest and penalties. This will help maintain a good standing with the CRA and reduce the risk of audits.

Do We Submit the Receipt With the HST Filing?

In Canada, the tax filing system is based on self-reporting, meaning you submit the returns without attaching any receipt or backup. However, the CRA can ask you to provide a receipt or other backup, at their discretion, to substantiate your filed return. Accordingly, keeping receipts, invoices, and other backups for six years is essential for any potential CRA audit. 

Remember that bank statements alone are not the complete proof of an expense. You need to have a receipt or invoice from the vendor. Also, make sure that receipts also have the vendor’s HST/GST number for claiming ITC. 

These practices will contribute to smoother tax compliance and reduce the chances of an audit. 

CRA audits are stressful for business owners. This renders many taxpayers worried and restless.   Even if everything is correct, handling these audits cost a lot of time and energy. So, the most important recommendation is to avoid a red flag that can lead to a CRA audit by following the above tips.

Conclusion:

HST/GST is a highly intricate subject, and CRA reviews can further compound its complexity. In this article, we have only covered some strategies, which do not constitute an exhaustive list. However, our primary advice is to steer clear of actions that might trigger a CRA audit. It is of utmost importance to seek professional guidance from a CPA to navigate this process and obtain the necessary support that businesses require from time to time.

If you need assistance with HST/GST registration, bookkeeping, or tax filing, the Source Accounting Team is well-prepared to provide the help you need. Don’t hesitate to schedule a consultation call by dialing 647-930-8130.

Source Accounting Professional Corporation (CPA) is a full-service accounting firm in Mississauga, dedicated to individuals, small and medium-sized businesses, providing tax preparation, corporate tax filing, accounting, bookkeeping services, payroll solutions, etc. If you are looking for an accountant Mississauga (Brampton, Toronto, GTA) or an accountancy firm Brampton, you are in the right place.

Disclaimer: The above contents are provided for general guidance only, based on information believed to be accurate and complete, but we cannot guarantee its accuracy or completeness. It does not provide legal advice, nor can it or should it be relied upon. Please contact/consult a qualified tax professional specific to your case.