Canada’s tax laws are always in a state of flux, so small business owners would do well to have a feel for what might or might not trigger a CRA audit.
Here are a few myths that persist and are, in fact, not true.
1. Getting Audited Automatically Means You Owe Big Bucks
A common belief is 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 when facing an audit.
2. The CRA Only Audits Big Companies and Rich People
Another myth is that the CRA focuses solely on wealthy individuals and large corporations. In reality, the CRA aims to ensure income tax compliance across all levels of taxpayers. Any taxpayer, regardless of their financial situation, can be subject to an audit.
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 to ensure that everyone follows tax rules fairly.
3. Claiming Deductions Will Trigger an Audit
Many believe that claiming deductions automatically invites CRA audits. In truth, the CRA doesn’t frown upon legitimate deductions supported by proper documentation. Failing to claim deductions you are entitled to could mean paying more taxes than necessary.
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 should not 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 compliance.
4. The CRA Decides You Owe Money and There’s Nothing You Can Do About It
Contrary to this myth, 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. This proactive approach can help resolve any discrepancies and ensure fair treatment.
Conclusion
Understanding these myths can help small business owners approach CRA audits with less anxiety and more confidence. The key to navigating audits successfully lies in maintaining accurate records, claiming legitimate deductions, and seeking professional guidance when needed. At IDM, we ensure you have the highlights of your business regularly so you can focus on your business while we take care of your tax and accounting in a timely manner.
