Ways to Avoid a Small Business Tax Audit

Small businesses, due to their very nature, are under close scrutiny by the CRA. While there is no way to ensure you’ll never be selected for an audit, there are some ways you can decrease your chances. Read on for five ways to keep the auditors at bay.

1. Avoid Revenue Discrepancies

When submitting your business revenue, consistency is key. If there are any discrepancies in your business income across any tax forms, that is a big red flag for the CRA and will usually warrant a further investigation.

2. Understand Industry Risk

If you are in an industry that deals with a lot of cash (restaurants, bars, other retails businesses), the CRA is going to be keeping an extra watchful eye right from the start. To combat this, it’s important that your records are organized and complete so it’s quick and easy for you to send along supporting documentation if asked.

3. Stick With the Norm

If your business reports an income that is largely higher (or lower) than other businesses in your industry, it could tip off the tax man. Now, this point comes with a disclaimer: honesty is always the most important factor when it comes to your tax return, so if your company ends up legitimately bringing in an income that widely deviates from your competitors, that’s okay! Just ensure your paperwork and supporting documents are in order, as you may be prompted for further information.

4. Avoid Outstanding Balances in Shareholder Loans

Changes in shareholder loans can be a red flag for the CRA. Any money taken from the company needs to be reimbursed or reported as personal income to ensure the proper tax is being applied. Failure to do so can even result in double taxation under subsection 15(2) of the Income Tax Act. Ensure that any shareholder withdrawals are completed properly. To learn more about this process, speak to an accountant!

5. Stay Realistic (and Honest)

There are certain deductions (home office, car, etc.) that are commonly abused by small business owners, and therefore, are under close watch by the CRA. Claiming 100% business use of your vehicle is simply not realistic, and the CRA agents know this! If you are claiming these type of deductions, ensure that you’re keeping the proper paperwork to ensure your claim gets accepted!

Liu & Associates Can Help

Honesty and diligence are the two best ways to minimize your chance of being audited. Even more, if you do happen to be selected for an audit, the amount of stress you experience will be much less, because you’ll have nothing to hide! Keep thorough records, and you’ll have no reason to worry. If you have questions about your business tax return, don’t hesitate to contact an accounting professional. Having your taxes completed by a professional will help to maximize your return and minimize errors. If you are looking for help filing your business tax return, or are currently facing an audit, contact the team at Liu & Associates for honest, professional advice.

What’s a Tax Audit?

While the auditing process is meant to help maintain public confidence in the fairness of Canada’s tax system, it can be a stressful and onerous experience on a taxpayer. There are two main types of tax audits: business audits and personal audits. Read on to learn a bit more about each type, what you can expect if you’re selected for an audit of your own and how Liu & Associates can help.

Business Audits

A business tax audit is a process in which the CRA closely examines small and medium-sized businesses’ books and records to ensure they are complying with their tax obligations. Audits are also used as a way to ensure the business is receiving any monetary amounts they are entitled to.

How Are Businesses Chosen?

The business audit selection process is based on a risk assessment system. When choosing businesses to audit, the CRA will also look at any information it has on file and may compare it to similar files.

What Does an Auditor Look at?

A tax auditor will look at the company’s books, records and documents. Examples include but are not limited to:

Previous tax returns
Business records
Personal records

Personal Audits

Personal audits are very similar to business audits. The selection process and the documents that are reviewed are all of similar nature – the difference is that the focus is on personal taxes rather than company taxes. Again, the purpose of an audit is to ensure that your assessment is accurate. If you’re selected for a personal tax audit, the CRA will ask for you to submit certain receipts and records. Sometimes the submission of these documents will be enough, and other times an auditor will be sent out to complete a more thorough check. The audit may take place at a CRA office, or at your home.

Results of an Audit

Throughout the audit process, the auditor will openly identify any issues and discuss them with you. You are also welcome to raise any concerns you may have as well. At the end of an audit, one of three things will occur:

No adjustments will be made to your assessment
A reassessment will result in you owing more tax
A reassessment will result in you receiving a refund

Don’t Sweat It

Audits may seem like a scary process, but if your documentation is accurate and in order there shouldn’t be any major issues that come up. Most errors that arise are honest mistakes that are easily amended. The best thing you can do to prepare for an audit is to keep track of your records for a minimum of six years.

If you or your company is selected to undergo an audit, contact the experts at Liu & Associates. Our team will ensure that your rights are observed and work to minimize any consequences. We act as a buffer between you and the CRA to minimize the time and stress that is so commonly associated with an audit. Give us a call today!

Year-End Tax Planning Strategies for Businesses

If you operate a small business or the finances of a larger organization, you may find tax season very frustrating. Each document can reveal missed financial opportunities or unnecessary costs that could make a crucial difference in these difficult economic times. Don’t get stuck in the same spot next year, consult Liu & Associates’ list below for some helpful tax planning tips to mitigate higher taxes for businesses.

EMBRACE TECHNOLOGY

Avoiding tax accounting software and computers is unnecessarily costs you or your business capital that would be better spent elsewhere. From labour costs to fees for late or inaccurate returns, there are incredible savings to be gained by employing affordable, professional computer programs. Not only is most software endorsed by financial experts, it can also catch trends and opportunities that human error might overlook.

USE A FAIL SAFE

Don’t leave your business’ tax return to the last minute or even in the hands of just one individual. Spreading out financial preparation over the year and having another set of eyes can help catch mistakes and potential areas of improvement. Your business may suffer if you fail to prepare for the worst– if you do, you can expect the best!

HIT THE BOOKS

You and your employees should be well acquainted with eligible tax savings and deductions. Being aware of these options early on can help avoid higher taxes than you need to pay. Don’t overlook the value of minor costs added up over time– travel, gas, accommodation, meals, entertainment and even office supplies can often be deducted by businesses and their employees.

FILING SYSTEMS ARE YOUR FRIEND

We’ve all seen the caricature of a small to medium business owner with an overstuffed shoe box of bills, receipts and invoices (not to mention the exasperated accountant)! There is a reason society makes of this situation– anyone with interest in furthering their business should be well on top of its finances. If you are naturally disorganized or easily overwhelmed, there is no better money spent than that which builds an error-free, easy-to-use filing system.

KEEP IT PROFESSIONAL

Never mix your business and personal accounts! This can create a quagmire of documents for you, your bookkeeper or your financial advisor. Clear business records will ensure you are taking advantage of every opportunity.

This list only covers a portion of the financial responsibilities of a business, but if you have any questions: Liu & Associates can help! Our staff is standing by to offer consultation and guidance to keep your business in the black all year round.

Income Tax Guide To Working from Home

If your business operates out of your home or living space, you may be eligible for credits that can help reduce the taxes you owe each year. Canada Revenue Agency honours your home office or workspace, if you meet one of these two conditions (quoted from CRA’s website in italics):

The workspace is where you mainly (more than 50% of the time) do your work.
You use the workspace only to earn your employment income. You also have to use it on a regular and continuous basis for meeting clients, customers, or other people in the course of your employment duties.

Read on for a summary of tax credits and requirements for those that work from home.

DO I QUALIFY?

Along with the above CRA guidelines, you may be required to provide a form from your employer that specifies the need for you to work from home. Self-employed or small business tax returns generally do not require such a form.

WHAT CAN I CLAIM?

Income tax credits for a home office are very wide-ranging. Here are just a few of the deductible expenses that may be available to those that operate workspaces out of their home:

Home insurance
Property taxes
Utilities
Maintenance costs
Rent/mortgage payment
Housekeeping/cleaning costs

Depending on usage, some or all of these may be entitled to a full or partial tax credit. Examine your home expenses closely and get the best possible tax return.

HOW MUCH OF MY HOME IS CONSIDERED WORKSPACE?

CRA allows you to use a “reasonable basis” to determine the percentage of your home or living space that is used for your work. For example: in a five-bedroom home with one dedicated workspace, you are entitled to claim a fifth of your deductible expenses. Another example: you use an existing living space as a workspace for 12 hours of the day, so you are entitled to claim half of the expenses.

The above guidelines only address a portion of the requirements and credits for those that work out of their homes. For more details, consult the CRA website or your Liu & Associates financial expert. We can help ensure your home-based business will have a maximized tax return every year.