Where Canada Revenue Agency finds money

If you ever get audited, here’s where you can expect Canada Revenue Agency (CRA) to check in search of unreported income.

• Repairs or renovations. If your company owns real estate, make sure you don’t claim capital improvements as repairs that can be deducted. Jonathan Garbutt, a tax lawyer, says CRA will home in on cash-intensive businesses that buy, renovate, and sell buildings because unreported cash income can be used to pay contractors under the table. “Revenue Canada knows this scam and is looking at families with cash businesses and also property flips where there have been big cap[ital] gains in an unduly short time,” he explains.
• Net-worth audit. Toronto tax lawyer David Piccolo says CRA will look to see if your lifestyle is roughly equivalent to your income and net worth. That comparison may involve estimates on your investments and other assets, especially if they include equities whose values fluctuate. “When you have a net-worth audit,” Piccolo counsels, “you almost have to go through it with a fine-tooth comb” to see if CRA’s assumptions are accurate.
• Inferred revenues. With cash-intensive businesses, such as restaurants, CRA has taken to double-checking reported company revenues by indirect means, such as extrapolating total sales based on tip income declared by wait staff.
• Personal use of company vehicles. Make absolutely sure all trips in the company car are documented in a log—date, mileage, purpose. Only claim expenses for the business portion.
• Meals, entertainment, travel. The old advice is the best advice: make sure you can explain how all such expenses relate to the business.
• Ineligible business expenses. You can go golfing with your clients as much as you want, but golf club dues and equipment purchases are not allowable business expenses, says Bruce Ball, national tax partner with BDO Canada LLP.
• Loans from the corporate account. CRA will check to see if the company is lending money to principals, and on what terms. They also want to see evidence of timely repayment; if those loans linger on the books, tax authorities will deem them undeclared income.
• Credit cards. For business expenses, CRA doesn’t regard a credit card statement as sufficient record-keeping. If you claim the expense, you must have a receipt showing the payment and applicable sales taxes.