Receiving a Toronto tax audit can be a scary feeling. Tax evasion or declaring incorrect income is a federal offense. That is why it is essential to remain honest when sending in your reports. It is better to stay on the right side of the law.
The Canadian government has a system in place which can detect defaulters. This system has proven to be highly successful in picking up minor differences on a claim.
It would be best if you managed your expenses correctly to avoid a Toronto tax audit. Working tax returns can be a stressful process, so employing an efficient accountant can make life easier.
Today we discuss some of the reasons an audit gets triggered and how you can avoid it.
Common Audit Triggers
The Canadian Revenue Agency (CRA) has a risk assessment system that aids in identifying potential audits. It is one of the best tools it has to verify income tax returns.
The CRA can correctly identify returns that need verifications or have missing information through systems like Matching Program or the risk assessment system. Returns without proper proof can lead to a common problem between businesses and the government.
If you are aware of the most common triggers, you can minimize the risk of being audited.
Unusual Changes in Credit or Deductions
Claiming more deductions or credits than you have previously is a sure-fire way to be flagged for an audit. There is an increased chance that the CRA’s software picks up your activity and reports it to authorities.
However, if you have records to prove your claims are accurate, the auditor can issue you a letter of completion and close the case.
Excessive Business Expense Claims
If you own a small business or are self-employed, having excessive business expense claims can trigger an audit. The CRA could consider a small home office reasonable, but a red flag may be raised if you claim that your workspace takes up 50 to 60 percent of your home.
In the same breath, if you claim 100 percent of your automobile expenses as a business cost, that also raises suspicion. The Canadian Revenue Agency assumes that you use the car for personal use at least now and then.
Make sure when completing your return as accurately as possible by keeping records of all your documents to back up your claims. Remember being self-employed can increase your risk of being audited.
Employers issue staff with a T4 document and send a copy to the CRA. If all your T4 income is not reported, the CRA database typically picks that up.
Additionally, reporting significantly less income than your neighbors can result in the CRA initiating a case. If the individual runs an under-the-table business or underground economy, the CRA has methods to show a financial picture and create a higher tax bill.
Recurring Losses from a Rental Property
The CRA permits you to write off rental property losses. However, it assumes the property was bought to create an additional income for you. When you repeatedly report losses on your property, that might be a red flag for CRA. In that case, it may want to look at your records and confirm if the damages are actual.
By keeping records of legitimate losses, you have proof to support your claims. Specifically, the agency wants to confirm you have done due diligence regarding charging market-rate rent prices and finding acceptable renters.
A loss cannot be claimed if your property is rented out for less than fair market value.
What Are the Penalties for Filing Your Income Taxes Late?
Filing your taxes late when you don’t owe any further tax or have earned a reward does not result in penalties or fees. However, if you file late and owe money, the Canadian Revenue Agency adds liability to your taxes. Usually, this penalty is five percent of the amount owed, plus an extra percent late each month.
April 30th is the day taxes are meant to be paid to the CRA. It is the exclusive day tax return commences. Returns are due for individuals earning an income in Canada. If the total amount cannot be paid, late payments are accepted but gather compound interest daily.
If you owe taxes from many years back, your current payments help clear your oldest debt.
Penalties for Small Business Owner Filing Late Taxes
As a small business owner, filing an additional return may be required. Things such as GST/HST remittances, withholding, and payroll are essential to note. If you are self-employed, your taxes return must be filed on June 15th each year.
Luckily it is an extended period compared to the average individual, but if you own more, the due day moves back to April 30th. That is the time when interest and penalties start accumulating.
Failing to meet the Canadian Revenue Agency’s payroll obligations results in interest and penalties. There are a few types of payroll account penalties for small business owners.
Failure to meet obligations can result in a 10% penalty and go up to 20% with additional shortcomings. If you file your tax returns late, you can expect non-payment penalties. These start at 3% and can go up to 20%. Submission and withholding of payroll source deductions are taken very seriously by the CRA.
As a small business owner, you must report remittance information returns to the CRA. This information is regarding your staff and must be submitted each year. If these are filed late, a fee of $10 per day is the penalty. That is the case if you have less than 50 returns. If you have more employees, you could receive significantly higher penalties.
Interest Relief for 2020 Income Taxes Owing
When it comes to taxes owed from 2020, there could be some relief from the interest gathered. That is, if you are struggling to pay it on time (April 30th).
To fit the criteria, you need to prove that your income did not exceed $75,000 in 2020. You must have received one of the COVID-19 recovery or emergency benefits in 2020. The last requirement is that your 2020 tax return has been filed.
If all of these criteria are met, you can claim interest relief until April 30th, 2022.
Handling tax and accounting can be a challenging task for business owners. That is why it’s best to let a professional company conduct your Toronto tax audit.
RC Financial Group has an outstanding team that is qualified to help your financial status. Our team consists of business consultants, chartered accounts, and investment advisors.
The vast combined knowledge can help you maximize your earning potential while maintaining your financial records. Contact us to find out how we can help you.