Income Tax audit rules for self-employed persons and small businesses in Canada

The federal agency, Canada Revenue Agency, administers the relevant tax laws for the Canadian government and several provinces. Due to the self-assessment Canadian tax system, taxable individuals and corporations are legally compelled to file income tax returns every year. You can use Canada Income Tax Calculator to know the due amount for the present year. However, the CRA does continuous and detailed inspections to keep up with the tax system. These inspections can range from tax audits to processing reviews.

In some cases, the Canadian authority selects the taxpayer randomly. However, several risk factors are triggering the audit process. Let’s first analyze the rules for the self-employed person.

Will the CRA send you an audit request?

Taxpayers receiving T4 income are low-risk persons, and their tax has been withheld at the source. They have a chance of receiving tax refunds. The CRA prefers these low-risk taxpayers, and it mostly targets high-risk taxpayers.

In the case of some self-employed individuals, there is a chance of incorrect reporting of the tax. That is why the CRA targets this category of taxpayers. Underpayment and inappropriate reporting are nothing new among self-employed persons. 

Which businesses have a high chance of getting audited?

Especially, Small to Medium Business owners must be careful about business tax compliance. Ensure that the revenue mentioned on the income tax form must correspond to the amount stated on the GST/HST tax return. While the amount does not match, you have to be prepared for the CRA audit.

Although you may deduct some business expenses from income tax, you must be cautious. Promotion, advertising, entertainment, meals, and travel costs can draw the attention of CRA.

Moreover, the CRA knows that some businesses having opportunities to take in cash may properly report taxable income. Thus, while operating businesses like bars, hair salons, and restaurants, you can anticipate income tax audits.

When CRA has chosen your tax return for audit, the professional auditor will assess the return. He will ask you to send relevant information, like business contracts, bank statements, contracts, receipts, personal bank statements, credit card statements, and mortgage documents. 

During the audit process, the auditor needs to check out the problem with your tax return.

The process may have any of the two outcomes-

Reassessment- While the auditor has found that you have to pay a higher tax amount, he will consider reassessment. You will get a month to disagree/agree with this reassessment. 

No reassessment- When the previous assessment has no error, there is no need for reassessment. You will receive a letter and the audit process will be over.

How much time does the CRA need for the audit?

You can find a difference in time based on factors, like the overall scope of your tax audit process, missing records, and details of your records.

These are some important information about the income tax audit in Canada. To avoid an audit and inappropriate calculation, you can use an Income Tax Calculator Ontario. You will know about the amount due for the tax.