Have you received your Notice of Assessment yet?
If you’re a small business — a sole proprietorship, incorporation or partnership — you shouldn’t be surprised to find an audit letter.
The Canada Revenue Agency (CRA) is making a concerted effort to recover tax debt and many small businesses are attracting the government’s attention.
Thanks to the Spring 2013 Auditor General’s report, the CRA is following up on recommendations to collect billions of dollars owed to the government.
The outstanding tax debt, currently sitting at around $29 billion, is an inventory of amounts that are known and actively managed by the CRA. The debt total is continually affected by new amounts, or by debts that are collected or addressed through other measures.
Trouble is, the number has been increasing steadily since 2006. In fact, the undisputed tax debt increased by 57 per cent from 2006 to 2012, and the amount of tax debt written off grew by 90 per cent.
The CRA says it is working to recover all debts, and that means they’re going to be going over our returns with a fine-toothed comb. It has identified three key factors in the growth of the tax debt:
- An increase in overall revenue due to higher population and more businesses, along with the harmonization of federal and provincial taxes in some provinces
- More effective targeting of measures to combat aggressive tax planning and transfer pricing, leading to additional amounts to be collected
To start improving upon the total tax debt, the CRA is focusing on debt collection and increased compliance with the tax laws. For the latter, that means a microscopic look at tax returns, especially targeting small businesses and entrepreneurs — a population that has grown to around 3 million — and international tax evaders.
What can I do?
Your best bet is to, as always, be honest and accurate on your tax return.
In a story earlier this year, the Toronto Star listed seven red flagsthat the CRA uses to select returns for audit:
- Being self-employed: If you own a business the CRA is more likely to take a closer look to make sure you are declaring all that you make. If you’re in construction, retail or the restaurant business — places where cash can change hands unrecorded — the odds that the CRA will flag you are even greater.
- Any big changes from the previous tax year: This could prompt the CRA to ask if there’s been a mistake or ask for proof that things have changed.
- Recurring losses: The CRA may take a closer look at a business that doesn’t ever seem to make a profit but where the loss can be used to offset other income.
- Big expenses: Did you really move 40 km closer to your work? Were those childcare expenses incurred so you could go to work or head to the movies on Friday night? The former is deductible; the latter is not.
- Not blending in: The CRA compares what you report against the norm for your industry, what your colleagues report and even your neighbours.
- Aggressive tax planning: Federal Finance Minister Jim Flaherty said in his latest budget that he would collect millions in extra revenue by closing tax loopholes. Those can include tax shelters and donation schemes
- Home office expenses: You’re allowed to declare a certain percentage of your residence as a home office, but claiming more than 10 or 15 per cent sends a signal.
If you are selected for an audit, it’s best to consult a tax professional.
Can you help?
We sure can. We specialize in small-business accounting and financial services. Contact one of our tax specialists and we can help you optimize the tax benefits and credits available to self-employed individuals and small businesses.
Fill out our contact form or give us a call at 403-226-8297.