What Triggers the CRA to Take a Closer Look? Top Reasons for Tax Audit
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20 Mar 2025
Are You at Risk of a Tax Audit? Here’s What You Need to Know
Ever wondered why the Canada Revenue Agency (CRA) suddenly decides to take a closer look at your tax return? No one wants to receive that dreaded audit notice, but the reality is that audits happen and sometimes, they can be avoided. If you’re a business owner, self-employed, or filing personal taxes, understanding what raises red flags can save you from unnecessary stress, penalties, or even legal trouble. A tax audit isn’t always about catching fraud. Sometimes, even an honest mistake on your tax return can trigger the CRA to dig deeper. From unreported income to unusually high expense claims, the warning signs are easy to miss if you’re not careful. So, what exactly puts you on their radar? Let’s break it down.What is a Tax Audit and How Does It Work?
Before we get into the top reasons for tax audits, let’s quickly go over what a tax audit means. An audit is when the CRA reviews your financial records to ensure you’ve reported everything correctly on your tax return. This doesn’t always mean you’ve done something wrong, but it does mean that something in your filing stood out enough to warrant a second look. If you’re selected for an audit, the process typically involves:- A request for supporting documents (receipts, invoices, bank statements).
- A detailed review of your reported income, deductions, and expenses.
- Possible in-person meetings with the CRA.
Top Reasons for Tax Audit – What Triggers an Investigation?
Now, let’s dive into the most common reasons why the CRA might flag your tax return for an audit.1. Unreported Income
If there’s a mismatch between what you report and what the CRA receives from third parties (like employers or financial institutions), that’s an instant red flag. Whether it’s a missing T-slip or undeclared side income, any discrepancy can lead to an audit.2. Claiming Unreasonable Business Expenses
Running a business means you can deduct expenses but within reason. If your deductions are much higher than businesses in your industry, the CRA may question whether they’re legitimate. Expenses like meals, travel, and home office costs must be clearly linked to business activities. Not sure what qualifies as a legitimate expense? Learn more about tax-deductible business expenses in Canada.3. Being Self-Employed or an Independent Contractor
Self-employed individuals and contractors often get audited more than regular employees. Why? Because they have more opportunities to misreport income and expenses. If your reported income fluctuates drastically year over year, you might get noticed.4. Writing Off 100% of Your Vehicle or Home Office
If you’re claiming your car or home office as entirely business-related, the CRA will likely investigate. Most businesses only use a portion of these expenses for work, so claiming 100% usage raises suspicion.5. Overpaying Salaries to Family Members
It’s common for business owners to hire family members, but if you’re paying your spouse or children an unusually high salary, the CRA may check if their pay reflects actual work done. Salaries must be reasonable based on market standards.6. Large Charitable Donations
Generosity is great, but if your donation claims are disproportionately high compared to your income, the CRA might want proof that they’re legitimate. Always keep official donation receipts from registered charities.7. Reporting Business Losses for Multiple Years
If your business reports losses year after year, the CRA may suspect that it’s a hobby rather than a real business. Continuous losses without any sign of profitability can trigger an audit. If your business is struggling, effective tax strategies for small businesses can help you improve your financial health.8. Using Aggressive Tax Shelters
Some investment strategies promise tax savings, but if they seem too good to be true, the CRA might investigate. Tax shelters and gifting programs that promise high returns with little risk often come under scrutiny.9. Big Discrepancies in Industry or Location
If your income or deductions are significantly different from others in your industry or neighborhood, it could raise questions. The CRA compares data across businesses and industries, so outliers tend to stand out.10. Prior Tax Audits
If you’ve been audited before and had adjustments made to your tax return, the CRA may audit you again to ensure compliance. A history of errors or discrepancies increases your chances of future audits.How to Reduce Your Chances of a Tax Audit
While you can’t always avoid an audit, there are steps you can take to lower your risk:- Keep accurate records – Always maintain receipts, invoices, and financial statements for at least six years.
- Report all income – Don’t leave out any sources of income, even side gigs.
- Be honest with deductions – Claim only what’s reasonable and can be justified with proof.
- Use professional tax services – A qualified accountant or a firm offering tax services for businesses in Surrey can help ensure compliance and reduce audit risks.
