Avoiding a CRA Audit When Self-Employed

Tax audits can be a stressful ordeal.

The CRA conducts audits based on risk assessments and considers self-employed individuals to be risky when it comes to filing taxes.

Rest assured that many self-employed individuals who experience audits have done nothing wrong – they simply caught the attention of the CRA, who wants to ensure that tax legislation and compliance are maintained.

However, there are ways that your small business can properly file its taxes and avoid a CRA audit!

Reasons Self-Employed Individuals Get Audited

As someone who is self-employed, there are things that can trigger an audit with the CRA.

Before we look at how to avoid an audit, let’s look at these common audit triggers:

You’re Self-Employed

Sometimes being self-employed is enough to trigger an audit!

When you don’t receive a T4 slip from an employer, the CRA cannot check your income against an official document to look for mistakes and accuracy.

Because you are reporting your income, the CRA may assume that the records are not accurate and will audit your income to check for errors.

Your Tax Return Has Changed Significantly

If you claim way more or way less than you did in previous years, the CRA may flag your account and conduct an audit.

There are many reasons a self-employed income can vary (COVID, supply chain issues, more time to dedicate to your business, etc.), but if you know you are filing a significantly different amount, then be prepared for an audit.

Your Claims Seem Excessive

Being self-employed means you can claim various expenses on your tax return, such as your home office or vehicle.

However, if the CRA thinks you are claiming more than you are eligible for, they will conduct an audit to review your expenditures.

For example, it’s unlikely that you would use your vehicle solely for business, so claiming the entire cost of your car is going to raise eyebrows at the CRA.

You Continually Claim Business Losses

If you are continually claiming business losses each year and reducing income from other sources, the CRA will conduct an audit to verify whether or not your business is actually a commercial enterprise.

How to Keep Proper Tax Records

The first step in avoiding a CRA audit when self-employed is to keep proper tax records!

This includes organizing your records, invoices, receipts, and other financial documents for at least six years.

You can use record-keeping software such as QuickBooks to help manage your tax records, but here are some other self-employed tax tips for organizing your documents:

Keep your business and personal accounts separate to keep things simple and efficient.
Use spreadsheets to log claims such as mileage on your vehicle and purchases for your business.
Use a file folder to organize your receipts. If the receipt doesn’t fully describe your purchases, make a note.
Make backups of any digital information. If using paper copies, make digital backups.
Dedicate time each week to work on your bookkeeping. Don’t leave your tax preparation to the last minute!

By improving your financial record-keeping, you can avoid a CRA audit, and if you do get audited, you will have all the necessary information organized and ready to go!

Incorporated Business vs. Non-Incorporated

Even as a self-employed individual, you can incorporate your business in order to separate your business from your personal finances.

Otherwise, when you run a non-incorporated business, you are personally responsible for the results of the business – good and bad.

However, when you incorporate your business, you are responsible for preparing quarterly and annual reports for the CRA.

This can involve extensive paperwork, so keeping good records as an incorporated business is essential.

Non-incorporated businesses don’t require such a heavy load when it comes to preparing taxes, and your business and personal taxes can be filed in one individual tax return.

Get to Know your Tax Deductions

Earlier, we mentioned how excessive deductions can trigger an audit. To avoid a CRA audit when self-employed, let’s look at the type of tax deductions you are eligible for:

Business Operating Expenses

Start-up costs
Delivery and shipping costs
Accounting fees
Advertising costs
Tax preparation services

Home Office Expenses

Home office cost (the percentage of your home your office space occupies compared to your rent/mortgage, utility costs, etc.)
Telephone and internet (the percentage of hours used for business versus personal)
Cleaning supplies
Office supplies

Vehicle Expenses

Gas
Insurance
Repair Costs
Parking Fees

(Keep in mind that if you use your vehicle for both business and personal use, you will have to calculate the deduction costs based on how often you use your car for business and how many kilometers you use for business.)

Other Deductions

Don’t miss out on these additional tax deductions for self-employed individuals!

Bank fees on your business bank account
Private health plans

Keep a Backup Fund (Just in Case)

As a self-employed worker, you do not get to enjoy having a regular income like waged and salaried workers.

For this reason, it’s important to keep a backup fund just in case!

Start by establishing an emergency fund by looking at your budget and seeing how much you can afford to put aside.

Not only will an emergency fund help you in a pinch, but it may come in handy for paying your taxes.

You should keep any balances on your credit cards below their limits and consider applying for a personal line of credit. These can be great buffers should you run into any financial hardships.

When it comes to being self-employed, financial hardships can occur for many reasons, such as:

Irregular income
Tech breakdowns
Late payments from clients
Burnout (you don’t get paid vacation, sick leave, or mental health days when you’re self-employed!)

Ultimately, having a backup means you can address any sudden financial issues in your business and avoid a CRA audit.

Accounting Services in Edmonton For Self-Employed Individuals

Avoiding a CRA audit when self-employed is considerably easier when you have a professional and knowledgeable accountant by your side!

Get in touch with Liu & Associates today to learn more about how our team can support your small business and help you organize your taxes to avoid a stressful audit.

Let’s talk!

How to Deal With Tax Collection Actions

Owing money to the Canada Revenue Agency (CRA) is not like owing money to any other debt or creditor. The CRA and its Collections Department is empowered by laws to collect on your debt. This means they negotiate differently than other creditors – they have the means to be more aggressive when working out a payment plan.

Each year after you file your taxes, the CRA sends a Notice of Assessment detailing the information of your return. If you owe money on that return, you have 30 days from the time of the assessment to pay the amount owing. The CRA will usually contact you with a request for payment, by phone or mail, if the amount isn’t paid within that 30 days.

You have 90 days after the date that the Notice of Assessment was mailed to make a payment or set up a payment arrangement. Otherwise, the debt then gets passed over to the Collections Department.

What are the CRA’s collection options?

Because the CRA has more power to collect on a debt than regular creditors, they have various means of seizing the amount owed and apply it to the tax debt:

Using money owed to you from other government programs. The first step the CRA will likely take is to use money owed to you, such as your GST/HST credits, and apply these towards the debt.
Garnishing your wages. It rarely gets to the point of having your employment income garnished to satisfy a debt but the CRA is legally allowed to intercept payments to you from 3rd party such as an employer.
Seizing and selling your assets. As a last resort, the CRA can seize property that you own, such as your car, and have these assets sold by a court enforcement officer. They then use the proceeds to pay off the debt.

What are my options when dealing with CRA collections?

Paying in Full

If you find yourself with a tax debt, it is in your best interest to pay the amount owing as soon as you can. By paying in full, you avoid interest charges and other legal and financial consequences. The easiest way to do this is to pay online through the CRA website.

Otherwise, you can pay through your bank or other financial institution or by mail. To do so, you will require the remittance slip located at the bottom of your Statement of Account. Do not staple it to any cheques or other forms and be sure to never mail cash to the CRA.

You can find more information about payment options at Canada.ca.

Partial Payments

Even if you cannot pay the tax debt in full, you should take action right away. The CRA will work with you to resolve debt and you may qualify for payment arrangements. When a payment arrangement is made, you are able to make smaller payments over time. However, if you miss payments the arrangement may be null and voided.

You may also qualify for a taxpayer relief provision, which relieves part of your debt or interest based on your situation.

Refusal to Pay

Refusing to pay a tax debt can have serious financial or legal consequences. Once the debt goes to the CRA’s Collection Department, they are liberty to employ any of the above methods to collect on the amount owing. If you are in disagreement with the CRA’s assessment, you can file an Income Tax Objection.

Have questions about tax debt and collection actions? Contact our professionals at Liu & Associates LLP for more information.

3 QUESTIONS: So You’ve Been Selected for a Tax Audit

As you may know, sometimes individuals or businesses are selected for an audit by the Canadian Revenue Agency (CRA). What you may not realize are the varied consequences that can occur should you not be adequately prepared. For a start, consider Liu & Associates’ three most common questions about tax audits. After that, bring your questions or concerns to one of our financial professionals today!

“How was I selected for an audit?”

CRA agents do not select audit candidates at random, they use a system of risk assessment that identifies returns that could be considered “high risk.” Some reasons you or your business may be selected for an audit are:

Finances unlike people or businesses in similar location and industry;
Return is meant to circumvent or avoid taxation;
Business always reports a loss;
Return has errors or instances of poor comprehension.

“What is expected of me in an audit?”

If you are selected, the law does require you to cooperate with your auditor– part of this is always keeping adequate financial record, whether you are chosen or not. Read your initial notice carefully and collect any records request of you, filling in any holes with supporting documents such as account statements. Always be familiar with your rights as a taxpayer and consider the appeals process carefully after your final assessment.

“Do I need to hire a professional?”

You may be skeptical about taking an accountant’s opinion, but we cannot stress the advantage you gain by employing a financial professional during an audit. Your ideal candidate should be deeply familiar with taxation and the associated laws– they should also be able to outline both best and worst case scenarios. If you are concerned with being able to afford an accountant with CRA fees and penalties on the horizon, proper organization and experience can actually save you money in the long run.

The above three questions are only a brief introduction to the world of tax audits and their consequences. If you or your business have been selected by the CRA, do not hesitate to contact Liu & Associates!

4 Ways to Avoid A Personal Tax Audit This Season

Ah, the dreaded tax audit. While few taxpayers will ever actually face an audit, we all fear receiving that notice letter. Undergoing a personal tax audit can be a stressful and time-consuming experience – so how do you avoid it? While there is no sure fire way to ensure you never get audited, there are a few steps you can take that will minimize the chance of the CRA knocking on your door; read on to learn more!

1. Know Your Risk

Certain industries have been flagged as “high risk” by the CRA. Contractors, restaurant serving staff, and mechanics are just a couple of industries that are well-known audit targets. If you work in one of these industries, take extra caution in ensuring your tax filing is complete and accurate. Make sure you have all your supporting documentation for any deductions or credits you are claiming.

2. Don’t Ignore Further Information Requests

Most times, if the Canada Revenue Agency contacts you it will just be a request for further information. This is not the same as an audit. Now that reports are filed online, people don’t need to send in all of their supporting documents so sometimes the CRA will request these documents to be sent in. It’s important that you don’t ignore these requests as doing so can not only get your claim denied but also flag your returns for audits in the future.

3. Note Large or Unusual Expenses and Deductions

Certain types of expenses are more likely to be flagged by the CRA that others. Interest deductions, charitable donations and moving expenses are a few examples. Don’t let this scare you from claiming these on your next return, just make sure you understand the rules around claiming and keep your receipts in case you’re asked to provide further proof. Another audit red flag is drastic changes in income or expenses from year to year. Again, if your claims are legitimate there is nothing to worry about. Just make sure you have the appropriate supporting documentation and you’ll be good to go!

4. Get Help!

Having things done right the first time is the best way to avoid an audit. Having your taxes filed by a professional will not only maximize your return, but also ensure it’s filed correctly.
Looking for Tax Advice?

Whether you are looking to get help filing your personal tax return, or are currently facing an audit and are seeking professional advice, the team and Liu & Associates can help! Contact us to schedule an appointment today.

What’s a Tax Audit?

While the auditing process is meant to help maintain public confidence in the fairness of Canada’s tax system, it can be a stressful and onerous experience on a taxpayer. There are two main types of tax audits: business audits and personal audits. Read on to learn a bit more about each type, what you can expect if you’re selected for an audit of your own and how Liu & Associates can help.

Business Audits

A business tax audit is a process in which the CRA closely examines small and medium-sized businesses’ books and records to ensure they are complying with their tax obligations. Audits are also used as a way to ensure the business is receiving any monetary amounts they are entitled to.

How Are Businesses Chosen?

The business audit selection process is based on a risk assessment system. When choosing businesses to audit, the CRA will also look at any information it has on file and may compare it to similar files.

What Does an Auditor Look at?

A tax auditor will look at the company’s books, records and documents. Examples include but are not limited to:

Previous tax returns
Business records
Personal records

Personal Audits

Personal audits are very similar to business audits. The selection process and the documents that are reviewed are all of similar nature – the difference is that the focus is on personal taxes rather than company taxes. Again, the purpose of an audit is to ensure that your assessment is accurate. If you’re selected for a personal tax audit, the CRA will ask for you to submit certain receipts and records. Sometimes the submission of these documents will be enough, and other times an auditor will be sent out to complete a more thorough check. The audit may take place at a CRA office, or at your home.

Results of an Audit

Throughout the audit process, the auditor will openly identify any issues and discuss them with you. You are also welcome to raise any concerns you may have as well. At the end of an audit, one of three things will occur:

No adjustments will be made to your assessment
A reassessment will result in you owing more tax
A reassessment will result in you receiving a refund

Don’t Sweat It

Audits may seem like a scary process, but if your documentation is accurate and in order there shouldn’t be any major issues that come up. Most errors that arise are honest mistakes that are easily amended. The best thing you can do to prepare for an audit is to keep track of your records for a minimum of six years.

If you or your company is selected to undergo an audit, contact the experts at Liu & Associates. Our team will ensure that your rights are observed and work to minimize any consequences. We act as a buffer between you and the CRA to minimize the time and stress that is so commonly associated with an audit. Give us a call today!

What to Do If the CRA Orders You To Pay Back Taxes

For some, getting a letter from the Canada Revenue Agency that your taxes have been reassessed – and that you owe back taxes – isn’t just a bad dream. The reality is that in most cases, the CRA has three years from your original date of assessment to reevaluate your income tax return. If they can prove willful or careless misrepresentation – or fraud – then the three-year window can be waived.

What Can You Do?

Pay up. CRA charges 5% interest calculated on a daily basis back from the original tax year – meaning that if you get a letter from the CRA requesting back taxes, you already owe a significant amount of interest on those back taxes. The only way to stop the accumulation of interest is to pay the fine up front.

2. File an objection. You have 90 days to file an objection with the CRA outlining your position regarding your reassessment, which they are obliged to consider. You will be contacted to confirm receipt of your objection, however, it could take months or years for your objection to work it’s way through the process.

3. File an appeal. If you haven’t heard back about your objection within 90 days again, your next option is to file an appeal at Tax Court. Like any court case, you’ll require legal representation and it could take years to resolve. Furthermore, the odds are against you – in these matter, the CRA’s assessment is considered to be correct and the burden of proof is on you.

This is a simplified overview. If you’ve been reassessed and owe back taxes your best bet is to contact a professional, like the accountants at Liu & Associates, who have years of experience working with the CRA that can walk you through the process to get you the best outcome.

Top 10 Canadian Tax Myths

It’s tax season again and everyone’s uncle, neighbor and postman have advice on how to maximize your return. Don’t listen to the chatter– consult the professionals here at Liu & Associates today! Meanwhile, refer to our myth-busting list below for the hard facts about filing your Canadian taxes in 2016.

1: I earned less than the basic personal amount, so I can skip filing this year.

While yearly income under $11,474 is not taxable, you should still file a return.

2: Once I get my Notice of Assessment, I’m in the clear.

People usually breathe a sigh of relief when they receive a Notice of Assessment, but it is only a brief review of your document’s basic math. CRA has a window of years to follow up on any inconsistent files.

3: Interest on my mortgage is tax deductible.

You do receive a tax credit when you sell your home, but not for any interest paid against an existing mortgage. On exemption is a small percentage for people that operate a business out of their homes.

4: Filing online is risky and flags your account for audits.

Some feel that an online return could put them in a bad position, but it is simply not true. Filing method has no effect on the reasoning behind tax audits. You may be asked to send in supporting documents, but this is a routine verification.

5: There’s no incentive to report tax evaders.

Recently this would have been true, but new legislation in 2014 established a hotline for good Samaritans to report false tax claims. If true, the whistleblower stands to earn 5-15% of the tax collected as a cash reward.

6: Only a child’s mother can claim the corresponding tax credit.

It is the responsibility of the spouse who earns less to claim any children on their return, regardless of gender.

7: I have no taxable income, but I can still cash in my tuition credits.

A student must have taxable income to be able to use tuition credits for a refund. Credits can be held over or transferred to relatives or spouses.

8: My tips and gratuities are not taxable forms of income.

Don’t fall for this common line, especially if you work in the service industry! Tips and gratuities are considered income– they are therefore taxable. You risk fines and other consequences if you fail to report taxable income.

9: Skipping the tax deduction means I don’t have to report RRSP contributions.

Whether or not you intend to use your RRSP contributions as tax deductions, they need to be reported in your annual filing. Failing to do so will be viewed as an inconsistency, raising your risk of audit.

10: The employment insurance I received during maternity leave is not taxable

All employment insurance benefits– regardless of maternity status– are eligible for taxation.

5 Myths About Tax Audits

When it comes to tax audits, this standard governmental process tends to get a bad rap. In general, tax audits are dreaded because they are not well understood by those who file. By debunking common myths about tax audits, Canadians can ease their worries over this regularly occurring event. Whether you are being audited or would just like to know more about the process, consider the following five myths about tax audits:

Filing for tax deductions makes you more likely to be audited.

Every year, many people avoid filing for the deductions they deserve because they are nervous it will put them at an increased risk of being selected for an audit. However, the number of deductions you claim on your taxes has little to do with whether or not your filing is audited. When it comes to your submission, the Canada Revenue Agency (CRA) looks at the filing as a whole, rather than just your deductions, to ensure it makes financial sense. It is better to claim the proper deductions each year, and receive an appropriate tax return.

I can avoid being audited by waiting to file my taxes.

It is wishful thinking to hope that you will not be audited by avoiding the CRA altogether. Failing to file your taxes can not only result in serious fines, it is also illegal. Penalties for missing the submission deadline can be much stricter and less desirable than a routine audit. It’s best to file your taxes on time with the appropriate financial details.

It is not worth correcting previous filings.

Audits do not take place immediately. In fact, they can take place several years after you file. If you notice an inaccuracy on a previous year’s submissions, you can typically volunteer the correct information to the authorities without risk of criminal charges. Keep in mind, the CRA can access any year’s tax filing at any time; if you’re concerned about an error or omission, it’s best to speak up proactively.

If you file online, you will be audited.

Many individuals who have a history of filing their own taxes or working with a professional to submit their filing are skeptical of online tax submission services. Yet those who utilize this software have been shown to be at no increased risk of being audited. In fact, those people who submit taxes online or work with a professional may be at a decreased risk of being audited, because it is less likely that a mathematical error will occur.

Audits are scary.

While many taxpayers fear being audited, the truth is that the auditing process can be a very straightforward procedure. Typically, the audit process involves you being asked several questions about your filing, and being given an opportunity to explain any drastic, year-over-year financial changes.

This tax season, if you would like more information on avoiding an audit or properly filing your taxes, consult Liu & Associates for assistance.