My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant and a partner with a National Accounting Firm in Toronto. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. The views and opinions expressed in this blog are written solely in my personal capacity and cannot be attributed to the accounting firm with which I am affiliated. My posts are blunt, opinionated and even have a twist of humor/sarcasm. You've been warned.

Tuesday, February 15, 2011

CRA Audit- Will I Be Selected?

I am often asked how the Canada Revenue Agency (“CRA”) selects its audit victims; oops, I meant to say taxpayers subject to audit. Through experience I know certain taxpayers, certain claims and certain industries seem to trigger audits. With that in mind, I will list below what I have seen and how I believe the CRA selects certain individuals and businesses for audit.

Reasons for Individuals and Corporations

I would suggest there is nothing worse than a scorned lover, a business partner you have had a falling out with or a dismissed employee to trigger a CRA audit. These individuals know your little secrets; a cash deal here, an offshore account there and a conference you expensed that was really a vacation. These people are also vindictive and in some cases, they make statements and claims that are not factual in nature; however, the claims are enough to bring the CRA to your door.

CRA also loves net worth audits. These are audits undertaken because you live in a 3,000 square foot home, have a Porsche and kids in private school, and yet show minimal income on your tax return.  Typically CRA either stumbles upon these situations, or information from one of the individuals noted in the preceding paragraph provides a lead.

Reasons Specific to Individuals

We see far more desk audits (information requests in regard to certain deductions claimed) than full blown audits for individuals. You can expect an inquiry if you claim any of the following:
  • a significant interest expense,
  • an allowable business investment loss (usually if you held shares in a bankrupt private Canadian company),
  • tuition from a university outside Canada (typically the child and parent are tied together as most children transfer $5,000 of their tuition claim to their parents),
  • a child care claim for a nanny; even if you have filed a T4 for the nanny with CRA. Why CRA cannot crosscheck their records is baffling and befuddling.
In all the above cases you are just providing back-up information, these are not audits.

In past years individuals who purchased any tax shelter other than an oil & gas or mineral flow through have been audited. However, in most cases the CRA is auditing the tax shelter itself and the individual investors just get reassessed personally.

Full blown audits seem to occur with regularity in regard to individuals who earn commission income or self employment income and claim expenses against that income. In those cases, CRA gravitates to auto expense claims, requesting logs books they know one in 100 people actually keep, and advertising and promotion expenses they consider personal in nature.

Reasons Specific to Corporations

Corporations seem to be selected for three distinct reasons.

They carry on a business that is CRA’s flavour of the year; some prior flavours have been pharmacies, contractors and the real estate industry and any other industry CRA feels is a “cash is king” industry.

Corporations file General Indexed Financial Information known as GIFI. This information provides a comparative year to year summary of income and expenses. It is suspected by many accountants that CRA uses this information to review year to year expense and income variances of the filing corporation and to also compare corporations within a similar industry sector to identify those outside the standard ratios, but we don't know that for certain.

The final reason is that it is just your turn. I have no knowledge of this, but it seems like CRA just runs down a list and if you don’t get caught in regard to #1 or #2, your turn just eventually comes up.

In all cases it is imperative you keep your source documents to provide to the auditor; CRA more then ever wants source documents. It is also vitally important if you and not your accountant are meeting with the auditor, that you try and keep your cool. In the end, the auditor is just doing his or her job and if you treat them badly, you are not doing yourself any favours.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

235 comments:

  1. Mark, how important is the car log in an audit? I have tried to maintain a log but find it to burdensome.

    ReplyDelete
  2. Hi Mona

    Good question. Keeping a log will almost guarantee you that your auto claim will not be adjusted (assuming it is accurate and does not include home to work miles and work to home miles). The reality is most people do not keep a log. I tell my clients at a minimum to take their odometer reading on Jan 1 and Dec 31 of each year, so at least the know their mileage for the year. Many auditors will request the client to build an auto log which is a time consuming process if they even have the information. Other auditors ask various questions about my clients auto activities and taking into account their job come up with an acceptable percentage they will allow my client to claim. It is of course typically far below what my client wants to claim. But that is the crux of the matter, without a logbook, you are at the mercy of the CRA auditor unless you want to rebuild up to 3 years of auto logs.

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  3. Mark - We own a medium sized incorporated business. What recourse would we have if an auditor disallowed a significant amount of legitimate expenses as a result of a misunderstanding or missing source documentation? Should we be calling in a tax lawyer at this time?
    Mike G

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  4. Hi Mike

    A misunderstanding will typically be addressed by having your accountant file a Notice of Objection and hopefully the misunderstanding can be clarified at the appeals level.

    It is ironic you ask about the source documents, I have the same situation currently. CRA is more then ever requiring source documents to support any expense claim. Before calling a lawyer, I would try and go back to the orginal vendors and customers and try to obtain copies of the missing source documents.

    In my current case I have directed my client to a lawyer, as we cannot obtain the source documents for a reason I shall not go into here. I am hoping they can provide guidance as to what alternative evidence a court would accept.

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  5. Interesting article. I heard that individuals are unlikely to be audited, and I guess you agree with the caveats you mentioned in your post.

    One odd situation with a huge number of desk audits happened about 15 years ago when I was working in a small mining town in northern Manitoba. It seemed like tens of employees were asked for proof they qualified for the northern living allowance. I guess it was just the time when Revenue Canada (as it was called then) decided to crack down on that deduction.

    ReplyDelete
  6. Hi Gene

    You are correct in your analysis. CRA will still occasionally "crack down" on a perceived abuse or misunderstanding of a certain claim or deduction on a personal basis. However, those are few and far between in general, the desk audit is the most likely contact on an individual basis.

    ReplyDelete
  7. Hi Gene,

    Is there a time limit for an audit associated with automobiles (taxable benefit)? Is it 7 yrs? How far back will they go if they find a discrepancy in the given year that they are auditing?

    ReplyDelete
  8. Hi Anon

    I have been called many names, but never Gene :)

    Anyways, the CRA will typically only go back 3 years in an auto benefit situation.

    ReplyDelete
  9. Hello Mark,
    I hear that CRA is now get audits executed by subcontractors who work on a commission of whatever they can discover.

    Is anyone challenging this (as far as I am concerned) offensive, questionable method?
    Is it just me or are others offended, too.
    Peter

    ReplyDelete
    Replies
    1. Hi Peter- I cannot confirm either of your assertions. However, if commissions are being paid to subcontractors, I would find this troubling, as the auditor could arbitrarily disallow deductions, knowing the cost to fight certain reassessments may not be worth the effort.

      Delete
    2. As employees at CRA are part of PSAC I think the union would be upset and making noise if sub-contractors were involved

      Delete
    3. Its a lie. There are no subcontractors (whatever that means). And auditors are NOT paid on commission - salary only, with NO bonus.

      Delete
  10. Mark,
    We had an R&D tax audit last year.
    Is there any way to actually find out who or what may have triggered this audit? Do they have to disclose this information if we know how to ask?
    Thanks Peter

    ReplyDelete
    Replies
    1. Peter, R&D audits in most cases have no trigger. Many R&D claims of dubious nature have been made over the last few years and the CRA essentially stepped up audits and almost everyone of my clients has now been audited who made a R&D claim. It is just the nature of the R&D beast.

      Delete
  11. Hi Mark,

    I am a 54 year old guy who has made a meager living as an auto mechanic. I am married and have two adult boys, one living with me while finishing University. I live in a modest home and my wife has a good job. Over the years, I have amassed a collection of 18 older (vintage) cars which I proudly store in my place of business. I rent my shop.

    I have been selected for and audit for the years of 2008 and 2009. I have all my paperwork up to date and available. I am worried that when the Auditor visits my shop, she will look at my collection and use it against me by interpreting it as though I have not been honest with my income declaration. Should I be worried and if so, how should I handle this issue?

    Dennis.

    ReplyDelete
    Replies
    1. If you have an accountant, you should meet with him/her to prepare for the audit and discuss this issue. It is good to hear you have all your required paperwork that is a good start. As a side note, I hope you have insurance for all these cars.

      Unfortunately, I think your concern is probably warranted. This is a case where perception may not be reality—ie: The auditor wonders how you have amassed such a collection and looks into your collection even if you have not done anything wrong.

      Hopefully you have kept detailed records regarding this collection and can provide the auditor invoices for the purchase of each car if they ask. I assume you have restored these cars to some extent. Again, hopefully you have records for any parts you have purchased.

      I am not sure if you own these cars personally or whether your business owns them, that also could be an issue. In addition, if the business owns the cars are they inventory or capital is a potential issue.

      There may be several issues the cars present that you are not even aware are issues, so again I suggest you see your accountant or possibly engage one prior to the audit to discuss some of these issues so that you are prepared to answer properly

      Delete
  12. Hi Mark,

    I am retired with the usual pensions but I also have about $1500.00 a year income from a textbook that is still being used. I forsee in the next couple of years the book will be out of date and dropped from the course curriculum; would the loss of that income trigger an audit by Revenue Canada.

    And, just in general, how often does Revenue Canada audit seniors and why would they?

    Thanks
    Rudy

    ReplyDelete
    Replies
    1. Hi Rudy

      I would not be concerned that you will be audited based on losing your textbook source of income. If you continued to write off expenses relating to that source of income while having no income and claimed business losses, that could be problematic. As a general rule, seniors are not typically audited, as their income is usally all on T-slips, which negates any reason to audit.

      Delete
  13. Mark.. Love the blog, great info here, thanks for what you do..

    I have a question for you that has not yet been addressed here, perhaps you can lend your insight to a situation like this.?

    I run a corporation that has recently been contacted for an audit. They are requesting the electronic data (General ledger), along with all the usual 'hard copy' items such as receipts, everything really..

    Oddly though, when my accountant called them back to get the electronic thing sorted out, he was referred to someone else at CRA, apparently the auditor does not deal with the electronic part?

    THe person he was directed to works in the Fraud Detection Division... Is this common place for all electronic data?

    My company has not done anything fraudulent, so that leads me to believe it's just part of the general audit, but it still seemed kinda weird.

    Secondly, we commonly send and receive wires without any real invoicing done.. Nothing weird about it in my industry, it's fairly common.. While I'm pretty good at either getting the invoices later, there are times where wires have come in (without any invoicing) from offshore companies, and the same applies to outgoing wires...

    What does a situation like this look like to an auditor in your opinion?

    ReplyDelete
    Replies
    1. Hi Greg:

      Thx for your compliment. The last couple audits my clients had, we just provided CD's of the electronic info to the regular auditor, however, I am not certain if in certain cases a regular auditor just has the info sent to the fraud detection division because of the techincal nature or size of the the data. Maybe some of the accountants that read this blog can comment, however, it definitely raises a red flag after I read your next comment.

      In respect of wire transfers, which are very common these days, you still need to obtain invoices (electronically or otherwise) and issue invoices (electronically or othewise) or how does the auditor know why money is being transferred. From an auditors perspective, wire transfers offshore without support would be cause for concern, even if they are truly transacations in the regular course of business.

      Thus, since you ask me how it looks like to an auditor, unfortuanately I would have to say your lack of documentation and overseas wire transfers could possibly cause some confern for an auditor, even though as you state, you do nothing wrong.

      Delete
    2. Totally understandable.

      I'm just curious what kind of concerns it could/would arise.. We can account for a big portion of the wires, the rest may need tracking down, but strictly from a curiosity POV, I'd like to know.

      Delete
  14. Also, I'd like to point out, that offshore wire transfers I am talking about were not sent offshore, but rather received, and tax paid on them... If that makes a difference?

    ReplyDelete
    Replies
    1. My concern was two part, no supporting documentation which the CRA requires, which if you can track down will allievate that issue and two, offshore transfers always cause suspicion because of tax avoidance issues offshore. If there are no outgoing wires, that is positive. For the incoming, I would still try and ensure you have support to match the incoming transfers.

      Delete
  15. Hi,

    I went through separation / Divorced last year. I have three small kids ages 11, 9, and 7. My ex and I have split custody.
    I was laid off from work as of last October. Since my ex make less than $1000 a month Judge issued temp order to pay my ex lump sum in arrears since our separation dating back to March 2011. As court ordered I paid child / spousal support to my ex cash directly so I don't have any paper trail other than bank statement showing the amount withdrawn. Little that I know I should have waited for Social services to deduct the payment from my account. When I file my taxes I claim for spousal support / Child support. CRA asking proof of documentations for payments. I need this money so badly to buy food and pay rent for my kids. Is there is any way to convince CRA to accept my ex acknowledgement that she received payments from me if notarized?
    Thanks....Lee

    ReplyDelete
    Replies
    1. Lee, on the request form the CRA they usually provides alternative forms of evidence they will accept. I assume there is nothing relating to an ackknowlegement or something similar?

      In the past, the CRA has sometimes accepted signed acknoledgmeents on certain child related issues for my clients. I would call the number on the form and tell them your situation and see what they will accept, if you are lucky they may have some sympathy to your plight.

      Delete
  16. hi,
    i received a letter from cra asking me to provide information on my employment expenses. My tax return was done by an accountant but was never signed by him. i never checked how he did my tax return, all i cared about is getting a very good amount of refund every year. there was never an employment expense or whatsoever, so im afraid im criminally liable for this. please advise on what step should i make. i only have 30 days to reply to cra. thanks in advance

    ReplyDelete
    Replies
    1. Anon, without knowing all the facts and reviewing your return, I cannot really comment. However, this could be a serious issue (most likely from a penalty issue). ASAP you should engage either a new accountant or possibly a law firm that deals with CRA issues.

      They will be able to review your situation and guide you and they may or may not want to contact your prior accountant. The 30 day time period can typically be extended if you call the CRA and tell them you require more time and as such, you may be advised to do so to allow for a proper review of your situation. Good luck.

      Delete
    2. thanks for the advice. im going to see a good accountant. by the way, do you know anyone i could go and seek help? thanks again.

      Delete
    3. Send me an email to one of my "contact me " emails on the right side of the page with your location and if I have a referral I will advise you

      Delete
  17. Hi - My daughter has been asked for backup info to confirm tuition payment outside Canada. She has the required form, duly completed. Is it enough to send that in? Should she also be pointing CRA to the place where they can confirm that this is an accredited institution? Also, complicating factor: the program she was in is no longer being offered so it's not on the institution's website any longer. Should she address this in her reply or not worry about it unless they raise it?

    ReplyDelete
    Replies
    1. Caroline, this is a standard request where a student claims tuition fees for a University outside of Canada. If the form is completed, make a copy for yourself and provide the original form to the CRA and that should be the end of the mattter, hopefully. Do not provide any info to the CRA other than the form, you will only complicate matters for no reason, if they want that info. they will request it.

      Delete
  18. I am a full time student who works 10 hours a week making about 100 each week. My private university costs are approx. 14000 a year and I receive osap benefits to help. I have been audited every single year (3) and I am just wondering how I can avoid this. I don't know what is flagging my account and it's very frustrating

    ReplyDelete
    Replies
    1. Meandering, you cannot do anything. The CRA's approach to tuition claims and subsequent audits is bewildering at best. You have plenty of company amongst my clients children. I actually have a future blog on this topic.

      Delete
  19. Hello Mark Goodfield. I have a question with respect to audits as it applies to a corporation. I've read that all corporations eventually get audited. But what about in the following scenario? If one closes a corporation, is it likely that the Canada Revenue Agency will audit that corporation if it was only operational for less than 3 years?

    ReplyDelete
    Replies
    1. Hi Anon-- Although one never knows which corps. the CRA will audit, it has been my experience that if a corp. shuts down after three years and all the years are losses, the chance of audit are slim. If there has been profits, the chances of audit would increase.

      Delete
  20. Hey mark, today I revived a letter from CRA asking for supporting documents for my vehicle expenses, supply expenses, and a detail of my kms and daily journies. The first two I have no issue with supplying. I've kept all work related receipts in a folder by month. ( is that "organized" enough? Or are they going to want it put into day by day?)

    As for the vehicle log I do have a copy of all the receipts that I give to clients, however in some cases I have 5-6 per day. And working 25-27 days a month that is a lot of paper. Are they really going to want me to make copies of those and send them off?? Seems like a ton of work, they're going to be paying the poor guy going through those more than what the amount that is in question.

    Anyways, thanks in advance for any info you can shed on this situation.

    Eric

    ReplyDelete
    Replies
    1. Hi Eric.

      It really depends upon the auditor. I have had auditors that want an actual log and clients have had to go back and recreate a log from their outlook or appointment book if they wanted their full claim to stand. On the other hand, I have had auditors that take into account your job and whether it would require a lot of driving, take a look at a mini log or the receipts you speak of and say ok, I will not make you recreate the log, but I will only give you 70% auto instead of 80% for example and often clients accept that to avoid the work you discuss. However, techncially a log is required and many agents stick by that requirement. So I would feel out the auditor to see if the receipts you have would be sufficent without recreating a day to day log and most importantly, be nice and treat them with respect, that often helps.

      Delete
  21. Hi Mark,

    I'm filling out the form for designating a principle residence for so many tax years (some years it was not my principle residence). I have adjustments to the cost base of my house, but have lost track of some of the receipts to support the claims. Are there other forms of evidence that CRA will accept in the event I am audited? They are pretty large expenses like an addition to the house.

    ReplyDelete
    Replies
    1. Hi Anon, unfortunately the CRA likes to see source document invoices. I have had cases where they will not even accept visa receipts that do not have source documents attached. I know you will not like this answer, but see if you can track down the contractor to see if they have a copy in storage.

      I know other accountants read this, so maybe they can comment if they have had success with alternative sources of documentation.

      Delete
  22. Hi Mark,

    First I think it's incredible of you to be so thorough in your replies to your readers!

    My question is in relation to 'other' non-work related income. I work a normal 9-5 type job, but I also have a hobby fixing junk and reselling it that earns some extra money on the weekends. I've never reported it as income as it has always been quite an insignificant amount, that I mostly do for fun. However, in the past few months things have picked up quite a bit. At what point should I start to consider claiming this as income? If I don't claim it all, will the CRA notice that I've been making larger cash deposits like maybe $1000 per month? Do you think that they check people's accounts for that type of thing?

    ReplyDelete
    Replies
    1. Hi James:

      Thx for your kind comments.

      Firstly, I hope you did not use your real name, I am pretty certain people from the CRA read this site.

      The CRA does not typically review bank accounts unless you are selected for a net worth audit, although they may occasionally review your account on a regular audit.

      Unfortunately, as a tax accountant I cannot advise you anything other than to report any income you earn. However, you probably have various expenses to claim against the income, including your work shop/home office and various small tools etc.

      Delete
    2. Haha, yes, thanks for the heads up! Maybe if this is becomming a serious thing, then I should set it up properly as a business. I was just thinking that many people do things on the side for which they don't claim income, and that there was some rule of thumb where if you made more than a certain amount then you should start claiming it properly.

      Delete
  23. Mark,

    I just stumbled upon your Blog while trying to figure out the details of my auto log. Great source of information!
    I'm a salaried non-commisioned employee working from home, reporting to a distant U.S. office. I have a company car and company policy is that it is to be used only for VERY LIMITED personal use. That being said, I declare less than 10% to CRA. If I do get audited, does my company policy hold weight or do I still need to keep a log? I feel as if I'm being taxed for a benefit I really don't get to use do to company policy. I do keep a log on my Android, but, I occasionaly have to stretch the math to make the numbers add up!

    ReplyDelete
    Replies
    1. Hi Anon

      I would suggest your company policy would be considered but not be enough on its own. If you are claiming over 90% busines use, a log should be kept even though a pain, or at least keep something that would allow you to put one together should the CRA come knocking.

      Delete
  24. Hi Mark, very good blog you have. I read the comments on in coming overseas wire transfers, and understand the need for documentation. However going back 6 or 7 years ago I had several large overseas wires sent to my accounts here, from a personal loan repayment but I never kept documentation. My question is how far will CRA go back normally? And who do they get the information from in the first place, since I read "Fintrac" only keeps records for 5 years. Should I be concerned that they may audit me from that far back based on seeing those wire transfers? Thanks !!!

    ReplyDelete
    Replies
    1. Hi Martin:

      Unless the CRA thinks there is tax evasion or the year was opened up due to a carryback or something, the CRA will only go back 3 years. No idea were they get their info. I think it is really more seeing large amounts coming into accounts that trigger their interest than them tracking, but i have no idea.

      Delete
  25. Mark,

    Great blog you have. I was divorced in 2011 and listed that when I filed my 2011 taxes along with her income amount she made in her country. My ex lives in and is a citizen and resident of an another Country. She has never visited , worked in or been to Canada. For my 2012 taxes do I list myself as divorced or single ? If I list myself as divorced again do I have to report her 2012 income again like 2011 ? I am a little confused.

    ReplyDelete
    Replies
    1. You do not have to report her income unless you tick the married or common law box from what I recall.

      Delete
    2. Thank you for your time and patience. As I am divorced now for over 1.5 years then I take it, I check divorced and write my ex wife name in ?

      Delete
    3. As far as I know,once divorced your ex does not need to be shown anywhere unless you are deducting alimony

      Delete
  26. Hi Mark, I don't know if my issue is really a problem or not. I work at a retail store part time, I am also a foster parent. Every year when I file my taxes, it looks as though my expenses, far exceed my income. This results because, the money that I receive from being a foster parent is not taxable, the money is considered the childs and not mine. I usually net file, should I be putting something in there to explain why my expenses exceed my income? In addition, my rent expenses have been greatly fluctuating every year, despite the fact that I live in the same place. I have been struggling, and some years I have not paid my rent in full each month, so I have only declared what I have actually paid the landlord for that year. Does something like this, send up a red flag to audit? Thank you for your time Mark.

    ReplyDelete
    Replies
    1. Anon, read my blog on Monday, on point. I would suggest you do not provide anything you are not asked for, you can explain if asked, since all answers appear plausible. If the CRA wanted explanations, they would have an explanation box.

      Delete
  27. I live in Fort McMurray and I know CRA also often audits the travel deduction for northern residents.

    It's common for people to make a mistake with this deduction by using the cost of the airfare from their home to their destination, instead of the cost of the airfare from their home to the nearest "destination city", which for Fort McMurray, would be Edmonton.

    This is definitely an area that could be explained on CRAs site in a much clearer fashion!

    ReplyDelete
    Replies
    1. Hi Lanette

      This is not an issue I deal with being in Toronto and thus have no comment or specific knowledge. I have heard it can be an issue as you note.

      Delete
  28. Hello Mark , My questions is about the Ontario children`s activity credit vs Canada Child Fitness credit ? I am claiming Ontario children`s activity credit for my children and not Canada Child Fitness credit. Is this a problem ? If I claimed both it seems it would be a double claim and wrong. Can you clear this up. I seem to be reading conflicting information and would like to file correctly. Thanks

    ReplyDelete
  29. Hi Mark,

    My husband registered a business in 2012 but did not make any income from it. Is he required to add the business information to his tax return, or can he leave it off completely?

    Thanks.

    ReplyDelete
    Replies
    1. I would report it,you should have some initial expenses to claim

      Delete
  30. Hi Mark,

    My wife and I worked for a Japanese company teaching english for about 4 months in 2007. The company went bankrupt and never paid us. We were considered Canadian residents for tax purposes (we checked with CRA)at the time. Recently the Japanese bankruptcy trustees notified us that they had completed liquidation of the bankrupt company and that we were entitled to a pro-rated payout. We filled out some forms and they are going to wire the money to our bank accounts in Canada. We haven't received the money yet but do you think such a small amount would increase our risk of audit? Also do you have any idea of how to claim such a source of income, Do I need to adjust 2007 income or does it count as 2013 income?

    ReplyDelete
    Replies
    1. Hi Mark,

      BTW the amount we are getting is less then 1k each so it's small potatoes but we are just worried that the process of getting it and reporting it could raise flags at the CRA and we obviously want to avoid an audit hassle.

      Delete
    2. I think you are worrying unnecessarily. If you were a client for such a small amount I would just report the income in 2013 as foreign employment income,

      Delete
  31. Hello, Mark,

    I just bought a property for my wife, one kid and myself to live in and I'm thinking about renting out a couple of rooms. According to the information on CRA's website, you can rent out part of your principal residence and still able to get the principal residence exemption for capital gains when you sell the property as long as the following 3 conditions are satisfied:

    1. your rental or business use of the property is relatively small in relation to its use as your principal residence;
    2. you do not make any structural changes to the property to make it more suitable for rental or business purposes; and
    3. you do not deduct any CCA on the part you are using for rental or business purposes.

    As for the first condition, what does "relatively small" mean, say, in percentage? less than 50% or less than 30% or what else?

    Thanks very much!

    Sam

    ReplyDelete
    Replies
    1. Sam, I would guess the CRA is being vague on purpose. There have been various rulings which provide some guidance and generally have been somewhat generous, but are fact specific. I cannot and will not give you a specific %, however, I would try and be a lot closer to your 30% figure than the 50% figure

      Delete
    2. I have been told the amount is actually 25%. And renting a room out and giving access to common areas like your kitchen and living room, should be fine.

      Delete
  32. Hi, Mark,

    Thanks very much for your reply!

    One more quick question. For how many years should I keep all the original papers of my returns?

    Thanks!

    ReplyDelete
    Replies
    1. http://www.thebluntbeancounter.com/2011/02/how-long-do-i-have-to-keep-my-income.html

      Delete
  33. Hello, Mark,

    I rented a room of my principal residence, which takes about 10% of the total square feet of the property.

    I would put in 100% of the total expenses and then set it up to calculate personal portion by inputting a personal percentage. But I can't do this by using Turbo Tax Premier on line version, and the personal portion on T776 ends up showing nothing, which is apparently wrong.

    Do you know why this happens?

    Thanks!

    ReplyDelete
  34. Hi Mark,

    Is there any condition that to caim CCA for the vehicle used in self employed business, it has to be used 90% for business activities ?

    Thank you

    ReplyDelete
    Replies
    1. Hi Anon:

      No, the CCA claim is pro-rated based on percentage use.

      I think you are confusing the rule for claiming HST where the car must be used all or substantially all(90% or more) in the business to claim 100% of HST paid.

      Delete
  35. Hi Mark,

    I received a CRA pre-assessment review on "Interest Expenses" that I deducted. Here's an issue that I'm wondering if you can comment on:

    My investment brokerage statement documents the interest I paid on margin borrowing that I did and those were the amounts I submitted on my tax filing. However, after looking at the rules around interest deductibility, it now appears to me that I shouldn't have claimed these expenses. The reason I think I shouldn't have claimed the interest expense is that the margin borrowing was for Foreign Currency trading. I had borrowed a foreign currency (austrailan dollars - high interest costs to borrow) through my brokerage and then invested the proceeds in another currency (US dollars). So I paid interest in one currency and received interest in another. I simply held the purchased foreign currency (US dollars) as cash in my brokerage account: I did not buy any specific investments with the borrowed currency.

    My issues/questions are:

    1) should I have claimed these interest expenses given that they were for forex trading? I'm now pretty sure I shouldn't have as I didn't buy speicific shares or property. (I have reported the capital gains and losses from this trading and the interest recieved on the cash held -- I don't think any of this needs to be changed)

    2) assuming that I shouldn't have claimed the expenses, what is my best approach on the pre-assessment review:
    (a) send them a letter simply saying I retract my interest expense deduciton (and if so, should I provide an explanation of the error)
    (b) submit the brokerage statement to them and let them decide;
    (c) submit the brokerage statement (as the source of the amount I claimed), but indicate that on further review, I shouldn't have claimed the expenses. i.e. Is submitting the brokerage statement helpful in anyway to show that it was not some fabricated number that I had claimed ... or is an error an error and I would complicate things submitting the statement;
    or ... some other course of action.

    (The last bit on this is that there were some small amounts of interest expense claimed from 2011 related to currency trading that I don't think I should have claimed either ... which I now intend to correct through an adjustment to my 2011 return.)

    Any thoughts on this would be greatly appreciated.

    Thanks,
    Rodney

    ReplyDelete
    Replies
    1. Thanks Mark for yor quick response. You are amazing.

      Rodney

      Delete
  36. Mark, do you think that the CRA would (or could) be able to access records of personal bank accounts which I've recently closed?

    (say I am being audited now for the past 3 yrs and I closed an account 2 months ago)

    ReplyDelete
    Replies
    1. Unless the CRA thinks there is evasion or are doing a net worth audit, they would typically not be asking for or trying to access your personal accounts

      Delete
  37. Hi Mark,

    I own a sole proprietorship (logging truck company). I've been deducting my common-law partner's vehicle as an expense for the past 4 years. My tax preparer said that this was an allowable write off. We have never kept a log-book. It is insured in her name and she is the primary driver.

    There have been a couple of other trucking companies in my area that mentioned they are under "review" for the motor vehicle expense and for various other deductions. I'm worried that this may not have been a legitimate write off.

    Please advise. Thanks so much!

    ReplyDelete
    Replies
    1. Anon

      Is the car used in the business? If not, then clearly an issue. If the car is used in the business, it is always sticky point with auditors when spouse's car is expensed. Witout log or any record, may be problematic. You may want to try and build record of use in case you are audited. The other issue would be if the auditor goes for it, what costs are allowed? Sometimes they may at least allow a km allowance.

      Delete
  38. Hi Mark,

    Thanks for the quick response! The pick-up is used rarely for business. I have been writing off another vehicle as well for the capital cost allowance (not the motor vehicle expense). What sort of record would I start to use? We haven't been tracking kms at all which is probably going to cause huge issues from what you have said. We have been deducting the capital cost allowance and the motor vehicle expense for three years now for her vehicle. Sounds like I have a serious "beef" with my tax preparer as this is thousands of dollars in expenses!

    ReplyDelete
    Replies
    1. Anon, I just provided you some general comments. Your tax preparer may have reasons for doing what they did. Just discuss the issue with them in context of my comments

      Delete
  39. Hi Mark,
    Thanks for the great resource. My question relates to providing bank statements to the CRA. I have been instructed to provide supporting documents for my claims and one of them is for public transit amounts. I have copies of the TTC passes that they need, but they also need proof of purchase, which in this case would be a bank statement indicating the debit card purchase. I have the documents but my question is whether I should provide the entire bank statement for each of the monthly passes? There is nothing there that I need to keep from the CRA it just seems very invasive for a relatively small amount (roughly $800 for the year). Thanks very much

    ReplyDelete
  40. JoAnn,

    In my opinion, this is ridiculous overkill. The receipts are proof enough of purchase, especially given the small value of the actual tax credit.

    So, you can just say you cannot easily access your bank records without a substantial cost and say the receipts should be sufficient evidence of payment which may or may not be sufficient depending upon your desk auditor or u can copy your bank statements, but I would only copy the relevant charges.

    ReplyDelete
    Replies
    1. Thanks very much for the prompt reply and helpful advice.

      Delete
  41. Hi Mark.
    My mom just recieved a letter from Revenue Canada requesting information on all properties she owns, including proof in the form of letters and bills etc in her name, I guess to determine her primary residence.
    The letter got me wondering why? I came up with these scenerios:
    I purchased a condo under her name and sold it a year later. My intention was to use the condo as her primary residence, but she didnt like the idea of condo living, so I ended up renting it out. When I finally sold the condo, neither of us claimed the taxes on it due to pure ignorance on our part (approx. $12-15K net gain). The tenants were quite disgruntled for us selling it and we had to pay them $2500 to get them to vacate.
    Alternatively:
    We are joint tenants on a house which we both live in, and a rental property which I have always claimed taxes, and rental income on etc. I dont like numbers too much, and always had an accountant (not officially designated) that my mom used, to do my takes as well. Our accountant passed away last year, and we used a new accountant that bought out his clients. My mom didnt like the return she was getting from the new accountant so she decided to choose someone else. I filed with the new accountant.
    My question is, what do you think triggered this audit?
    Now, even though, I havent been audited myself, will I be next as we are joint tentants on the other two properties?
    Any help will be appreciated.
    Thanks!!

    ReplyDelete
    Replies
    1. Hi Anon

      No idea, could be any of the things you noted or none. As Condo's are under scrutiny I would guess that if I had to guess.

      You could also be audited as u note; however, I have seen lots of situations where you think someone is next in line and they are ignored, so dont lose any sleep until you are selected.

      Delete
  42. This thread is funny. As a CRA auditor, I can address some of the things brought up in here.

    1) Are subcontractors who are paid on commissions used to audit persons?

    Subcontractors are NOT used at all. I have never met a subcontractor (whatever that means) in all the time I have worked there. There are co-op students as well temporary employees that sometimes get full contracts (this is more common in the call centre during tax season), but they are all employees of CRA. Audit work is NEVER sent outside the firm. And NO commissions/bonuses are EVER given out for auditors. We are all payed fixed salaries that can readily be found on the CRA website.

    2) Why are log books necessary? Why are credit card statements not sufficient audit evidence?

    For both questions, look at it from the perspective of an auditor - we have to be able to audit something! Generally speaking, we audit compliance and then look at the facts and if the claim is reasonable. If there is absolutely no documentation, then there is nothing to audit and the only path an auditor can take is reconstruction of what happened (an approach that the courts have upheld). This is especially true in the case of log books, where reasonability is often stretched.

    In the case of credit cards, the reason they are unacceptable is that few details of the transactions are given. To give a more specific example, I once audited someone who claimed significant fuel expense. There was no doubt about the fact that fuel was actually consumed (audit objective of occurrence), but it seemed pretty unreasonable, given the industry. So, when I looked at the source documents (i.e. the gas station receipts), I found that this individual liked buying stuff (e.g. food, lottery tickets, etc.) at gas stations that were not permissible business expenses. The credit card statements alone would never have given me those details.

    More broadly, Canada has a self assessment system. The system is based on trust, so people are allowed to report their incomes yearly, instead of being tracked more closely. Due to this fact, the onus is on the taxpayer to establish that they are entitled to a deduction or credit or that your reported income is accurate. So, if you plan on claiming something or if your income appears unusual given your life facts, then prepare to back it up with documentation as to why its legit.

    3) Are people from CRA reading this thread (on official duty that is)

    Not to my knowledge. But I still would not use my own name for the simple reason that I am concerned about identity theft.

    ReplyDelete
  43. Mark,

    My small one person company was selected for an income tax audit it May. The year selected was fiscal end May 31, 2011. My accountant and I met with the auditor two weeks ago and answered all of her questions. The auditor took all of the books requested and indicated she would get back to us with questions. As mentioned it has been two weeks and we have not heard a word. My questions are why would the year selected be 2011 and is it normal to not hear a word back for two weeks? Richard

    ReplyDelete
    Replies
    1. Richard,

      I have no idea why a certain year was selected. However, be glad it was not 2010 also.

      I have had auditors take months, one even over a year, so two weeks is nothing. However, several weeks is not unusual especially over the summer

      Delete
  44. Hi Mark,
    I have been selected by CRA for an audit on my capital gains that I declared in the last few years on my income taxes. They want to consider the gains as business income and not capital gains as they consider me a day trader which I don't believe I am. I averaged about 100 purchases of securities in the year and 90 sale of securities; no shorts or option trading. They are all dividend paying securities and are mostly large Canadian and US companies, not speculative in nature. I do have a margin (about 20% of my non registered account). I have a full time job and I don't live on the gains provided from my stock trades as that money is my retirement account even though it's in a non registered account (I am maxed out in my RRSP and TFSA). Most of the gains were made by holding securities for more than 1 year but some were less than 1 year as I had good gains in small period of times sometimes. There was various reasons why I would sell stocks (Ex. to reduce my holdings, for tax loss reasons, but also being afraid of losses, I would sell to lock in gains only to change my mind a few days later or that same day and re-buy again which is probably what caused the most transactions. If I sell a security that I held for 3 months and then re-buy it back a few days later at basically the same price, I don't see how that can be considered day trading. There are a few trades that I made that provided 5 to 10% gains in a week or month, but overall, these trades contributed little to the gains as there were trades like those that I sold at losses. Any advise as I am at the objection part of this audit.

    ReplyDelete
  45. Anon


    I assume u never elected initially to treat all gains as capital? Assuming no, it is far from clear to me u r a day trader. Ur accountant should be able to make a strong argument you r not but I have no specific advice for u

    ReplyDelete
  46. No I haven't elected to treat all my gains as capital and that would only solve my canadian gains and not my US gains which have been the majority of my gains the last few years

    ReplyDelete
  47. Wow! TBBC you are amazing with your knowledge and thorough insightful answers. If I ever move to Toronto I will look you up for sure!

    I have an incorporated business and I understand that a shareholder's loan must be paid within 12 months. I have always assume that this is cash from the corporation. However, what if the shareholder utilizes the corporation secured credit line, can that be longer than 1 year? Basically, if the corporation has a secured credit line of X at 1% interest rate. Can the corporation in turn formally lend that X amount to a shareholder at 5%, fixed amortization, and loan term, and declare the 4% as income gain to the corporation? Basically, I am looking for a means to consolidate personal debt and give the interest benefit to the corporation.

    ReplyDelete
    Replies
    1. Hi Anon:

      First of all, S/H loans must be repaid within one (1) year from the end of the corporation’s taxation year as long as the repayment is not part of a series of loans or other transactions.

      Thus, a loan could be outstanding as long as 23 months. For example, if you take money out say in Jan 5/2013 and your year end is December 31, 2013, the loan does not have to be repaid until Dec 31, 2014,however, you must pay interest at the prescribed rate on the loan.

      Answer to Line of Credit question is NO, you cannot do that. The same rules as above apply.

      Delete
    2. Thanks a lot for the clarity - that time is still plenty to implement what I would like to do.

      Delete
  48. My family from uk wants to wire transfer me a large amount of money.$300k. Will i be audited? What paperwork i need to show if i get audited.

    ReplyDelete
    Replies
    1. Hi Anon:

      Not my area of expertise. Not sure if caught under the FINTRAC reporting requirements in Canada (http://www.fintrac-canafe.gc.ca/reporting-declaration/info/rptlctr-eng.asp)

      From a CRA perspective, if you were audited, you would want to show the actual money transfer and be able to show that the money came from your family and did not belong to you and possibly even where they got the money. I have seen lots of large money transfers without the CRA auditing, but again FINTRAC may be the main issue.

      Delete
  49. I have a house. I am now married and have moved to my husband's house. I have rented my house. My house is under my name and his house is under his name.

    Since my income is high and his is low, can i put the rental income under his?
    What do i need to do since my house is not my principal residence anymore?

    ReplyDelete
    Replies
    1. Hi Anon

      No you cannot put the income under your husbands name if it is your house.

      You need to engage an accountant to understand your options for the rental income you are earning. You may or may not want to make an election under section 45 to prevent the change in use of your house. But you need to provide various details to an accountant so they can advise you properly. If you Google 45(2) election, you will get some background information.

      Delete
  50. Hi Mark,

    I have been selected for CRA audit for Road tax as i owned a Gas station and sell propane also. Some part of propane sold is not taxable like sale for House and commercial purpose and for road purpose is taxtable but i didn't keep any record for which shows what are taxable and what r not and paid Tax on a estimated figure. I don't know that how to convince CRA audit guy. Please advice. Thanks

    ReplyDelete
    Replies
    1. Hi Anon:

      I have no experience with the Road Tax and the substantiation where records are not kept. If you asked this question in August I would say keep detailed records for Aug a month you would make several home sales and then again for Sept and Oct (a month where there are probably minimal house sales)and then see how these compare to your estimates and you would at least have a start point with the auditor.

      Not sure what to tell you, but you need to make some kind of actual to estimate comparison. Speak to your accountant ASAP

      Delete
  51. Hi,

    In this age where the banks pretty much force you to print your statements off of their website, was is considered acceptable documentation for CRA in the case of an audit. Would just printing it off be sufficient or do you need to get the actual statements provided by the bank?

    Thanks for your help.

    ReplyDelete
    Replies
    1. Hi Anon

      I have provided online statements to the CRA and the auditor has not balked.

      Delete
  52. Hi...would CRA ever find about a large deposit from a foreign back cheque. In other words, I close the foreign bank account, get a cheque and deposit it in a Canadian bank ?

    ReplyDelete
    Replies
    1. Hi Anon, sorry I missed this question. By the sound of your question you may have not reported foreign income. Thus, as an accountant I must tell you that you are required to report this income in Cda if u were a resident when it was earned. It is my understanding large deposits ($10k or more) must be reported by the banks to the government, however, I dont know if it is automatic or only where the banks feel it is suspicious.

      Delete
  53. We declared the wrong vehicle on my wifes return and claimed CCA, now I have to admit the error. What kind of response can I expect?

    ReplyDelete
    Replies
    1. Hi Anon

      Some people, I may or not be one of them, would tell you if the net difference between the wrong and right vehicle is fairly small, you may want to ignore this and just explain the error with back up to the correct vehicle if you were ever audited. If you contact the CRA to correct this, typically it would not be a big deal, but sometimes adjustments do lead to audits, but not in general.

      Delete
  54. G'day,
    I provide services (not personal service corp) through a corporation where I work from home. I charge the corporation for a portion of my house expenses. How long do I need to keep the bills to support the claim? Would it be at least 6 years or something shorter? I keep all capital purchases indefinitely as well as bank statements and the like, I just find there is lots of paper I need to keep to support for things like gas, electricity, taxes, water, etc etc. Does CRA allow for something similar to cars for home offices, that is the 54 cents per mile with no need to keep all the bills just a log.

    Thanks.

    ReplyDelete
    Replies
    1. Hi Anon

      Yes, unfortunately 6 years. Considering your returns are statute barred after 3 years in most cases, this seems excessive, but that is the answer

      Delete
  55. I have been asked to act as advisor for an elderly gentleman who also told me that he transferred his Florida condo to his son 20 years ago and never paid or declared capital gains. The son is reselling and proposes to use the 18 year ago value as his tax base. Does this raise any issues for either of them that we should be concerned about or is it all 'ancient history'?

    ReplyDelete
    Replies
    1. Hi Anon:

      There is no thing such as "ancient history" for the CRA. Technically the gentleman should have reported the gain when he gifted the property and technically he should probably do a VDP for it still. That is all I can tell u on a blog, the correct technical answer.

      The son should use the value at the time of the gift, I cant say if it will raise a red flag or not.

      Delete
  56. have a quick question. I have got an audit letter in the mail to verify and provide recipts for T2200 claim. Can I provide a copy of the recipits or do they have to be originals?

    ReplyDelete
  57. Anon and frustratedFebruary 7, 2014 at 3:02 PM

    Have a co-worker, who for 10 years claimed as a single mother, when in fact lived common law with their father. She has been subjected to an audit, and owes a very substantial amount of money to CRA. She is now bragging around the office that instead of paying it back, she intends to file for bankruptcy which will clear her of all of her debts because she cannot afford he payments CRA is requesting. She knowingly collected more than she should have from child tax, gst, etc and now can just clear herself from having to pay it back? I am so bothered by this. Does it really work like that?

    ReplyDelete
    Replies
    1. Hi Anon and Frustrated,

      It is not always that simple, bankruptcy is a complicated area to itself and something the average person rather avoid due to the lasting consequences.That being said, I have seen tax liabilities reduced or eliminated in various scenarios from settlements to bankruptcy.

      Delete
    2. Thanks for the insight ... I am just surprised that she can commit fraud, brag about it at work and potentially clear that debt, walking away unscathed. I certainly wouldn't want to be in her shoes! Appreciate your reply.

      Delete
  58. Hello Mark,

    I own a couple of properties in Fort McMurray, AB and rent them annually. Each year, we chose to claim the northern allowance on each of the properties. When our tenants move in, we tell them that we claim it and because only one person can claim this allowance, they are not able to. We've been challenged several times now. We claim every penny we make from the rentals and provide receipts to each tenant. This year one person is claiming that it is their decision on who claims this allowance for the property he is living in. Any advice? Is it the landlords decision to claim or not claim? For the last 6 years that I've been renting properties, it was my understanding that it was my decision to claim it or not. Thanks in advance for your response.

    ReplyDelete
    Replies
    1. Hi Anon

      I am sorry, as someone who lives in Ontario, I don't even know what the northern allowance is.

      Delete
  59. Mark
    I have a large(ish) outstanding debt with the CRA for my personal taxes. I have made an arrangement with the collection agent to make monthly payments. They of course asked me to pay it all within 6 months, but that is not possible. My hope is that by making the agreed to payments I will stay in good with the collecting agent. I have 1 asset that they don't know about, a vintage car that my Father left me. It is worth a decent amount, probably enough to pay off my bill, but I can't bear to sell it for obvious reasons. My question is, if I transfer it over to my common law wife, will it be safe? Or will they see that i just did it to avoid having it seized and take it anyway and auction it off for 20 cents on the dollar?

    ReplyDelete
    Replies
    1. Hi Anon:

      I don't provide personal tax planning advice on this blog, especially advice to transfer assets to avoid tax. That being said, you need to understand there are fraudulent conveyance rules that are set up to prevent what you are contemplating. I am not a bankruptcy expert and cannot and will not comment on your plan. Finally, it is my experience if you make consistent payments, the CRA will extend the payment period, I would try that first and if that does not work, maybe have a consultation with a lawyer.

      Delete
  60. Hi Mark,
    Can home daycares claim landscaping maintenance costs? CRA said not to include the backyard in the business use of home calculation and I cannot find anything in the tax act any longer for claiming landscaping maintenance (lawn care or lawnmower, repair/repave pot holes in driveway, etc).
    Thanks

    ReplyDelete
    Replies
    1. Hi Anon

      Speak to your accountant. He or she may say to claim a percentage of those costs equal to the percentage of your home u claim for business, but they will know the facts of your business. I will not provide you a definitive answer.

      Delete
  61. Hi
    I am 60 years old and had a small restaurant for about 10 years. In 2012, I was selected for an Income tax audit for 2010-2011. Everything was fine, no significant mistakes, no adjustments, this was the only audit. I sold the business in 2013. I want to go back to my birth country to live for 5 years, sort of early retirement. What is my chance of being audited again? I do not want to come back to Canada just for an audit. What are my options?

    ReplyDelete
    Replies
    1. Hi Anon

      I would not put my retirement plans on hold for fear of an audit. Your chances are probably low to be audited again if you had a clean audit. Also, if you sold shares, the purchaser may deal with this, even if you have liability based on the sale agreement. U could also have your accountant deal with this on your behalf, but why worry about something that may not happen and even if you are audited, at worst case you come back to meet the auditor.

      You have a larger issue I dont think you have considered. If you leave Canada for 5 years on a full time basis, the CRA will probably deem you a non resident, so you will have deemed disposition issues upon leaving Cda and lose your health care. You need to speak to your accountant or if you dont have one, hire one to consult with your regarding your retirement plans and the income tax consequences.

      Delete
    2. Hi Mark. Great blog.

      As a follow up to your comment, I am considering retirement outside of Canada (not USA where there are lots of blogs etc. on the subject). Destination might be Europe (Malta may be the place). Do you specialize in this area and can you consult on my retirement plans and the income tax consequences in Canada. Not asking for the future domicile taxation, only how best to prepare my departure from Canada and by tax obligations during non-residency. I am not in Toronto but can you provide this service long distance or do I need face to face meeting. If it will not work with you, how do I ensure an accountant is competent in this area. My situations is simple as for income sources and assets; gov and work pensions, RRSPs, a house which will consider selling and investments at the bank. What cost should I anticipate for this type of consultation? Thank you in advance for your comments. Ret.

      Could not find this topic specifically in the index but somehow found your last comment here.

      Delete
    3. Hi Anon:

      Unfortunately, you could not find the topic in the index, because it has been on my "to write a blog about list" for a while and I have just not got around to it. Send me an email to one of the two emails in the contact me section at the top right hand side of the blog and I can discuss the consultation or right accountant issue.

      Delete
  62. I am now considered common law with my boyfriend as we have been living together for more than 12 months. Do I just tick the common law box on my tax return or is there any other paperwork that also needs to be completed?

    ReplyDelete
    Replies
    1. Hi Anon

      That's it, just tick the box. However, your returns will now be interrelated as far as any tax credits, deductions and claims

      Delete
    2. I'm in a similar situation to the person above. So I don't have to fill out and submit an RC65 form?

      Delete
    3. Hi Angela

      Should you file the form, probably. Have I ever seen anyone do it, not that I recall. If you have kids and the various related benefits, it may be useful to file. If you do not have kids,, I would just note the change on your actual return by changing your status to common law.

      Delete
  63. Mark,

    I have a question in regards to business use of home. I am a commissioned salesperson. I have no 'business' with an office that I can or do use. My home is it, and I am full time (actually, a workaholic). I claim what I feel is fair of the home, but really don't want to trigger an audit (while I feel I am justified, an audit sounds painful). Is there a 'magic percentage' that they will allow, without it triggering an audit?

    Thanks for your time.

    ReplyDelete
    Replies
    1. Hi Anon

      There is no magic number, the claim should be based on the actual work space in sq ft as a percentage of the whole house.

      Realistically, I would say for most homes, the true office space is maybe 5 to 10% of the house at max. I usually put my foot down at 15% use when a client wants to push it.

      Delete
    2. Merci for your time. :) The blog is quite useful by the way. Not every question is something that relates to me, but your answers are great to read.

      Delete
  64. Awesome information on your blog, Mark. Thank you.
    My 18 yr old son worked all last year and received a T4. He also did some work as a subcontractor and was paid by check. He thinks that he won't report this money because it was not his regular job and the CRA won't know. I told him that the CRA will cross reference from the guy that paid by check and claimed him as a business expense to him and he will need to pay the taxes. My son was told that CRA will only find out if they audit one or the other of the parties involved. We both know that we are supposed to report this bit he wants to gamble.
    Who is correct?
    Thanks in advance.

    ReplyDelete
    Replies
    1. Hi Shane

      Technically your son is committing tax evasion, so not the best way to start as a taxpayer and I would urge him to report the income properly. However, if he does not, the CRA would most likely only find out if they audit the company that paid him, although some industries such as real estate must file information on contractors paid.

      Delete
    2. All companies in the construction industry must file a T5018 which lists all their subs and amounts paid to them.

      Delete
  65. Hi Mark,
    My brother told me that he just filed taxes from 2008 - 2014 this year and he is due a smallish refund for each. I told him there is no way cra will pay a 5 or 6 year refund. Am I correct?

    ReplyDelete
    Replies
    1. Hi Anon

      The limitation is 3 years, however, the CRA has the discretion to go back 10 years, so he may get the refund or he may not, but they typically do pay more than the 3 years

      Delete
  66. Hello Mark,
    Thanks for your continued support of this blog.

    Our daughter (20) just moved to Switzerland for a one year internship as an architect.
    She is going to make about $1000/month. Her living expenses are quite a bit higher than that though.
    If she stays registered in Canada, can the living expense offset the income in that case?
    If she registered in Switzerland, at what point will she loose medicare etc.
    P.S.: we are dual citizens...

    ReplyDelete
    Replies
    1. Hi Anon

      You will have to check with ur provincial Medicare provider there are very specific rules, exemptions and physical presence tests.

      As for living expenses they r typically not deductible however she may qualify for a remote board and lodging credit however not sure off the top of my head

      Delete
  67. I am owed a lot of retroactive child support by my ex who is claiming not to be working. I have discovered several offshore companies that he claimed to work for are really his. He is now claiming to be fired from one of these and unemployed while he is actually working for a well known Canadian company in a Canadian city. This mess is headed to court - again - he doesn't know all I know. I would love to tell Revenue Canada because he's evading taxes as well but I don't want to if they get their money first. I could use their help compelling disclosure from the offshore country and the current employer but it's no good to have them take my children's money before I can get it. What comes first - Child support or taxes?
    Susan

    ReplyDelete
    Replies
    1. Hi Susan:

      I dont know, that is a family law question, you need to ask your lawyer. You should also speak to them about whether you can leverage what you know about your ex's actions or whether it would be self defeating.

      Delete
  68. Hello,

    I am a small business owner (corporation) and am filing my taxes myself this year. I filled out my income statement based on the most current information I had at the time of filing. As in, I had not yet received all invoices from my suppliers so I based the numbers on quotes that I had been previously given. Now I have received up to date invoices and they are different than the numbers I used to file my taxes. How do I correct this? Do I need to inform the CRA? Do I fix it when I do my taxes next year?

    Another quick question. Is the CRA likely to target corporations for an audit if they are very small in scale? My revenue is only about $40k/year. Do they typically target larger scale businesses?

    Bill

    ReplyDelete
    Replies
    1. Hi Bill:

      The correct treatment is to file amended tax returns and financials. Based on the fact you have minimal income, I would suggest many accountants would say the practical approach would be to adjust next year. The CRA may audit smaller businesses, however, they tend to target large businesses.

      Delete
  69. Hi,

    Thanks so much for the help, this is a really great resource.

    This is my third consecutive year that I have filed losses for my corporation (only about $2-3k each year). Does this increase my chances for an audit?

    The business is quite small and I do not claim many expenses, do not make charitable/political contributions, and do not pay myself very much from it. It's a fairly simple tax return.

    Thank you,

    ReplyDelete
    Replies
    1. Hi Anon

      typically losses of that size would not generate an audit, not enough for the CRA to gain by auditing. However, I cannot guarantee that.

      Delete
  70. Given the end of your busy season, hope that you are getting out and enjoying your golf.
    I was wondering if over the last 6~12 months if you have seen in your practice a common theme of industries or tax issues that have been subject to audit and if so what would they be.

    Thanks.

    ReplyDelete
    Replies
    1. Hi Anon:

      Unfortunately I have been too busy with December year ends due in June to golf that much, but I have got a few games in and I am hoping starting in July to get many more.

      Great question. What I have seen is CRA and EHT trying to make contractors employees and the audit of self employment expenses.

      Delete
    2. Thanks for your quick response and sorry to hear that you have not been able to enjoy the nice weather as much as you should now that it has arrived.

      Is there a specific industry of contractors (for example construction trades) or types of contractors (for example work from client office) they are going after or is it across the board? With respect to self employment expenses again is it specific (home office) or is it looking at all the expenses?

      Again thanks for your help.

      Delete
    3. Hi Anon

      For the contractors, it has been across the board, however, my sample is too small to not mean they are not going after IT or real estate contractors more specifically.

      For self employment, it is wages to family, advertising and promo, auto, home office and cell and internet where they feel large personal use.

      Delete
  71. Hi Mark, I am owner of a small construction business (incorporated). One of my subcontractors has not paid taxes on his earnings, so the CRA tells me that now my company is required to pay his past taxes. And deduct taxes from any future cheques to that person. Is this legal? Can my company be responsible for my subcontractors unpaid taxes?

    Thanks
    Mike

    ReplyDelete
    Replies
    1. Hi Mike:

      You need to first speak to your accountant to determine if you want to fight the assessment. In the construction industry, subs are typically truly contractors, unless you essentially use them full time. This is often a contentious issue with the CRA.

      I am not sure if by taxes you mean CPP & EI and any related penalties and interest. If yes, than the answer is yes, if the CRA has assessed the contractor as an employee and you do not wish to fight them on that determination.

      If the CRA is going after you for the contractors income taxes, than that would be unusual.

      Delete
  72. Hello Mark,

    CRA sent me a letter stating that my company is must repay all past unpaid taxes by this subcontractor (from all cheques from my company written to him). They also want me to withhold taxes(40%) from all future cheques that will be paid to this contractor. All this because CRA seems to not be able to collect any taxes from him for past 20 years, because as he told me "he is a free, original, natural man created by God of nature & is not a subject to CRA's Tax Scheme". It seems like they can not touch him, so they try with my company. In any case, do they have the right to make my company liable for all his past unpaid taxes (from all my cheques to him) & his future taxes? Is this legal? Thank you for all your help Mark.

    Mike

    ReplyDelete
    Replies
    1. Hi Mike

      For employees the CRA can issue garnishments. Speak to your accountant who is more familiar with the details of this situation to scope it out properly.

      Delete
  73. Hi Mark,

    My son lied about going to college and when filing tax return I unknowingly put a fake number as a transfer for his tuition fee. I've only recently just found out when I received a letter from CRA asking for the supporting documents, he couldn't give me one. So now I'm off by 1 document.

    What will happen now? Will the whole claim(I have 3 kids going to college) be disallowed or will the balance be adjusted for the missing document?

    Thanks!

    ReplyDelete
    Replies
    1. Hi Anon:

      Provide the CRA the tuition receipts you have and they will typically just disallow the undocumented amount. Hopefully for you, they will not ask for any further details of the situation as this is a bit messy.

      Delete
  74. Hi mark, love your blog,
    I find ly really useful.

    I have a question for you. We have a business for long time then 2 years ago we close it down because is was out of work. Then we open a different business again 6 months after that.

    We were told is to use the same bussiness number . Which we decided to keep. So last year when we file out payroll we send it to general revenue. But I think we miss a payment. So they call me and said that I have an outstanding balance thwy give mw thwy name of the business and I realized it the old bussiness. They said thst I might of not close down payroll qhen I close the old bussiness and continue pay to the same one when I open up the new business. Now they want to send someone to look at my book.

    My question is: the people they are sending is that the audit? If it's what going to happen? What should u do now.

    She said someone will call me to ask me to set up a date with them but they haven't call me yet.

    I'm just worried.

    Thanks hope to hear from you soon
    Li da

    ReplyDelete
    Replies
    1. Hi Li

      I cant really answer, as I don't know all the facts. It appears it is a payroll review. They may just be coming to see what is going on with the two accounts as you have probably confused the CRA. However, it may turn into an audit if they are concerned with missing payments and how you have dealt with your payroll. Good luck.

      Delete
  75. Hi mark

    Thanks for the reply. They sis said I have an outstanding balance. Which I did pay them.
    I just have a few more questions.
    What do they look at when they come down and what should I do to prepare before they call me.
    Should I let my account talk to them?

    Very worried
    Thanks Li

    ReplyDelete
  76. Hi Mark
    My bank just sent me a notice that they are being requested by CRA to provide all of my banking information at my expense. I have worked at a hospital all my adult life with only T4- no business income. I have always paid my taxes. They are even requesting information from my maiden name from the 1970's. This seems to be about my adult son declaring bankruptcy last year. I have never been involved with his business. I have had the same job and bank for over thirty years and always paid taxes. Can they do this to me. I am now on a pension and cannot afford a lawyer.
    Worried
    DH

    ReplyDelete
    Replies
    1. Hi Anon

      What may be happening is that pursuant to subsection 160(1) of the Income Tax Act, where a tax debtor (like your son) transfers property to a person with whom the tax debtor does not deal at arm’s length (someone like you) there are situations the CRA can make you pay your sons tax debts.

      So my concern would be;did your son transfer you any property to try and conceal or protect from his creditors. If so, that could be an issue for you and you may need to engage a tax specialist or tax lawyer. If this has not occurred, I have no idea what is going on.

      Delete
  77. Hi Mark,

    I live in ontario and work as a sales rep for a company based out of Quebec. I'm often on the road or working from home. I moved to be more centrally location in my territory (southwestern ontario). Would I be eligible for moving expenses? I moved roughly 80km but I didnt move closer to a specific office, just more central to my territory.

    Thanks.

    ReplyDelete
    Replies
    1. Hi Anon

      See this financial post article, does not look goo.

      http://business.financialpost.com/2012/01/07/tax-case-affects-eligibility-to-write-off-moving-expenses/

      Delete
  78. Hi Mark,

    I was wondering the following:

    Can the CRA mistakenly double count revenues when they make a tax audit on an individual or business? and tell you to pay more taxes for revenues that you never actually got?

    For example, let's say I have all my supporting documentation and provide it to the CRA if they request it for a tax audit. And let's say that within the documentation I have two copies of the same sales invoice placed in different folders. Is it possible that the CRA count the revenue twice and make me pay tax on income that I actually never incurred?

    Basically what I want to know is if, during a tax audit, duplicate supporting documentation in the hands of the CRA may cause them to mistakenly assume that you haven't declared some income.

    Thanks Mark

    ReplyDelete
    Replies
    1. Hi Anon,

      I would avoid providing duplicate invoices where possible to ensure u dont have any issues. However, should the CRA double count an invoice in error, it has been my experience you just have to show them their error and it will be fixed. But try to avoid any issue off the bat.

      Delete
  79. If a company is deducting source deductions off of employees payroll but not paying CRA the amounts owed -close to 100 thousand- already have been audited but company still can't pay how long will CRA allow company to go on without paying? What will happen come tax time when the employees tax amount was deducted but not paid?

    ReplyDelete
    Replies
    1. Hi Anon

      The CRA is usually fairly serious about this, so they will probably take some action sooner than later. The directors are personally liable for this tax. The employees will still get credit for amounts deducted.

      Delete
  80. Hi Mark,

    Kudos on replying to so many posts!

    Our company has been selected for an audit. This is OK as we have nothing to hide. I compiled the ledger, bank stmts, deposit books, invoices, etc...for the auditor. However the auditor is insisting that we reconcile our bank deposits to revenue reported on the tax return. This might be beyond my skill, isn't this something the auditor should do?

    The auditor also asked for the shareholder's personal bank stmts, credit card stmts, and a summary of their personal expenses from over 2 yrs ago. We have the bank stmts, but do not have the credit card stmts and have no idea how determine the personal expenses. Do we really have to dig all of this up? Any advice?

    ReplyDelete
    Replies
    1. Hi Anon:

      You really need to speak to your accountant or if you dont have one, engage one. I cant really answer without knowing your corporations details and what and how you report. These are not unusual requests, but sometimes they are excessive based on your situation. ie: do you have many deposits other than sales into your business bank accountant? If not, then the request should be discussed with the auditor. If you do have many deposits other than sales, it will be your responsibility to provide the summary.

      Delete
  81. Hey Mark,
    CRA asked me to provide information for my 2012 taxes for my automobile usage for employment.

    As this was 2 years ago, I do not have any receipts to provide backup, but I have all my bank statements available online. I also have a mileage log broken down to the day and what activity was done on each day.

    First question I have is regards to receipts, does the CRA ever allow supporting documents to be from a bank statement and not an actual response?

    Second question, I have claimed depreciation for two vehicles, I sold one mid year and purchased a second one. What supporting documents are needed to claim depreciation?

    Thanks,

    Tim

    ReplyDelete
    Replies
    1. Hi Tim

      It is great u have a log most people don't. The CRA lately seems to want actual receipts and they are not necessarily happy with just bank statements or visa slips. For the depreciation, you will need to show the purchase and sale documents

      Delete
  82. Hi Mark
    My question is regarding claiming Occupancy Cost in a Corporation - if you are a Home Based Business and have incorporated can you claim occupancy cost - percentage of applicable space or fixed amount? Is there a maximum? Can it be claimed even if the business is running at a loss (before the claim for occupancy expense)? I know in a sole proprietorship it cannot be claimed to further increase the loss, but can be carried forward. Kindly clarify rules as it relates to a Corporation. Thanks.
    Annette

    ReplyDelete
    Replies
    1. Yes u can claim home occupancy cost. The accepted percentage is based on sq ft used for corporate business purposes. There is no restriction

      Delete
  83. Hi mark, your advice is very useful. Thank for sharing all those information qith us.

    Anyway back to my story, i start my business at the end of 2012 to present. I got a call from cra they want to review my 2012 and 2013 pay roll.... they have give me all the information on all the documents that they want me to collect and set a appointment with them after. That also include cancel cheque. problem is I have been calculating all my pay roll instead of hiring a account to safe the cost.but gst and everything else been calculated by my account.

    My question is she I go to her office for the appointment or to my bussiness.

    Since my account doesn't do my payroll ahould I hire a tax advice to come with me to the appointment?

    Well this coat me any problems later on.

    Do u have any advice how I can be prepared for this in anyway.

    Thank you so much.
    Cindy

    ReplyDelete
    Replies
    1. Cindy

      Personally, I would have them come to my office as all your records are there. I would suggest that you meet with your accountant before hand and have them review the payroll information and help you prepare. They can then tell you whether they suggest they attend the audit or not.

      Delete
  84. Thanks Mark for your advice.

    I have talk to my account. She doesn't want to attend the app with me. Do you think I should hire another account t to help me go through this or should I just talk to the cra alone. I'm just not sure what kind of questions they would ask me. Do you think it benefits me more if I hire another account to be there with me because they would know more then me.

    Thanks
    cindy

    ReplyDelete
    Replies
    1. Cindy, most clients meet the CRA without their accountant. If yours prepares you properly, you probably dont need to hire one to be with you, however, only you can answer that based on your comfort.

      Delete
  85. Thank you so much for your advice. Very appreciated.

    Cindy

    ReplyDelete
  86. Hello Mark

    I left a corporate job in November of 2012 where I was making $100+k per year to go out on my own. Over the last two years I haven't drawn any salary & have been living off my savings as we grow our business out. I haven't completed tax returns for 2012 or 2013 & I'm wondering if I'm setting myself up for an audit by going from a significant salaried income to one where I am literally drawing less then $30k a year in salary?

    ReplyDelete
    Replies
    1. Hi Anon:

      I would suggest you are not setting yourself up for an audit by starting a business and having a reduced income and if you were audited, it is a valid reason. You are setting yourself for trouble by not filing your returns on time. You should complete and file your returns ASAP or the CRA will start sending you some nasty demand letters.

      Delete
  87. Hi Mark, An off topic question. My CGA in BC had filed my last years' T2 (Dec.31,2013) but later changed the balance sheet for some classification issues. no effect on income statement or taxes payable. He did not refile the GIFI. Should he have refiled because I am changing the accountant this year and opening balance won't match if does not correct it. However, if he changes it, would i be audited? Again, changing would have no changes to income at all. Thanks.

    ReplyDelete
    Replies
    1. Hi Anon

      I would ask your new accountant what he/she wants to do. The correct and practical answers may differ, so get his/her opinion as they will be filing going forward.

      Delete
  88. Hi Mark,

    I have a few questions, and I would appreciate your expert response.

    I opened a TFSA and I transferred money from my checking/savings account to Investment close to $21K which fits my room. My brother from Canada also returned $5000 he owed me year 2014.

    Will CRA use T5 slip to question my income? So my investment look like with initial $100, and then I transferred $20K beginning year 2014. During the course of year 2014, I withdraw $15K and did more contributions so that by end 2014, it came back to 21K.

    I am worried CRA might question from where this kind of money comes from. I actually made around 18K gross year 2014. How

    Appreciate your reply.

    ReplyDelete
    Replies
    1. Hi Anon

      I am having trouble following what you did and it seems like you may have withdrawn and contributed in the same year which could be problematic depending upon the facts.

      Anyways, if you transfer money from an investment account, the CRA does not generally concern itself where the money came from, but that does not mean they will never do such.

      Delete
  89. The thing is a teller from RBC told me its better to have a TFSA and put money in there. I was not explained about the room constraints when do withdrawals. Result is I used the TFSA as a normal account and have few more transactions in there; maybe 2-3 on average a month.

    I heard they look for bank statements to find out?

    ReplyDelete
    Replies
    1. Taking advice from a teller at RBC is your first problem. I have nothing more to add then you may have overcontribution issues if you used the TFSA like a bank account. Don't do that in the future, you cannot re-contribute what you withdraw in a year until the next year, unless you have contribution room.

      Delete
  90. I started IT contracting - If my company earns X amount and i do not pay myself any money(payroll or dividend). Is my personal income 0 for tax purposes?

    I plan to defer taking out money or pay lil to my unemployed wife.......

    ReplyDelete
  91. Hi Anon

    If you leave all the income in the corp you have no personal income. However, you should speak to your accountant or engage one, as that may not be the best tax planning for a few reasons, including use of the low marginal tax rates and issues to whether your income is personal service business income or not. I strongly suggest u speak to an accountant to get the best remuneration strategy in place.

    ReplyDelete
  92. My employment expenses are being audited, I am a commissioned real estate sales person, but own the company. The CRA is quoting a case of an owner of a company and disallowing all employment expenses, (Morton Adler V the Queen) but he wasn't a commissioned sales person. Do you have any case law you can provide me that helps in my position back to CRA? I have filed a T2200 (and meet the requirements) and receive a T4 slip, which is all the CRA tells you is needed when you call their help line, but it is different when being audited!

    ReplyDelete
    Replies
    1. Hi Anon

      I don't know of a case off hand, but that does not mean there is not one applicable to your situation. Have your accountant do a search.

      Delete
  93. Hi,

    I am just wondering to show credit card statements to claim reasonable gas & food expenses. Also my daughter earns $400/month she will be getting a T4 A so can she also claim her personal expenses through credit card statements.

    ReplyDelete
    Replies
    1. Hi Anon

      The CRA typically likes to see the actual receipts as back up to the credit card. You should attach the receipts to the statement. For meals, you also need to note who you took for dinner on the receipt and why it was a business expense.

      Delete
  94. Hi Mark. I got great info from this site. I have several questions regarding my tax filing for 2014. I've been a financial planner employed and on salary for a number of years. In 2014, I changed employer and my income was based on commission. My employer provided me with T2200. My income for 2014 has doubled what I was making on salary. I understand the threshold for home office is 15% and auto expense is about 70%, but what about entertainment and meals? Peers in my role expense on seminars and advertising etc. I don't advertise or hold seminar. I take clients out and have many prospect client meetings at restaurants and bars so naturally, my entertainment and meal expense is very high. I also provide gift card for referrals which is $100 a gift card. And this was how I was able to drive my business in 2014. I do not want to trigger an audit so I was wondering if there would be red flags for 1. Double of the income from all salaried to commissioned. 2. Expense deducted in 2014 as I never deducted in the past on salary and 3. The higher expense of entertainment /meals/gift card for referral.

    Would you recommend anyone in my positron to file income tax on my own using tax software or seek an accountant? If accountant, are you talking on new clients?

    ReplyDelete
    Replies
    1. Hi Anon

      In general I tell people they may need an accountant where they are self employed, on commission have rental income or significant investment income. Since you fall into this category, I would suggest you probably should use an accountant, however, as you are a financial planner, you may be able to do it yourself using software. I dont take on personal tax clients anymore. If you send me an email, (see main page) I can refer you someone at my firm or another accountant.

      Delete
  95. Hi,

    A couple questions regarding self employment. I ran a small dayhome in 2014 and this is my first year claiming expenses. My income was very small, under $5000 for the year. The expenses I'm claiming bring my income down to $0. Is this going to be a red flag for an audit?

    ReplyDelete
    Replies
    1. HI Anon

      Assuming your expenses are deductible, I would suggest no for the first year of a business. However, I cannot provide any guarantees you will not be audited.

      Delete
  96. Hi Mark,

    My sister and her husband are both self-employed artists. She uses her car to buy supplies etc. mostly for him. The car is in her name as her husband does not drive. Can he claim any of her car expenses?

    ReplyDelete
    Replies
    1. Sort of a grey area and some accountants make a notional claim and other don't.

      Delete
  97. Hi Mark,

    My mother left me and my brother a home after she passed away. I took my name of the title and left the whole thing to my brother and he donated this house to my nephew however our understanding is that my nephew pay me 300k. Will this transaction be a problem case with CRA if suddenly this amount appears in my account transferred from my nephew as a gift? Thank you

    ReplyDelete
    Replies
    1. Hi Anon

      There could be income tax issues with this whole series of transactions depending upon the full facts. You should consult an accountant, i do not provide personal tax planning advice on this blog.

      Delete
  98. Hi Mark, if my business has mostly online transactions is the full receipt from the company enough? Unfortunately my credit card company has "lost" my statements from 2012 due to a company merger...are the statements absolutely necessary? Do I just need to prove I owned those cards somehow?

    ReplyDelete
    Replies
    1. Hi Anon

      Not sure, what I do know is the CRA often feels the credit card statement is not enough and wants to see back up receipts, so if you have those receipts that may be sufficient, but may depend upon auditor.

      Delete
  99. Does a corporation have to claim it's expenses?

    Lets say a corporation makes $10,000 a year and spends $2500. Does the corporation have to tell the CRA they spent $2500, if they wanted to pay as much tax as possible?

    I'm assuming that when the balance sheet cash-on-hand says $7500, the CRA will come knocking asking where the money went?

    ReplyDelete