The Canada Revenue Agency (CRA) audit is scary for any business, and the best way to handle a CRA audit is to avoid one in the first place! Despite your best efforts, if the CRA auditor does happen to come knocking on your door, you should be well-equipped to navigate the process and come out unscathed. For this, you need to understand why and how CRA audits are conducted. The primary reason the CRA conducts audits on unsuspecting businesses is to ensure they are compliant with federal laws and are punctual and honest with their tax payments, including the Goods and Services Tax (GST) and Harmonized Sales Tax (HST). So, the question arises, what exactly triggers the CRA’s GST/HST audit?
Why Does the CRA Conduct GST/HST Audits?
A GST/HST audit is done to see if your business has been collecting, reporting, and remitting the correct amount of GST/HST. Suspicions about the same are raised when a business either underreports its GST/HST, claims a higher input tax credit (ITC), or misclassifies its taxable and non-taxable sales.
Another red flag is if a small business fails to charge or remit GST/HST, either by accident or design. Many small businesses are unaware that they are liable to register for GST once their worldwide taxable supplies exceed $30,000 in a single calendar quarter and over the last four consecutive calendar quarters. Failure to do so can act as an invitation to a CRA audit.
Tips To Reduce Risk Of GST/HST Audit
Businesses where cash transactions are common, such as construction, restaurants, retail, and logistics, are more susceptible to accounting mistakes and underreporting taxes. The CRA compares your reported figures to the industry benchmarks, and any significant discrepancies can lead to a GST/HST audit. By being aware of the CRA’s industry standards, such businesses can ensure their numbers align with them. It is also essential to save all documentary proof, including receipts for cash sales and invoices to clients. If you run a cash-based business, make it a habit to regularly monitor and reconcile your books of accounts with your bank statements and cash registers.
Here are a few tips that can help ease your stress in case of a GST/HST audit:
Keep Input Tax Credit Claims Minimal and in Line with Industry Trends
Some businesses, such as manufacturing and construction, inherently have high input costs, which is why they frequently claim ITCs. If the ITC claims are in line with industry trends, it may not raise CRA’s suspicion, but anything out of context will. The CRA looks for patterns, and any inflated ITCs raise suspicion of fraudulent claims or mistakes and gaps in records.
If there is a high ITC claim in a month, ensure you keep detailed documentation of those purchases and have a detailed explanation to prove it is a business expense. Avoid claiming ITC on personal expenses. For instance, the purchase of a camera by a soap manufacturer may be difficult to justify as a business expense.
Ensure Sales Figures in GST/HST Filings and Income Tax Returns Align
The CRA cross-checks your GST/HST returns with your income tax filings. Any discrepancies in sales figures, such as underreporting of income or overstated input tax credits, could be taken as a sign of poor bookkeeping or purposeful tax evasion, triggering an audit.
Make sure you regularly reconcile all sales figures in your GST/HST returns and income tax returns. Using good accounting software to maintain consistent records across all books of accounts is a good way to ensure this.
Avoid Sudden Changes in Revenues and Expenses That Could Attract Suspicion
The CRA is wary of inconsistencies in financial data. Sudden dips in sales or spikes in ITC claims, if not corresponding with business revenue figures, could be taken to be a sign of intentional errors or incorrect reporting to conceal accurate sales figures. Inflated ITC claims could also suggest personal expenses being claimed as business expenses, which in turn could suggest tampering with invoices. Even sudden losses without a reasonable explanation can be a trigger for a CRA audit.
So, make it a point to accurately document the reasons for any sudden changes in revenue, such as winning a new contract or a business downturn due to uncontrollable events. Also, save every receipt, invoice, contract, agreement, and any other document related to your small business, and only claim ITCs for purchases related to your business. Most importantly, ensure you are collecting the correct HST rate, and your reported figures match all filings and returns.
File and Pay GST/HST Accurately and Timely
Errors, accidental or intentional, are frowned upon by the CRA as they suggest poor financial management and a lack of compliance. Similarly, delays in filing GST/HST returns can lead to penalties. To avoid this, ensure you set reminders for GST filing deadlines and check your returns twice before submitting them to the CRA.
Conduct an Internal Audit
The most effective way to tackle a CRA GST/HST audit is to think like a CRA auditor and logically understand what would be required of you, as a small business, in the event of an audit.
To cross-check financial information, you would need access to all bank statements, ledgers, and other books of accounts. However, bank statements alone do not prove expenses. You would have to supplement them with sales and purchase invoices, as well as agreements for any capital assets that are leased, sold, or bought. You would also need details of the GST/HST collected and remitted to the CRA, along with the ITC claimed.
An auditor would match all figures with bank statements, documents, returns, and claims to ensure they are genuine.
The absence of any of the above points usually leads to a CRA audit. Remembering these triggers and having all necessary documentation and explanations ready can help you avoid an audit. While all these steps can help reduce the chances of a CRA audit, you can still face one, nevertheless. However, the above practices can keep you well-prepared and make the entire ordeal less stressful.
Contact Glenn Graydon Wright LLP in Oakville to Help You with GST/HST Filing and CRA Audit
A tax expert is well-versed in the CRA’s audit process. They can communicate with the CRA on your behalf and draft proper responses with the required documentation and explanation acceptable to the CRA. At Glenn Graydon Wright LLP, our accountants and tax consultants can provide services such as GST filing, internal audits, and representation in CRA audits. To learn more about how Glenn Graydon Wright LLP can provide you with the best accounting and tax audit expertise, contact us today at 905-845-6633, or connect with us online, to schedule an initial consultation.