Top 10 CRA audit triggers to avoid

Red flags are not just in your personal life. They can also appear in the tax returns and other documents you submit to the Canada Revenue Agency (CRA). If the CRA spots them, these red flags can trigger an audit with serious legal and financial consequences for you or your business.

In this article, we will tackle the top 10 CRA audit triggers to avoid, so you can spot warning signs early and deal with them before they escalate. For complex situations, consider speaking with a tax lawyer who practices in your province.

What are the top 10 CRA audit triggers to avoid?

Here’s a summary of the top 10 CRA audit triggers to avoid for individuals or corporations:

• Failing to file an income tax return
• Lacking information in a tax return
• Discrepancies in tax returns vs. information slips
• Unreasonable tax credits or deductions
• Shady tax shelters
• Failure to report foreign assets or investments
• Discrepancies between income and industry
• High-risk individuals and corporations
• History of previous tax law violations
• Tips from informants

We will discuss these triggers below, including ways to reduce your audit risk. You can also use our table of contents to jump to any section.

Watch this video to see how far back the CRA can audit you and what triggers these reviews:

If you are facing a CRA review, you can speak with a Lexpert‐ranked best corporate tax lawyer in Canada for advice on how to avoid CRA audit triggers.

1. Failing to file an income tax return

Many CRA audit triggers relate to how you file your tax returns, including late filings, failure to file, and incorrect information. It’s important to take your returns seriously, file them on time, and know how to complete them properly.

How to avoid this CRA audit trigger

• get the basics of filing tax returns: if you run a business, make sure you understand the basic rules for filing corporate tax returns
• learn about your tax season: at the very least, you should know the specific tax deadlines that apply to you or your business and file on time
• file your return: even if you have missed the deadline, you can still show good faith by filing a late return as soon as possible

2. Lacking information in a tax return

Missing a small item in your return might be treated as simple negligence. But when important items are missing (for example, key receipts), the CRA may treat that as a trigger for an audit, especially if the missing information affects how your tax owing is calculated.

How to avoid this CRA audit trigger

• correct data in your return: key details such as information slips, receipts, and deductions should be entered accurately in your return
• get professional help: if your situation is complex, consider working with an accountant or tax lawyer to prepare accurate returns
• request a change to your return: if you discover an error or a missed entry after filing, you can still file a request to adjust your return

See what other CRA tax audit focus areas are and how to reduce the audit risk for your business:

Reach out to any of the Lexpert-ranked best law firms for corporate tax in Canada for more details on how to avoid CRA tax audits.

3. Discrepancies in tax returns vs. information slips

Another common audit trigger is obvious discrepancies between your tax return and your information slips (such as T‐slips) or your GST returns. In some cases, you can correct these by filing a request to change your return.

How to avoid this CRA audit trigger

• learn key filing rules: if you a run a business, it’s vital to know when and where to pay corporate income tax to the CRA
• use certified software: to reduce manual entry errors, you or your advisor can use certified tax software that auto‐fills many details in your return
• keep documents for a while: preserve all supporting documents for at least six years, so you can respond to CRA audit queries and avoid penalties

4. Unreasonable tax credits or deductions

Many taxpayers try to reduce their tax bill through legal tax planning. But when claims are excessive and cross the line into tax evasion, they can quickly attract CRA audit attention.

One tax evasion scheme that you should avoid is claiming excessive or unreasonable credits, deductions, or write-offs for your business. Examples of these are:

• home office deductions of more than 10%
• vehicle deductions of more than 75%
• a sudden increase of credits or deductions compared to last year

How to avoid this CRA audit trigger

You must file truthful returns. Do not underreport income or overstate the deductions or credits you claim.

Read next: Tax evasion vs. tax avoidance: How CRA draws the line

5. Shady tax shelters

Tax shelters (e.g., RRSPs, TFSAs) are also valid forms of tax avoidance. However, the CRA says that you may be penalized administratively and/or criminally if the following are found after an audit:

• using false or misleading information in respect to a tax shelter
• omitting or inappropriate use of the tax shelter identification number

How to avoid this CRA audit trigger

• properly use and declare the tax shelter identification number when necessary
• avoid using fake non-profit organizations as tax shelters or donating to non-existent non-profits

6. Failure to report foreign assets or investments

After a CRA audit, you may also be penalized for any specified foreign property (SFP) that you did not declare. These properties include any foreign shares, real estate, bank accounts, and mutual funds.

How to avoid this CRA audit trigger

• report specified foreign property on Form T1135 in a timely way if its total cost amount exceeds $100,000
• get a cross-border lawyer who can help you report foreign assets properly and address double taxation issues.

7. Discrepancies between income and industry

CRA auditors can sometimes spot discrepancies by comparing your income with your industry, your location (which affects typical costs), and your reported expenses.

How to avoid this CRA audit trigger

If there are genuine reasons for a discrepancy (for example, a sudden business opportunity), be ready to explain them. Keep clear records such as receipts and bank statements so you can support your explanation if the CRA asks questions.

8. High-risk individuals and corporations

CRA audits are risk-based. Taxpayers are assessed as high, medium, or low risk for non‐compliance, and those in the high‐risk category are more likely to be selected for audit.

Here are some examples of these high-risk taxpayers for CRA audits:

• self-employed individuals: because the CRA does not receive information slips (e.g., T4 slips) about them, the CRA will most likely audit self-employed individuals to see if what they reported is true and correct
• independent contractors: similar to self-employed individuals, independent contractors are also prone to CRA audits not just because of the lack of third-party reporting, but also to confirm that they meet the CRA’s criteria for contractor status
• heavily cash-intensive businesses: these businesses, especially service-oriented businesses (e.g., restaurants), are high risk because of the large possibility of underdeclared cash income in their returns
• high-income professionals: these professionals may include medical professionals, construction contractors, or legal consultants, due to the possibility of using overstated business expenses or aggressive deductions

How to avoid this CRA audit trigger

You may not be able to change your work or industry, but you can file complete and accurate returns. If the CRA audits you, well‐kept records and honest reporting make the process much easier to navigate.

9. History of previous tax law violations

Your history with the CRA can also be basis for an audit. This includes:

• history of tax law violations
• CRA audits that resulted in adjustments
• pattern of non-compliance

How to avoid this CRA audit trigger

You reduce this risk by filing accurate returns from the start, so your name or business does not develop a record of non‐compliance with the CRA.

10. Tips from informants

Another potential trigger is tips that the CRA receives from the public, such as through its Leads Program. These tips are allegations, but they can still prompt an audit to confirm whether the information is accurate. If you are audited because of a lead, work with a tax professional or corporate tax lawyer to respond to CRA requests and explain your position.

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