Tips on Audit Proofing your Business Part 3

We’ve been discussing some great tips on helping audit proof your business.  In reality the majority of businesses in Canada get audited at some point, unless they are short term in nature. Even the short term businesses do sometimes get audited.  So the key is to not hope for an audit, but be prepared in the case you do get audited!

Being prepared for an audit means that you can prove all your transactions with back up documentation and that all flow of funds have good paper trail.  One of the things that CRA almost always looks at in an audit is to confirm deposits going into the Company are either reported as income or elsewhere.  If the deposits into the corporation do not match the income reported, you will have to prove where the other deposits came from.  If you cannot prove where these deposits came from CRA may just deem it as income to the company.  An example of this is shareholder loans.  If you loan funds to your company, keep a good paper trail for proof of the transaction(s).

Another major area that CRA audits is the Shareholder Loan Accounts of corporations.  This is the account that has both incoming and outgoing funds.  Every time you, as a shareholder or director, put funds into the Corporation this shows up in the shareholder loan account.  Every time you pull funds out of the corporation this typically shows up in the shareholder account, until the Corporation’s year end where it may be cleared to dividends, wages etc.  If you cannot document that the payments to you are payments of shareholder loan then CRA could deem it as personal income to you the shareholder.  This is especially the case if they find the shareholder balance to be negative, meaning that you owe the corporation.  You are typically not allowed to owe the corporation any funds for more than 6 months.  In the past many people have set up loans from their corps with interest which used to stand up, but today CRA will just deem it as income to the shareholder or director! 

Tips on Audit Proofing your Business Part 1

I’ve been asked by people before if they could audit proof their business. That question is interesting as no business is audit proof in that there is always a great chance that CRA will audit your business. However, that being said, there are many things you can do to keep your business from being reassessed after an audit. The key here is that if CRA finds things wrong when you are first audited, then you may be audited again in future years. If they don’t find any issues the first time they audit the company, then they may never come back as they can see the company has proper backup documentation and paper trail and accurate reports.

Many business audits start with either a payroll or GST audit. Payroll audits may be simple trust examinations, where they just want to look at who the company is paying, and if all the remittances are being made to CRA. It could also be a full payroll audit that would look at much more, such as did any employees receive taxable benefits, did the owners receive benefits, are the shareholder loan accounts accurate and much more. GST audits on the other hand will look at all your income and expenses that incur GST and determine if you reported your GST accurately. Any of these audits can lead to a full audit if the auditor determines that one may be needed. In a full audit they may go through your entire business in great detail, not something any business would want!

As discussed in my prior blogs, you do not have to speak with CRA, you can request everything in writing and in the case of an audit you can authorize a representative, such as an accountant, to handle your audit. If you are ever going to send any documentation to CRA, do not send originals!!! Always send copies, because if they lose any of your documentation (hey have lost people’s documentation before!) then the onus is on you to still prove the numbers you reported on your tax returns. Now let’s get into some tips…

The first tip for audits is to never give CRA any of your printouts, handwritten papers, or any other personal documentation that may be mixed in with your business paperwork. Many people put notes and other things in their paperwork which can cause CRA to dig deeper to find more things to audit. Keep your notes and other documents to yourself. If you are audited, you should go through your documentation and pull out such documents.

More tips on my next blog!