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 2

The next tip for business owners is to ensure the business pays for its own expenses and the owners pay for there own expenses. As soon as you cross that line it is up to CRA scrutiny as to what happened. Instead of paying for expenses for your company, simply write a cheque to the company and let the company pay its own expenses. Same thing on the other side, don’t let the company pay for the owner’s personal expenses.

The next tip is to always make notes on your transactions. This is imperative as audits always happen years after the fiscal year(s) being audited. For example you may get audited in 2012 for the year 2009 and if they find things in 2009 they may go back further and audit years prior to 2009. For many people it is hard to remember what happened a couple months ago, never mind years ago. Notes in your bookkeeping and on source documents always help. Better to make a note and not use it, instead of not having a note when you need it.

Another tip is to ensure that vehicles are owned and expensed by the correct entity. If you are a shareholder of the corporation and you own a vehicle that is used for the business then you should not just have the corporation pay for your vehicle expenses. If you own the vehicle personally then you should track your mileage used for business and have the company reimburse you based on that mileage.(Currently acceptable: 52cents per km for the first 5,000 km and 45 cents thereafter) The reimbursement is an expense for the company, but not income to you. If you do it any other way an audit could cause you reassessment for personal use of vehicle expenses or the denial of company vehicle expenses.

In the case where the corporation owns the vehicle, then it is best to own your own vehicle personally to separate the 2. Simply use the business vehicle for business and the personal vehicle for personal. Many business owners, however, only own 1 vehicle that is used both for the business and them personally. In this case a mileage log should be kept to determine business vs. personal usage. Another thing to remember about vehicle expense deductions is that whoever owns the vehicle, should pay for the expenses. If you own the vehicle, you will either want to get reimbursed for business mileage or you may want to sell the vehicle to the business so it can pay for the expenses. Either way, if you use the vehicle for both personal and business use, you should keep a mileage log to determine personal vs. business usage. Mileage logs do typically stand up in audits.