In selecting who to audit, CRA uses their large database to compare your tax return with others in similar businesses.  If your claims fit into the range of normal, you will likely be passed over.  However, each year a certain number of people are chosen randomly.

Being audited is stressful, but it doesn’t have to be.  Just keep records of all your expense claims, be reasonable with vehicle, meal and office at home claims and report all income.  Here are a few specific points: 

1. Vehicle Expense Claims – If you are claiming fuel, repairs and insurance expenses, CRA requires that you keep a log of your business related trips.  However, as of 2009, if you have previously kept a full 12 month log book, CRA only requires you to keep a sample period of 3 months in order to justify your claim.  Choose three typical months and remember to record both the distance and purpose of the trip. For a complete explanation see http://www.cra-arc.gc.ca/whtsnw/lgbk-eng.html.

2. Meal Expense Claims – This is one of the most questioned expense claims.  CRA requires that you record the client present, and if you are audited, they may contact that person to confirm that it was a business meeting.  I highly recommend recording the client’s name on the receipt, CRA also appreciates their phone number.  For travel and accommodation claims, always record the purpose of the business trip.

3. Non business related deposits into your business and personal accounts such as gifts and inheritances - In the case of an audit, CRA may examine both your business and personal bank accounts for any unreported incomes, so be sure to have documentation for all money sources.  For example, if you are gifted $500 from a relative, have the money deposited by cheque, not cash.  CRA may also want to see Uncle Jim’s bank records showing the money leaving his account.

4. If you are a contractor, be aware that your business customers will be claiming payment to you as their expense.  Therefore, if they are audited and your name comes up, CRA may be checking to see that you have reported this income.