CRA Audits - Where You Are Going to Get Ding'd

The letter that every business owner can't wait to open - You are Getting Audited by the CRA.  Not to fear.  Today I am going to give you a quick list of the common areas CRA will ding (AKA assess) you in an audit. This is not to say that you should start losing sleep over these items, but, you should think about how aggressive you want to be in your claims.  All of these items are guaranteed to be questioned in any CRA audit.


Meals and Entertainment
Billing the business for every single meal, every single day, may not be the right way to go.  As well, this expense is only 50% deductible, and this includes only a 50% deductibility for the GST that you paid on that meal/entertainment.  In general, meal and entertainment expenses should be incurred to earn business or property income.  Be reasonable and your reason will go a long way.

Automobile
If you are going to claim you drive your vehicle 100% for business, you will need an auto log to back that up.  In fact, you need an auto log for any claim that you make.   I know of a story of a small business that was audited; auditor came to their house to review the business auto claim of 100% for the business; looked in the work truck which housed two car seats for their young children; small business was assessed significantly as could no longer substantiate 100% business auto claim.  I will say this time and again - Just. Not. Worth. It.  

Technology is a wonderful friend for auto logs.  I use an app on my cell phone that tracks my business mileage.  Obviously, you have to remember to punch in your coordinates, but, get in the habit of every time you get in your car, you enter the date, your mileage, and purpose of the trip.  At the beginning of the year, you record your mileage, and at the end of the year, you record your mileage.  This will help with the calculation that is made as to the amount of business mileage you have driven during the year.  

Claiming 100% for auto is an automatic red flag.  Unless you have a vehicle for business and a separate vehicle for personal activities, you MIGHT be able to substantiate the 100% claim, but that is a big assumption to make.  Be smart.  Be moderate.  Be reasonable.

Office in Home
Any time I tell somebody that I have my own business, the automatic statement is "You can write everything off".  Ummmm...no.  This is not the case, and especially with business-use-of-home expenses. Before you start deducting your office in home expenses, you need to meet ONE of the following conditions:

• it is your principal place of business; or
• you use the space only to earn your business income, and you use it on a regular and ongoing basis to meet your clients, customers, or patients.

If you meet one of these conditions then you can deduct a PORTION of your heat, home insurance, electricity, cleaning materials, mortgage interest (no principal payments), property taxes, and CCA (AKA depreciation on certain assets. But, be careful in claiming CCA as can trigger capital gains and recapture rules when you sell your home.  Generally, especially in the Lower Mainland, CCA is not worth claiming to begin with).  To calculate the part you can deduct, use a reasonable basis such as the area of the work space divided by the total area of your home. CRA further states if you use this room for business and personal living, that you calculate how many hours in the day that you use this room for your business, and then divide that amount by 24 hours. The result is then multiplied by your total home expenses for the portion to be claimed. 

More importantly, you cannot use these expenses to increase or create a business loss. The remainder that is not claimed is carried forward to the next year.  So, amassing a huge amount of office in home expenses is not going to put you anywhere ahead.  Claiming that kitchen renovation as part of your office, has a good chance of rejection.  As always, be reasonable.

CRA is a great resource for what you can claim as Business expenses.  If the only thing you take home today is the following:

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Everything in Moderation.  Be Reasonable.

So if you get that certain special letter over this joyful season, there is no reason to become a Scrooged individual.  You can't change what you have done in the past, but you can change what you will do moving forward.  Choose what you expense wisely, and you will not have to worry about that CRA audit.