7 CRA Audit Risk Areas for Small Businesses—and How to Prepare
Business owners often search for CRA audit triggers, hoping for a list of numbers to avoid. CRA does not publish a simple formula that guarantees a business will or will not be audited. The better approach is accurate reporting, supportable claims, and records that explain your results.
These seven risk areas are useful review points for small businesses in Vancouver, Surrey and across BC, including the Lower Mainland, Fraser Valley, and Vancouver Island. They are not automatic audit rules.
1. Recurring Business Losses
Losses can be legitimate, especially during startup or expansion. The question is whether the activity is a source of income under the applicable legal principles and whether the claimed expenses are allowable. Repeated losses alone do not establish that an activity is a hobby.
Keep business plans, contracts, marketing records, and explanations of commercial decisions. Separate personal activity from the business and support the amounts reported.
2. Unexplained Changes in Revenue or Margins
A major contract, closure, expansion, or supply disruption can change results substantially. Record the explanation and retain supporting documents. Reconcile sales records, bank deposits, receivables, and tax returns so a change in activity does not look like a bookkeeping omission.
3. Incomplete Cash Sales Records
Restaurants, salons, trades, and other businesses receiving cash need complete sales records just as they do for electronic payments. Record all business revenue and reconcile point-of-sale totals, deposits, cash expenses, refunds, and owner withdrawals.
Do not assume a low reported margin is automatically wrong or that matching an industry benchmark makes a return correct. Report the business’s actual transactions.
4. Unsupported Meals and Vehicle Claims
Deductibility depends on the rules and business purpose, not on keeping an arbitrary percentage of revenue. Meals and entertainment are generally subject to a 50% limit, with exceptions. Keep details of attendees, purpose, amounts, and receipts.
For vehicles, maintain reliable business-use records, total kilometres, and expense support. Personal travel must be excluded. A contemporaneous mileage log is valuable evidence; claiming 100% business use requires facts that support it.
5. Income and Information Slip Mismatches
Compare T4, T5, T3, and other relevant slips with your records before filing. Investigate duplicates, missing slips, and incorrect amounts. Income can still be reportable even when no slip was issued.
For a corporation, also reconcile wages, dividends, shareholder balances, and the associated information returns.
6. GST/HST Refunds Without Supporting Records
Large refunds can be legitimate, such as when a business buys equipment or makes zero-rated supplies. A refund does not automatically mean an audit. CRA may ask for support, so confirm registration, commercial use, invoice details, and input tax credit eligibility before filing.
Maintain purchase documents and reconcile the return to the books. A payment receipt alone may not contain all information required to support an input tax credit.
7. Unresolved Filing or Compliance Problems
Missing returns, unpaid remittances, and unresolved discrepancies can require follow-up. Keep a deadline calendar, review account balances, and respond to notices. Address identified errors promptly rather than repeating them in future returns.
What to Do When CRA Contacts You
Verify the request and understand whether it is a review, audit, or another enquiry.
Note deadlines and ask for clarification or an extension when needed.
Gather the requested records and respond accurately and completely.
Coordinate with your authorized representative and keep copies of submissions.
Do not alter, destroy, or backdate records to support a claim.
CRA explains its selection and review process in What you should know about audits. Professional help can make the response organized; it does not guarantee a particular outcome.
Habits That Make Reviews Easier
Reconcile accounts regularly, separate personal and business transactions, document unusual events, and review filings before submission. Generally retain records for six years after the end of the last tax year they relate to, with longer periods for some records and situations.
If past returns contain errors, review amendment or disclosure options. Voluntary Disclosures Program eligibility and relief depend on the current rules and circumstances, including any CRA contact. Do not assume acceptance or relief is automatic.
Speak With a BC CPA
TSB Chartered Professional Accountant Inc. serves business owners across British Columbia, including the Lower Mainland, Fraser Valley, and Vancouver Island. Book a free consultation to discuss your business and next steps.
Tristan Bagri, CPA
Founder & Director
Tristan@tsbcpa.ca | 778-707-4699
Frequently Asked Questions
Does a Review Mean CRA Suspects Fraud?
No. A request may simply seek support for a reported amount. Read it carefully and respond to its scope.
How Far Back Can CRA Reassess?
The normal income-tax reassessment period is generally three years for individuals and CCPCs and four for many other corporations, measured from the relevant initial assessment or notification. Specific extensions and exceptions apply, including certain misrepresentations attributable to neglect, carelessness, wilful default, or fraud. Other taxes have their own rules.
Does Incorporation Prevent Audits?
No. Both incorporated and unincorporated businesses can be reviewed or audited.
Disclaimer: This article is for general information and is not legal or tax advice. Tax treatment depends on your circumstances and the rules for the relevant year. Consult a qualified professional before acting.
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