What Triggers a CRA Audit When You're Self-Employed 

Have you ever wondered what triggers a tax audit? The Canada Revenue Agency (CRA) clearly states on its website that it chooses files for audit “based on a risk assessment.” It considers things such as the frequency of past errors and indications of non-compliance. It will also compare a taxpayer's return to similar returns as it looks for anomalies. 

While the CRA doesn’t disclose your chances of being audited, it’s an experience most self-employed and small businesses should want to avoid.

Thankfully, there are steps you can take to reduce your chances of being audited. We explore seven common CRA audit triggers and explain why you should pay close attention if you drive a vehicle for work purposes. 

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Vehicle expenses are a leading audit trigger

While several risk factors can increase the likelihood of getting audited by the CRA, vehicle expense claims are among the most common audit triggers, according to accountants. For example, Reach CPA states that among returns flagged by the CRA for inaccuracies, one of the “biggest culprits” they see is incomplete or inaccurate mileage log requests when self-employed tax filers claim business use of a personal vehicle. 

By understanding this and other tax audit triggers, you can take appropriate steps to reduce your chances of getting audited by the CRA.

Disorganized mileage logs

If you use a personal vehicle to earn self-employment income, you can deduct some of your vehicle expenses, such as maintenance and repairs or registration costs, on your income tax return. However, the CRA requires you to keep an accurate logbook of your business mileage for the year. This includes travel dates, destinations, the number of kilometres, and the purpose of your travel. 

If your mileage logs are not well-organized, you may be unable to differentiate between personal and business mileage, leading to errors and increasing the risk of your return being audited. 

The CRA doesn’t have rules for tracking mileage, but keeping accurate records is critical. You can use a notebook, spreadsheet, or automate the entire process using a mileage tracking app like Driversnote. 

Writing off 100% of your vehicle

Writing off 100% of your vehicle expenses on a personal vehicle you also use for business could place you at risk of an audit. Any expense must be deemed reasonable, and claiming 100% of a vehicle you use to buy groceries or take family road trips doesn’t qualify as such. This is something the CRA will look for when reviewing your return. 

Claiming the same mileage every year 

For most businesses, it's unrealistic to incur the exact same business mileage every year. And if the CRA notices it in your tax return, it’s likely to raise an eyebrow or two. Instead of risking an audit, make the effort to log your business mileage accurately. 

Continually claiming business losses

Many small businesses struggle to earn a profit in their early years and, as a result, claim an operating loss. While the CRA doesn’t specify how long you can claim a loss, some businesses have been flagged after continually claiming losses. 

To reduce your audit risk, demonstrate a reasonable expectation of future profit. You can’t just indicate that you intend to make a profit; you must show the business has the capability to do so. 

Failing to report your tips and gratuities

Workers in Canada must report all tips and gratuities on their income tax return. This includes self-employed gig economy workers, such as rideshare and food delivery drivers working for online platforms like Uber, DoorDash, or Skip The Dishes. The rule applies even if you work part-time or casual. Regardless of whether the gig app includes your tips on a tax slip, you must include it in your income. 

If you're a gig driver in Canada, you might find our gig driving guide a relevant place to source information.

Unreasonable business-use-of-home deductions

Self-employed Canadians can deduct expenses incurred to run a business from their home. These expenses include heating, electricity, home insurance, and property taxes. The amount you can claim depends on how much space is designated for business use. For example, if you use one medium-sized room in a 1500-square-foot home, you may be able to deduct 10% of any eligible expenses. 

To qualify for the business-use-of-home deduction, your home must be your primary place of business, and the space you claim can only be used for business purposes. In other words, you can’t claim your kitchen.

While this is a great perk, you can run into trouble with the CRA if you claim an unreasonable amount of your home as business space. For example, if you are a real estate agent or personal trainer, don’t attempt to designate 50% of your home for business use. 

Inaccurate GST/HST remittances

Typically, Canadian businesses must collect and remit GST/HST as soon as they exceed $30,000 in sales within a certain period. Because you are collecting taxes on behalf of the CRA, the amount you collect and remit should be the same. If the amounts don’t align, as in, your invoices show that you collected $2,500 but only remitted $1,800, it could trigger an audit. A note for rideshare drivers —  if you drive for Uber, Lyft, or another platform, you can find more info in our GST/HST guide for gig drivers.

What to expect if you get audited by the CRA

If your tax return is chosen for audit, here is what you can expect: 

1. The process begins with a CRA auditor contacting you by mail or telephone. 
2. An on-site audit can occur at your home, business, or, if you have one, your accountant’s office. 
3. You cannot send information to the auditor via email. Instead, they will provide you with a more secure method of transferring documentation. 
4. Auditors may request business and personal records, in addition to reviewing information already available to the CRA. 
5. When the auditor has finished reviewing your return, they will either provide you with a correct assessment or let you know that your return must be reassessed. 
6. If you receive a “correct assessment,” no further action is required. 
7. If your return must be reassessed, you could owe more taxes or receive a refund. You will receive a proposal letter outlining the rationale and be given 30 days to agree or disagree. 
8. There is an escalation process the CRA will follow if you decide to appeal the auditor’s findings. 

While this process may sound intimidating, remember that an audit may only focus on a specific area of your tax return, such as vehicle expenses, GST/HST, or payroll, and not your entire return.