Who is most likely to be audited?

It’s every taxpayer’s worst nightmare: A notice from the Canada Revenue Agency (CRA) informing you that you’re going to be audited.

The CRA will send out around 30,000 such letters this year.

While it is impossible to say how likely it is for a given individual or business to be audited, here are some general guidelines about audit risk:

  • Business are far more likely to be audited than are employees.
  • GST/HST is the most common source of CRA tax audits.
  • Submitting a request to amend a prior income tax or GST/HST return will often trigger audit activity.
  • Industries with a record of poor compliance (such as construction, retail or the restaurant industry). The CRA has singled out those industries, where businesses are often heavily cash-based, for extra scrutiny due to high rates of tax evasion.
  • Keep reporting rental and/or business losses.
  • Reported drastic swings in income, especially if self-employed.
  • Income doesn’t match your postal code. Are you making significantly less than your neighbors?
  • Taxpayers with “outlier” claims – compared to their own tax history or the history of other taxpayers similar to them – are much more likely to be tagged for audit.  For businesses similar taxpayers are found in the same industry and for individuals similar taxpayers can be compared in the same neighborhood, postal code or employment type.
  • Employees who have untaxed employer benefits such as use of company vehicles, parking spaces, travel and entertainment are at higher risk of audit.
  • Large funds transfer, particularly made internationally, are reported to the Federal Government and can raise audit flags with the CRA.

Each year the Canada Revenue Agency refines the way it analyzes taxpayer information and attempts to identify and audit taxpayers with “high risk” indicators.

Ontario Public Holiday Pay Changes

Effective July 1, 2018, the public holiday pay calculation will revert to the old formula that applied prior to the Bill 148 that was passed on November 22, 2017.

On May 7, 2018, the Ontario Government filed O. Reg. 375/18 as an interim measure. Public holiday pay will return to the following calculation under the ESA:

The employee’s public holiday pay for a given public holiday shall be equal to the total amount of regular wages earned and vacation pay payable to the employee in the four work weeks before the work week in which the public holiday occurred, divided by 20.

O. Reg. 375/18 will remain in force until December 31, 2019.

The Bill 148 amendment of the public holiday pay formula removed any proration of an employee’s holiday pay based on the amount of time the employee had actually worked in the qualifying period, resulted in enhanced holiday pay obligations for many employers, particularly in relation to part-time and casual workers.

New Rules for Splitting Income with Family Members

Starting on Jan. 1, 2018, changes to the Income Tax Act regarding income sprinkling take effect. It no longer makes sense for incorporated professionals and many business owners to income split via dividend with their families because legislation introduced Dec. 2017 proposes to extend the current “kiddie tax” anti-income sprinkling rules to a spouse or partner as well as to adult children who are not “actively engaged on a regular, continuous and substantial basis in the activities of the business.”

There are some exceptions under the new rules. One of those exemptions will need owners of private corporations to take action before the end of 2018.

If your company is non-professional Canadian Controlled Private Corporation that earns less than 90 percent of its income from services, you can have your spouse or common-law partner and/or adult children aged 25 or over participate in an incorporated business by owning 10% voting shares acquired with their own funds. This would allow company profits to be distributed to them in the form of dividends. Owners of private corporations will have until the end of 2018 to re-structure their business to meet the 10% rule.

It’s crucial that you consult your tax adviser, who can review your personal situation and give you advice about which income-splitting strategies best fit your circumstances.