Avoiding an Audit: Red Flags the CRA Looks For

Filing your taxes is an important responsibility—but for many individuals and small business owners, there’s an extra layer of anxiety: what if you get audited?

While most Canadians won’t experience a tax audit in their lifetime, the Canada Revenue Agency (CRA) does review thousands of tax returns each year to ensure compliance. And while sometimes audits are random, many are triggered by specific patterns, errors, or red flags.

The good news? By understanding what the CRA looks for, you can take steps to avoid unnecessary scrutiny.

1. Reporting Unusually High Business Expenses

If your business expenses seem disproportionately high compared to your income, the CRA may take a closer look. This is especially true for sole proprietors or small businesses in service-based industries where profit margins are typically higher.

Red flag example: Claiming $45,000 in expenses on $60,000 in revenue without clear justification.

Tip: Always keep detailed records, invoices, and receipts to support your claims—especially for meals, travel, and home office deductions.

2. Large Charitable Donations (Compared to Income)

Donating to charity is great, but if your donation amount seems inconsistent with your reported income, it could trigger an audit. The CRA uses data analytics to flag outliers.

Red flag example: Claiming $20,000 in charitable donations on a $45,000 income without supporting documentation.

Tip: Only claim donations made to registered Canadian charities, and always keep your official donation receipts.

3. Failing to Report All Income

The CRA receives tax slips (T4s, T5s, etc.) directly from employers, banks, and other institutions. If your return doesn’t match what the CRA has on file, it will raise questions.

Red flag example: Forgetting to report income from a part-time job or freelance work.

Tip: Cross-reference all your tax slips before filing. If you’re self-employed, keep thorough records of all client payments and income sources.

4. Claiming the Home Office Deduction Without Meeting the Criteria

The home office deduction became more common during the pandemic, but the CRA still requires that specific criteria be met. If your claim seems inflated—or you claim it without actually using your space regularly for work—it may lead to further questions.

Tip: To qualify, your home office must be your primary place of business or a space you use exclusively and regularly to earn income. Keep a floor plan and receipts for any expenses claimed.

5. Repeated Losses in a Business or Rental Property

If you report losses year after year—especially from a business or rental property—the CRA may question whether it’s a legitimate income-generating activity or a hobby.

Red flag example: A side business that’s been “in the red” for 4+ years.

Tip: Ensure your business has a reasonable expectation of profit. Keep a business plan, marketing strategy, and income records to prove your intent to earn.

6. Cash-Heavy Businesses

If you operate in an industry that typically deals in a lot of cash (e.g., restaurants, salons, retail), the CRA may watch more closely for unreported income.

Tip: Use proper point-of-sale systems, issue receipts, and deposit all earnings into business accounts. Avoid mixing personal and business funds.

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While you can’t eliminate the risk of a CRA audit entirely, being organized, honest, and informed goes a long way in protecting yourself. Most importantly—don’t guess when it comes to your taxes. If you’re unsure about a deduction or how to report income, consult with a qualified accountant.

Worried About Tax Triggers? Let’s Talk.

Our team helps individuals and businesses navigate tax season with confidence—and avoid common audit red flags. Contact us today to make sure your return is audit-proof and CRA-compliant from the start.