CRA Audit: Top 3 Red Flags That Could Get You in Trouble

A CRA audit is likely if your sources of income are too complicated. Simplify your income by betting on dividend stocks like BCE Inc. (TSXBCE)(NYSE:BCE).

| More on:
analyze data

Image source: Getty Images

Filing your tax returns with the Canada Revenue Agency (CRA) is a painstaking annual process. Unfortunately, some taxpayers have to go through the added pain of being audited. Thousands of CRA audits are launched every year and your chances of being picked up for one could be higher if you earn or spend your income a certain way. 

With that in mind, here are the top three red flags that could make you prone to a CRA audit — and what you can do to mitigate the risk. 

Being self-employed or in business

A jaw-dropping 54% of the CRA’s audit budget is spent on auditing small and medium-sized businesses every year. This is by far the largest category of tax filers targeted by the agency — and with good reason. Self-employed taxpayers and business owners have complicated tax filings and plenty of opportunity to manipulate expenses or income. In a given year, the CRA audits on businesses of this size uncover $1 billion in additional tax payments. So if you’re part of this cohort, your chances of being audited are relatively high. 

Living large

Living far beyond your means is another red flag. The agency can match declared income to the level of spending or the value of your home to find discrepancies. Any discrepancy could trigger a CRA audit. However the agency is likely to reach out and ask for clarifications first.  

Previous CRA audits

An audit is much more likely if you’ve been audited in the past. Avoiding an audit is beyond your control. However, you could mitigate the impact by diversifying your sources of income and simplifying your tax situation. 

Protect yourself

The obvious way to protect yourself is to file your taxes diligently and manage documents well. However, another way to mitigate the tax burden is to maximize your income from tax-free sources. 

Tracking and declaring dividend income or capital gains is relatively transparent. In fact, your stock broker will offer an annual form with all your trades and tax liabilities. Which is why maximizing investments through your Tax-Free Savings Account (TFSA) could simplify your tax situation. 

My top pick is BCE Inc. (TSXBCE)(NYSE:BCE) a robust, high-yield dividend stock. BCE offers a whopping 6% dividend yield. If you maxed out your TFSA ($75,500) on this stock, you could expect $4,700 a year in income. That’s nearly two-months of the median salary!

Over time, if you keep maximizing your TFSA room and deriving high dividends, you could fund most of your expenses from investments alone. At tax time, your filing would be clear and simple. This would reduce the anxiety of every facing a CRA audit. 

Bottom line

CRA audits are fairly common. In fact, the agency uncovers billions in unpaid taxes every year. If you spend beyond your means, own a business or have been audited before, your chances are higher than average. 

Earning more income from dividend stocks and capital gains is the best way to maximize passive income and simplify your tax situation. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Vishesh Raisinghani has no position in any of the stocks mentioned.

More on Investing

risk/reward
Cryptocurrency

Why Is Solana the Next Cryptocurrency on My Shopping List?

Cryptocurrencies have allowed investors to generate exponential gains in the last decade. However, the volatility and lack of regulation associated …

Read more »

exchange-traded funds
Investing

1 Stellar ETF I’d Buy for a Frantic February 2022

It’s shaping up to be a frantic February 2022, with American markets falling into correction with no sort of relief …

Read more »

grow dividends
Tech Stocks

2 ETFs That Grew Over 98% in the Last 5 Years

Unlike individual stocks that represent a market unit, ETFs usually represent a market segment. If they follow sector-specific indexes, they …

Read more »

edit Sale sign, value, discount
Dividend Stocks

3 Top Dividend Stocks That You Can Buy Under $50

The global equity markets have turned volatile over the last few weeks amid the fear that the U.S. Federal Reserve …

Read more »

happy new year 2022
Metals and Mining Stocks

1 Canadian Stock Bay Street Bets Will Double in 2022

It might seem ridiculous these days to say a Canadian stock will double. But with so many companies down across …

Read more »

ETF chart stocks
Dividend Stocks

3 TSX ETFs to Buy for Big Dividends

Dividend-paying exchange-traded funds (ETFs) are excellent investment options for passive investors. Apart from instant diversification, would-be investors earn in two …

Read more »

work from home
Tech Stocks

RRSP Investors: Want to Turn $10,000 Into $50,000?

With February fast approaching, our focus naturally turns to RRSP investing. This is a good time to make note of …

Read more »

grow dividends
Dividend Stocks

3 of the Best Dividend Growth Stocks That Money Can Buy

Long-term investing has several advantages, which is why so many well-known investors like Warren Buffett recommend it as a strategy. …

Read more »