The CRA Audit Triggers Every Pension Recipient Should Know

If you’re living on pension income, you probably don’t think much about getting audited by the Canada Revenue Agency (CRA). After all, you’re a senior living on a fixed income — surely the tax man has bigger fish to fry, right?

You might think so, but the fact is that pension recipients can and do get audited. Your average pensioner is seen as having fewer “red flags” than a 30-something high-income business owner, but could still run afoul of the tax authorities if aspects of his/her tax returns and lifestyle don’t add up. In this article, I will share three CRA audit triggers that you should be aware of, so as to avoid the fate of an audit you can’t afford.

Discrepancies

Probably the most common way that people get audited by the CRA is by filing tax returns with major, obvious discrepancies. This goes for pension recipients and working-age Canadians alike. If the numbers on your tax return don’t add up, then the CRA is more likely to audit you.

That doesn’t mean that your tax returns need to be accurate down to the last penny, though. The kinds of discrepancies that tend to trigger audits are ones where thousands of dollars in tax revenue are on the line, not a few dollars here and there. Let’s say, for example, you earn tens of thousands of dollars per year from a side hustle but aren’t paying a cent in GST/HST. This could potentially get you audited, as Canadian businesses usually pay GST/HST.

Not reporting investment income

A big mistake many Canadian retirees make is not reporting investment income. If all of your investments are held in a Tax-Free Savings Account, then you don’t need to worry about this one. You do have to worry about it if you have a Registered Retirement Savings Plan, though; Registered Retirement Income Fund withdrawals are a form of taxable income. Also, stocks held in taxable accounts, of course.

One thing that not everybody knows is that dividend stocks create taxable income multiple times per year, even if you don’t sell them. There is no way to avoid the taxable nature of dividend stocks if you hold the shares in a taxable account.

Also, the way you account for dividend taxes is somewhat complex. We can illustrate it with a hypothetical example.

Let’s say you hold $100,000 worth of Fortis (TSX:FTS) shares in a taxable account. Fortis shares cost $64.13 and pay $0.61 worth of dividends per quarter, or $2.44 per year. So, if you hold $100,000 worth of Fortis stock, you get $3,806 worth of dividends per year.

Now you’re probably thinking, “So, I report $3,806 in dividend income. That’s pretty simple.” Not so fast! Eligible dividends are grossed up, so you actually report about $5,250 worth of dividend income. You also get to claim two dividend tax credits — one federal and one provincial — against that amount. So, you end up paying less tax than you would on $3,804 worth of employment income, even though you’re reporting higher income.

Lifestyle discrepancies

Last but not least, lifestyle discrepancies — such as living in a mansion while reporting $5,000 in annual income — can get you audited by the CRA. This point is fairly obvious, so I won’t dwell on it too much. But if you have a secret lucrative side hustle that’s paying you $200,000 per year, and you aren’t reporting that income, there are likely clues in your lifestyle that can tip the CRA off. So, report all your income — in the long run, it will save you money.