CRA audit red flags: Top 5 audit targets in Canada

Video Transcript: CRA audit red flags: Top 5 audit targets in Canada

HST builder audits, foreign exchange, offshore assets, cryptocurrency, and the gig economy. Today, I’ll walk you through the top five areas we’re seeing the CRA focus on, why that matters to you and what you can do to stay off the radar.

[00:00:19] Some facts and figures on CRA audits

The CRA performed over 96,000 audits last year. That’s up more than 53% from the previous year. And yes, they have specific areas they love to audit more than others. These audit focus areas could affect you directly, if you’re in real estate, development or medical practice.

Over the past year, the CRA hasn’t just been auditing more.

They’ve been targeting in specific activities and industries with much higher precision. Random audits. They still happened, no question. But, they seem to be increasingly rare to a degree. Today, I’ll walk you through the top five areas we’re seeing the CRA focus on.

[00:01:20] Audit target #1: GST/HST Builder Audit

HST builder audits. Unquestionably audit target number one, undeniably. Do you want a guaranteed audit? Then apply for a GST and HST rebate on a home and you’ll be a magic winner. Number one audit target for the last number of years has been consistently that GST and HST Builder Audit.

And we’re not saying don’t go through the process because hey, you’re entitled to all you can get, but know what’s in store for you. In fact, all these G-S-T-H-S-T rebate applications are looked at by Revenue Canada. So when you apply, you do so knowing you’re being audited. My wife and I, we’ve gone through one as well.

Again, wasn’t the reason to panic, but we knew it was coming. From April, 2023 to March, 2024, the CRA performed 2,270 builder audits resulting in over $209 million in penalties. These audits focus heavily on the new housing rebates and whether the property qualifies as a primary residence or an investment property.

[00:02:47] Substantial renovations and GST/HST audits

But be aware that substantial renovations also fall into this category. For real estate investors, developers, medical professionals investing in new builds or performing large renovations, this can become a very costly misunderstanding, particularly if you haven’t budgeted for it at the beginning. The CRA is looking for inconsistencies between your tax filings, mortgage documents, and even your utility records.

So as a tip, before making any claims or sales involving the newly built for substantially renovated homes, make sure your paperwork supports your intended use. Slightly exaggerated, but not by much. One wrong check box can cost you literally tens of thousands of dollars in lost rebates. Penalties.

Interest or at least a lot of aggravation.

[00:04:00] Audit target #2: Foreign exchange gains and losses

So next point, foreign exchange gains and losses. This is number two. Now, investing outside of Canada. Again, we’re not trying to say don’t do it, but be aware that foreign exchange gains and losses are currently more of a hot button issue for the CRA auditors.

Traditionally the CRA focused on foreign real estate or securities transactions. But now we’re seeing much more attention on large foreign currency transactions, period, even those not tied to traditional investments. The key issue beyond the more obvious, did the calculation get completed correctly using reasonable exchange rates before and after, is whether that gain or loss should be classified as a capital gain or loss, which is only 50% taxable or deductible, if you will. Or should be classified as a business income or loss, which is a hundred percent taxable or deductible. Needless to say, the difference can be huge.

For example, if you sold a property overseas and realized a large foreign exchange gain, the CRA will want to know, was this a onetime capital transaction or is this part of your business activities. Really no different than selling a piece of real estate in Canada. The concept is the same, but now we’re applying it to the component of the foreign exchange.

A tip, keep detailed records showing why foreign currency transaction occurred and your intentions behind it. This is your best defense if CRA challenges the tax treatment and really should coincide with the property itself or the assets involved. So we’re not only taking this from tax perspective, but the foreign exchange side.

[00:06:25] Audit target #3 – Offshore assets and foreign reporting

Number three, offshore assets and foreign reporting.

Foreign assets. So many of you by now know you have more than a hundred thousand dollars in foreign assets measured in Canadian dollars at any point during the year, the CRA wants to know about it. This applies whether we’re talking about foreign real estate, stocks, bonds, bank accounts, other specified foreign property.

There are some exceptions, but if you’ve got these foreign assets, you should be talking with your advisor. And this can snag even if you only held the asset for a single day in the year. If it’s value exceeded that a hundred thousand dollars you have to file. Keep in mind, for example, even transactions, going through a lawyer’s bank account, you may have an issue.

To report the foreign assets, in most cases, we’re gonna file form T1135. There are some other forms for trust and businesses.

Failing to file can trigger three different penalties as if one wasn’t sufficient, even if the income was fully reported, the CRA has been matching more and more international data than ever before, so it is risky to ignore this.

As an example, failing to file the T1135 form. If you’ve missed the first initial days, it can get you up to a $2,500 penalty after that hundred days. And needless to say, you typically won’t get that notice from Revenue Canada or reminder in that hundred days, so don’t wait for tax season to think about the T1135.

Track your foreign holdings through the year consult your accountant if you cross that threshold even briefly. Most financial institutions keep a good track of these, assuming that it’s a liquid portfolio, for example, an investment portfolio.

Usually though it’s done on a December 31st basis. So an off calendar year end for a corporation, it may not be quite as easy to get that detail from the institution or the brokerage, but it’s certainly, in most cases very possible.

[00:09:04] Audit target #4: Cryptocurrency transactions

The fourth point is cryptocurrency transactions. So with target number four, Revenue Canada looking at us with these crypto transactions of various natures. So if you had a crypto transaction over $10,000, the CRA already should have that information. They have a variety of reporting requirements that funnel into their databases.

And remember, it’s $10,000 Canadian.

The currency or crypto exchanges are going to report these transactions. Even smaller amounts though below the $10,000 threshold can raise questions if they’re linked to other taxable events or series. So whether you’re mining, trading, dabbling, the CRA is looking at how you’ve reported these gains or losses.

The same capital versus income classification issue applies here. Is it a capital gain or a loss where 50% is taxable deductible, or is it a business income slash loss, which is a hundred percent reportable or rather taxable versus deductible? Report this incorrectly. You’re well on your way to penalties and interest. To treat the crypto, like other investments or business assets in the sense of you’re going to be tracking the dates, amounts, the purposes of the transactions.

While we don’t want you to specifically rely solely on the exchanges transaction history. Depending on how many you’re doing, the nature of your investing activities or the activities that may not even be investment related, keep the support so you’ve got that in your records as well.

[00:11:24] Audit target 5: Digital platforms and gig economy

Number five, digital platforms and gig economy income expenses.

 If you make money through ride sharing, online marketplaces, maybe social media, CRA is paying more and more attention. They have again, a large amount of data coming in that they are using and filtering through.

Right now, the CRA’s approach is focused on outreach, education or talking to taxpayers about their obligations. This is changing fast and certainly depending on the circumstances, can result in some ugly conversations. The new digital platform reporting rules mean that the CRA will automatically receive income information from various platforms, making it much harder to underreport or overlook earnings.

I appreciate sometimes it can be easy to forget some of these small things, and contrary to some of the advice that used to be out there, not by professional accountants, but by others saying, don’t worry about it doesn’t get reported. Nothing could be further from the truth.

This even applies to real estate investors where you’re selling online courses, medical professionals with side consulting businesses. It can apply to just what anybody that’s using, again, some form of the gig economy. Ideally, don’t wait for the CRA to contact you. If you earn income from online or gig sources, report it accurately, keep expense records, really treat it like you would your other business and investment activities.

HST builder audits, foreign exchange, offshore assets, cryptocurrency, and the gig economy. The common thread is data. The CRA is collecting more of it faster and crosschecking it more effectively than ever before.

[00:13:48] Stay organized

The best way to stay out of trouble, again, it sounds overly simplified, but really keep organized.

Have detailed records. Do this through the year, as compared to waiting until after the end of the year to put everything together.

[00:14:10] Understand reporting obligations

Understand your reporting obligations before you make the transactions. Get professional advice early, not after you get the audit letter. I mean, you want it then too, but, ideally, everything’s been done correctly. You’ve been working with your advisor so that if you do get the letter, you’re all ready for it. No big deal.

[00:14:38] Dealing with audit letters

If you do get that letter from the CRA, open it right away. Timelines are very strict for replying to the audits, and I know some people are scared to open that mail while they’re virtual or physical.

If that’s the case, okay, that is what it is. Get it to your accountant so they can open it.

[00:15:02] More tips to avoid an audit

Want more tips on avoid in an audit? Check out the linked video. Do you think you might be affected by any of these CRA audit focus areas, or just want to make sure you’re prepared? Contact me and the team to discuss your situation.

I’m George Dube, saving the world from tax, one bow tie at a time®.

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