Common CRA Audit Triggers

The GST/HST mismatch deserves particular attention. If your T2 reports $120,000 in revenue but your GST/HST return shows only $85,000 in taxable supplies, the CRA’s systems flag the discrepancy automatically. 

Revenue Discrepancies and Structural Flags

 Beyond GST/HST mismatches, the CRA cross-references reported income against bank deposits and third-party slips. Inconsistent reporting year-over-year such as revenue dropping from $500,000 to $250,000 without explanation will almost certainly trigger a review. Cash businesses reporting unusually low income relative to industry benchmarks are similarly vulnerable. Chronic losses are equally problematic. While new businesses often operate at a loss, the CRA generally expects profit in at least two of five years. If you show losses in three or five years, expect questions about whether your activity is a genuine business or a personal endeavour. Similarly, aggressive offshore tax planning, frequent property flipping without proper reporting, and related-party transactions at non-arm’s-length prices all elevate risk. 

High-Risk Industries

Certain industries attract disproportionate scrutiny: construction, restaurants and hospitality, retail, transportation (particularly the “Driver Inc.” model), hair salons, and home renovation firms. These sectors share high cash transaction volumes and complex subcontractor relationships, making income verification difficult for the CRA.

.

Red Flag Expenses and How to Handle Them

Meals and Entertainment

 The CRA applies a strict 50% limitation rule, only half of meals and entertainment expenses are deductible. Every receipt must document who attended, the business purpose, location, date, and amount. A credit card slip alone is insufficient. If you claim $15,000 in meals on $50,000 of revenue, expect questions about whether those expenses were genuinely income-producing. 

Vehicle Expenses

 Vehicle claims are among the most frequently disallowed expenses. Claiming 100% business use without a detailed mileage log is a fast track to reassessment. The CRA requires a log recording date, destination, business purpose, and kilometres for every trip. The capital cost allowance on passenger vehicles is capped at $36,000 for 2024-2025, with lease payments capped at $900 per month and interest at $300 per month. Be realistic about your business-use percentage, 100% claims are rarely credible. 

Home Office Expenses

 Home office deductions must reflect the actual percentage of your home used exclusively for business trips, typically 10-20% for most home-based operations. Claiming 60% or more while maintaining commercial office space is a significant red flag. Eligible expenses include a proportional share of utilities, insurance, property taxes, and mortgage interest. Note that claiming a home office can affect your principal residence exemption upon sale, though the impact is typically minimal. 

Travel Expenses and Shareholder Loans

 International travel to vacation destinations and spousal travel claimed as business draw scrutiny. Document the business purpose before departing, keep all receipts and itineraries, and clearly separate personal from business portions. For shareholder loans, amounts borrowed from your corporation must generally be repaid by the next fiscal year-end to avoid inclusion in taxable income under subsection 15(2) of the Income Tax Act. Track loans through a dedicated ledger with written terms and scheduled repayments.