What May Triggers a CRA Audit? Eight Common Red Flags and How to Avoid Them!

Being audited by the Canada Revenue Agency (CRA) can feel random, stressful, and intrusive, but audits are rarely accidental. The CRA does not pick tax returns out of a hat. Instead, it uses advanced risk-assessment systems, data matching programs, and industry benchmarks to identify returns that appear incomplete, inconsistent, or unusually aggressive. In other words, audits are typically triggered by patterns and red flags, not bad luck.
If you’re a small business owner, self-employed professional or high-income taxpayer, understanding what attracts CRA attention can significantly reduce your audit risk. Below are the most common CRA audit triggers and practical steps to avoid them.

Key Takeaways

  • CRA audits are driven mainly by risk indicators.
  • Missing income, inflated deductions, and poor record-keeping are major triggers.
  • Self-employed individuals and business owners face higher scrutiny.
  • Accuracy, consistency, and documentation are your best defense.

1. Failing to Report All Income
One of the fastest ways to trigger a CRA review is missing income, especially income reported on T-slips.

The CRA receives copies of:

  • T4s (employment income)
  • T5s (investment income)
  • T4A slips
  • T5018 slips (construction industry)

If your return does not match CRA records, it will be flagged automatically.

How to avoid this:

  • Reconcile your tax return with all slips issued
  • Track cash payments carefully
  • Compare your current return with last year’s return before filing

2. Claiming Unusually High or Inconsistent Deductions
The CRA looks for reasonableness and consistency. Large deductions that are:

  • Out of proportion to revenue
  • Significantly higher than prior years
  • High compared to industry averages

All three can trigger audits
Example red flag: Claiming $10,000 in vehicle expenses on $50,000 of gross revenue without a logbook.

How to avoid this:

  • Keep receipts and supporting documents
  • Expect questions when deductions spike year-over-year
  • Ensure expenses align with business reality

3. Using Rounded Numbers Throughout Your Return
Rounded numbers (e.g., $5,000, $10,000, $2,500) signal estimation, not record-keeping.

CRA auditors often interpret rounded figures as:

  • Incomplete records
  • Missing receipts
  • Year-end guessing

How to avoid this:

  • Use exact amounts (dollars and cents)
  • Maintain detailed bookkeeping records
  • File returns based on actual transactions, not estimates

4. Excessive Home Office Expense Claims
Home office deductions are legitimate, but overstating them is a common audit trigger.

Claiming:

  • An unrealistic percentage of your home
  • Full expenses without proration
  • Costs unrelated to business use

Above these can raise immediate concerns.

How to avoid this:

  • Calculate business-use percentage accurately
  • Follow CRA home office guidelines
  • Keep floor plans, utility bills, and calculations on file

5. Writing Off 100% of Vehicle Expenses
Unless a vehicle is used exclusively for business (rare), claiming 100% of vehicle expenses is a major red flag.

CRA expects:

  • A reasonable business-use percentage
  • A mileage log
  • Proportional expense claims

How to avoid this:

  • Maintain a detailed vehicle logbook
  • Prorate fuel, insurance, maintenance, and CCA
  • Be conservative and defensible

6. Repeated Business or Rental Losses
Occasional losses are normal. Ongoing losses are not.

CRA may question:

  • Whether the activity is truly commercial
  • If the business has a reasonable expectation of profit
  • Whether expenses are personal in nature

This applies especially to:

  • Rental properties with recurring losses
  • Side businesses reporting losses year after year

How to avoid this:

  • Document your profit-seeking intention
  • Keep repair, vacancy, and financing records
  • Expect CRA scrutiny after multiple loss years

7. Being Self-Employed or in a High-Risk Industry
Certain industries are considered part of the “cash economy” and are audited more frequently, including:

  • Restaurants
  • Construction
  • Retail
  • Personal services

Self-employed individuals and independent contractors also face increased scrutiny due to:

  • Income reporting flexibility
  • Expense deduction opportunities
  • Employee vs contractor classification issues

How to avoid this:

  • Maintain airtight books and records
  • Separate personal and business finances
  • Ensure contractor arrangements are defensible

8. Bonus CRA Audit Red Flags

  • Overpaying salaries to spouses or children without proper documentation
  • Claiming questionable tax shelters or donation receipts
  • Reporting income far below industry or neighborhood averages
  • Ignoring CRA requests for information

Failing to respond promptly to CRA letters can escalate a review into a full audit.

Three Final Tips to Reduce Your CRA Audit Risk

  1. Maintain excellent records
    Use accounting software and retain receipts for at least seven years.
  2. Register for CRA My Account
    It reduces errors by centralizing slips, balances, and correspondence.
  3. Correct mistakes proactively
    Amending a return voluntarily is far safer than waiting for CRA to find the error.

Final Thoughts
CRA audits are not about punishment, they are about verification. Most audits arise from preventable issues: missing income, aggressive deductions, and poor documentation. Accuracy, transparency, and consistency are your strongest defenses.

Diamond CPA, a trusted accounting firm in Scarborough, Toronto, helps small business owners, self-employed professionals, and corporations:

  • Reduce audit risk
  • Prepare audit-ready tax filings
  • Respond to CRA reviews and audits with confidence

Disclaimer This article provides general information only and does not constitute tax or legal advice. Tax outcomes depend on individual circumstances. Always consult a qualified tax professional before acting.