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It’s audit season for farmers

Sept. 6, 2016 - You may be offsetting your farm income with a side business, whether it’s small engine repairs or just a road side stand. But are you properly accounting for the extra in flow of cash on your taxes and keeping records of the extra expenses?

Operating a cash business is a red flag for the Canada Revenue Agency (CRA). Are you prepared to account for all deposits into your bank account and expense deductions on your taxes?

Now that tax season and filing deadlines are in the past, CRA is now verifying your 2015 filing and comparing it to those filed in earlier years. Variations from previous years signify to CRA that further scrutiny is required. When tax filings were largely done manually, variations in claims could be quite substantial without generating attention. But CRA’s sophisticated computer systems now permit them to monitor massive amounts of data and information and identify relatively small differences between current year and past filings.

If you do get a phone call from CRA or a verification letter in the mail that suggests your claim is being reviewed there are a number of things you should consider. Ultimately, the success or failure of whether you survive an audit is dependent on a few things:

  1. What you claimed on the return
  2. The explanation supporting the claim
  3. The documentation you have that supports the explanation
In recent years CRA has been less open to accepting expense claims without all 3 components noted above being present and aligned. Therefore, it is important to organize, in advance, the written documentation that supports your explanation.

Your tax advisor can help you determine which documentation you need to support your claim. For example, merely stating that you purchased fuel for a farm vehicle rather than a personal use vehicle is not sufficient. The expense needs more detail to support your claim. Jotting down the plate number for the vehicle on the back of the receipt is extremely useful in establishing whether the vehicle is a business or personal use one as is recording the details of that particular trip in your calendar. The audit could be taking place 2 to 3 years after the expense was incurred so your dated diary descriptions of your travel become particularly important.

CRA rarely randomly selects a file; there usually is an underlying reason. For example, if a dairy farm is reviewed, the auditor will determine if the farm has been correctly reporting their patronage payments.

It would stand to reason that if you know the audit triggers, then you could plan and document long before that visit by the CRA.  

Approximately, one in 280 taxpayers will be audited. We note that self-employed individuals who are in a position to understate income or overstate expenses run a much higher chance of being audited than a T4 earner.

Generally, the farm community gets a great deal of attention from CRA related to farm losses and expectation of profit. Some triggers to an income tax audit include:

  1. Large losses in comparison to prior year or consistently large losses
  2. Unusual high or increased expenses
  3. Large capital additions
  4. Large purchases
  5. High input tax credit claims
  6. Consistent non-compliance (not filing or consistent late filing)
  7. Amendments showing large changes
This list isn’t exhaustive and considering the potential for an audit you’re best to involve a tax professional who is knowledgeable in the numerous rules and interpretations of the Income Tax Act and who can deal with CRA on your behalf.

FBC is Canada's Farm & Small Business Tax Specialist, providing tax accounting and bookkeeping services to over 20,000 farms and small businesses from Ontario to British Columbia. Our complete financial planning for farm and small business owners takes a long-term approach to address your specific needs at all stages of life and business, minimizing your taxes year after year. Year-round services include tax planning, tax optimization, business consulting and audit protection.