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22 Mar

Don’t step on these Revenue Canada landmines


Posted by: Aneta Zimnicki

Savvy real estate investors run their real estate investing like a real business, not just like a hobby. You can’t have the attitude of skimping out on advice and professional services. In addition to having the right mortgage broker on your team that can help you navigate through mortgage planning and the ongoing changes in mortgage rules and policies, you will need to align yourself with the right lawyers and accountants. Submitting your tax returns with intentional errors or full of ‘gray areas’ is business suicide. You do not want to set yourself up for an audit (which my accountant says, ‘not if, but when’), and put your joint venture business partners in jeopardy (auditor may sniff out a new path to follow).

Unfortunately, in the world of tax auditing, you are considered guilty until proven innocent, pretty harsh if you can’t produce the right documents. Think about trying to fish for documents or remember some expense that happene d years ago. Not worth the time, best you spent that time focussing on productive things. Keeping good records for tax purposes has multiple benefits. From a mortgage perspective, it will make the mortgage approval process so much easier and faster, plus you will get instant credibility with your mortgage broker and the lenders’ underwriting departments. It is always a pleasure working with clients that have documents at the touch of a button. Having your financial documents in order will help you understand the health of your business (Are you making money or not? What holes leaking money do you need to plug?) and mostly importantly, avoid the unpleasant tax audit panic and scramble.

Here is a recent article I came across ‘Where Revenue Canada Finds Unreported Income’, much of the points made in this article affect real estate investors, take note.

A summary of the points from the article:

  • Repairs or renovations. Don’t claim capital improvements as repairs . Canada Revenue Agency (CRA) scrutinizes businesses that buy, renovate, and sell buildings because unreported cash income can be used to pay contractors under the table.
  • Net-worth audit. CRA looks to see if your lifestyle is roughly equivalent to your income and net worth.
    Inferred revenues. With cash-intensive businesses, CRA double-checks reported company revenues by indirect means, such as extrapolating.
  • Personal use of company vehicles. Document in a log and only claim expenses for the business portion.
  • Meals, entertainment, travel. Make sure you can explain how all such expenses relate to the business.
  • Ineligible business expenses. For example, golfing does not qualify.
  • Loans from the corporate account. CRA looking for evidence of timely repayment.
  • Credit cards. For business expenses, CRA doesn’t regard a credit card statement as sufficient record-keeping.