Eventually, you are going to be audited, whether personally or through your corporation. There will likely be reasons why you might be selected. When that occurs, it will be imperative that you ensure your books and records are complete and talk to your accountant to act on your behalf. Too often clients seem to think that a bank and credit card statement will be sufficient. Those only aid in providing proof that a purchase or payment has occurred. The CRA, during its audit, are going to require evidence of invoices and receipts. Without it, you could be denied some deductions. I will list below some of the common reasons why certain individuals and corporations are selected for audit.
Full-blown audits can occur in situations where you are a high-net worth individual. Just recently, the CRA announced at various tax conferences that their audit practices would change to focus on high-net worth individuals. As a matter of fact, an article in the National Post did confirm that such audits have commenced.
Individuals who have purchased tax shelters have also been audited, but the CRA is auditing the shelter itself with the impact that the individual investor getting reassessed personally.
Other scenarios of full-blown audits include individuals who earn commission or self-employment income. They usually are looking for in-eligible expenses claimed against their income. Automobile expenses in particular seem to be an area most frequented by a CRA auditor because more often than not people tend to not keep a automobile log book.
The first reason why a corporation might get audited is when the CRA receives the General Indexed Financial Information (GIFI). Since the GIFI provides the CRA with comparative year to year summary of the balance sheet, and income statement, it's used as a tool by the CRA to determine inconsistencies from one year to another. In addition, CRA is able to compare that data to industry specific sectors as well for irregularities.
The second reason is that the CRA like to carry out special audit projects targeting specific industries for a particular year. Each year will vary depending on the success of all those audits in the past. Most notably, audits seem to occur in industries involving cash transactions, especially in the construction industry for example.
The third reason that you are audited is because you have unusual transactions that are not considered "normal" given your industry.
Lastly, you are getting audited because you were randomly chosen. It is CRA's mission "to ensure compliance on behalf of government across Canada, thereby contributing to the ongoing economic and social wellbeing of Canadians".