Dealing with the Canada Revenue Agency (CRA) is a reality for every business owner, but no one wants the stress of an audit or a comprehensive tax review. 

The truth is, many CRA reviews aren’t initiated by random chance or suspicion of fraud; they are often triggered by simple, yet significant, bookkeeping mistakes that create inconsistencies in your reported data.  

These flags tell the CRA’s sophisticated systems that something requires a closer look. 

 At Vertical CPA, we help Canadian businesses move beyond basic record-keeping to proactive compliance. Below are the top five common bookkeeping errors that act as red flags, inviting unwelcome scrutiny from the CRA.

1. Lack of Supporting Documentation for Expenses

This is arguably the most common and easiest mistake to fix. The CRA operates on the principle that if an expense isn’t documented, it never happened. 

The Trigger: Claiming large or frequent business expenses without the corresponding receipts, invoices, or contracts. This is particularly true for meals, travel, or home-office expenses. 

The Mistake: Your books might say you spent $500 on office supplies, but if you cannot produce a legitimate receipt that clearly shows the supplier, date, amount, and business purpose, the deduction will be disallowed during a review.  

The Fix: Implement a strict digital record-keeping system. Use apps such as DEXT which we use for all our clients to immediately photograph and categorize receipts. Ensure every transaction, has a clear digital paper trail. The documentation is just as important as the transaction itself.

2. Mixing Personal and Business Accounts (Co-Mingling)

For many sole proprietors or incorporated small business owners, the line between personal and business finances can get blurry. This is a massive red flag for the CRA, as it compromises the integrity of your reported business income and expenses.   

This is why we recommend all our clients to maintain a separate business chequing account and business credit card to ensure there is an adequate separation between personal and business finances. Think of it as a “church and state” separation. 

The Trigger: High volumes of deposits or withdrawals in your business account that are not clearly documented as owner draws, owner salary, owner contributions, or expense reimbursements. 

The Mistake: Using your business debit card to pay for groceries, or depositing a personal cheque into the business bank account. When a reviewer sees personal transactions flowing through the business, they will likely request all personal bank statements to trace the funds, significantly broadening the scope of the review. 

The Fix: Maintain absolute “church and state” separation. Use a dedicated business bank account and credit card for all business transactions. If you need to inject personal funds, record it formally as a shareholder loan. 

3. Inconsistent or Incorrect HST/GST Reporting

Sales tax (HST/GST) reconciliation is one of the most technical areas of bookkeeping, and errors here are immediately visible to the CRA because they can cross-reference your filings with your suppliers’ filings.  

The Trigger: Claiming abnormally large Input Tax Credits (ITCs) relative to your reported revenue, or having discrepancies between your total annual revenue reported on your GST/HST return versus your final corporate tax return (T2). 

The Mistake: Accidentally claiming ITCs on purchases that are non-taxable, exempt, or for personal use.  

The Fix: Review your HST/GST sales and expense coding quarterly. Ensure the tax treatment of both sales and purchases is correct. Most importantly, verify that your total sales reported on your HST/GST returns precisely match the sales figures used in your income statement and corporate tax return.

4. Major Discrepancies in Payroll Reporting (T4s vs. Expenses)

The CRA has two separate departments: one for income tax (T2) and one for payroll/source deductions. Their systems cross-reference data between them. 

The Trigger: When the total wage expense claimed on your corporate tax return (T2) does not align with the total employment income reported on the T4 slips filed under your business’s payroll account. 

The Mistake: Failing to properly account for all employment benefits, bonuses, or shareholder salaries through payroll, instead trying to claim them as a general expense. 

The Fix: Ensure payroll is processed using proper software and that all required withholdings and source deductions are remitted on time. A Controller or CPA firm can ensure a clean, three-way reconciliation between your payroll register, your general ledger, and the T4 slips filed with the CRA. 

5. Failing to Reconcile Accounts Monthly

While not a direct trigger in itself, the failure to perform monthly bank and credit card reconciliations guarantees that the first four mistakes listed above will go unnoticed until it’s too late. 

The Trigger: The CRA will flag accounts that show large, round-number journal entries at year-end to “true-up” the books. This suggests a lack of consistent record-keeping and a high risk of material misstatement. 

The Mistake: Waiting until year-end to reconcile all transactions, leading to rushed decisions, misclassified entries, and missed compliance issues that could have been fixed months earlier. 

The Fix: A good bookkeeping system helps you reconcile all bank and credit card accounts monthly. This process verifies that every dollar in your ledger matches your bank statement, forcing you to properly document and categorize all outstanding items immediately. This diligence is the foundation of audit defense for a CRA review.  

Take the Next Step 

A CRA review can be disruptive and expensive, but the best defence is a clean set of boots. By avoiding these five common bookkeeping mistakes, you drastically reduce the risk of triggering an audit. 

If your books feel overwhelming, or if you suspect your records might be inviting scrutiny, don’t wait for the CRA to call. 

Get in touch with us here. Our expert team specializes in implementing robust financial systems and providing oversight to ensure your records are compliant, accurate, and ready to stand up to any review. Sign up to get more accounting and tax tips in our newsletter here. 

The accounting and tax information provided in this post does not constitute advice and is meant to be for general information purposes only. The information is current as at the date of this post and does not reflect any changes in accounting and/or tax legislation thereafter. Moreover, the information has been prepared without considering your company or personal financial/tax circumstances and/or objectives.