CRA Audit Red Flags (2025/2026): 6 Common Mistakes That Could Trigger a Review

A practical prevention guide for Canadian small businesses, self-employed professionals, and landlords

Worried about a CRA audit? Learn 6 common tax filing red flags that can trigger a CRA review—income mismatches, big fluctuations, meals/travel, home office & vehicle claims, repeated losses, and contractor vs employee errors—plus 10 FAQs.

Quick Overview (Read This First)

Most CRA audits and “review letters” aren’t random. They’re often triggered by patterns—numbers that look inconsistent, deductions that seem inflated, or income that doesn’t match third-party reporting.

If you want to stay off the CRA’s radar in 2025/2026, focus on these three habits:

1. Report all income (even side gigs) and match your slips

2. Claim deductions realistically (especially home office, vehicle, meals, and travel)

3. Keep clean documentation that proves business purpose and calculations

Below are 6 red flags we see most often—and exactly how to fix them.

Why “CRA audit triggers” is such a high-search topic

Fear is a powerful click driver—because a CRA letter can feel stressful even when you’ve done nothing wrong. And as CRA systems become more automated and data-driven, mismatches get flagged faster, especially when slips and platform data don’t line up with what you file.

The good news: most issues are preventable with better recordkeeping and smart pre-filing checks.

CRA Red Flags: 6 Mistakes That Could Trigger a Review

1) Big Year-Over-Year Swings With No Clear Story

What the CRA sees: A business reports stable revenue for years, then suddenly revenue drops sharply or expenses spike dramatically.

Why it’s a red flag: Large, unexplained changes can look like under-reported income or overstated expenses.

How to protect yourself:

• Keep documents that explain the change (lost contract, market downturn, maternity/medical leave, major equipment purchase, one-time legal fees, etc.)

• Add a short internal note in your bookkeeping for the year (so you don’t scramble later)

2) “Lifestyle” Expenses That Look Too High (Meals, Entertainment, Travel)

What the CRA sees: High meals/travel claims that don’t make sense relative to your income or industry.

Why it’s a red flag: These categories are frequently over-claimed, and they’re easy for CRA to question.

How to protect yourself:

• Keep receipts plus a simple log: who you met + business purpose + date + location

• Remember: meals and entertainment are generally limited to 50% of the cost (with exceptions), so the math should be consistent

• If you travel, keep proof it was business-related (agenda, client emails, conference registration)

3) Aggressive Home Office and Vehicle Claims

These are legitimate deductions—but also two of the most scrutinized.

Home office red flags

• Claiming a huge percentage of your home without a reasonable method

• Claiming a space as “exclusive business use” when it’s clearly mixed-use

Fix:

• Measure square footage and use a reasonable allocation method

• Keep utility bills and a simple worksheet that shows your calculation

Vehicle red flags

• Claiming 100% business use for a vehicle that’s realistically also personal

• No mileage log to support business kilometers

Fix:

• Use a mileage log (app or spreadsheet): date, destination, business purpose, kms

• Keep fuel/maintenance receipts and reconcile total kms annually

4) Income Doesn’t Match Third-Party Data (Slips, Platforms, Bank Reporting)

What the CRA sees: T4/T5/T3, contract slips, or digital platform summaries don’t match what you reported.

Why it’s a red flag: This is one of the easiest mismatches for CRA systems to catch.

How to protect yourself:

• Don’t file until you have all expected slips (and platform annual summaries)

• If a slip arrives late, amend quickly instead of hoping it won’t be noticed

• For gig/platform income, reconcile:

  • gross earnings

  • fees/commissions

  • refunds/chargebacks

  • net deposits

5) Reporting Business Losses Year After Year

What the CRA sees: A “business” that reports losses repeatedly—especially if it’s used to offset employment income.

Why it’s a red flag: CRA may question whether it’s truly a business operated with an intention to earn profit, or more of a hobby/side activity.

How to protect yourself:

• Keep evidence you operate commercially:

  • marketing activity

  • invoices/contracts

  • business plan or pricing model

  • client outreach records

• If you’re investing heavily early (common for startups), document the growth strategy and why losses are temporary

6) Misclassifying Employees as Contractors

What the CRA sees: Contractors who look and function like employees.

Why it’s a red flag: Misclassification can mean CPP/EI and payroll issues, plus penalties and interest.

Common “contractor who looks like an employee” signs:

• They work only for you long-term

• You control their schedule and methods closely

• They use your tools/equipment

• They’re integrated into your operations like staff

How to protect yourself:

• Review contracts and real working relationships (not just what the contract says)

• If the worker behaves like an employee, payroll may be safer

If the CRA Contacts You: What to Do (and What Not to Do)

First: don’t panic. A CRA “review” letter is often a request for specific proof (receipts, mileage log, home office calculation)—not a full audit.

Do this immediately:

• Read the letter carefully and note deadlines

• Gather documents and respond on time

• If you’re missing something, explain clearly and provide what you can

• Don’t ignore it—missed deadlines can lead to denied deductions and added interest/penalties

The Best Audit Defense: “Audit-Proof” Bookkeeping

At AMH, we often find that CRA problems aren’t caused by “bad people”—they’re caused by:

• rushed filing

• messy records

• mixed personal/business transactions

• unclear support for calculations

A quick pre-filing “risk review” can catch most red flags before your return goes in.

FAQ: 10 Questions About CRA Audits and Reviews

1) Are CRA audits random?

Some are, but many reviews are triggered by patterns, inconsistencies, or mismatches.

2) What’s the most common CRA red flag?

Income that doesn’t match third-party reporting (slips, platforms, investment reporting) is one of the most common triggers.

3) Can high home office claims trigger a review?

Yes—especially if the percentage looks unrealistic or you can’t support your calculation.

4) Do I really need a mileage log?

If you’re claiming vehicle expenses, it’s one of the best ways to support business use credibly.

5) Are meals and entertainment closely reviewed?

Often yes. Keep receipts and write the business purpose (and who you met) to support the claim.

6) What happens if I forgot a slip after I filed?

Correct it quickly by amending—waiting can make it worse if CRA finds it first.

7) Can claiming losses for several years cause CRA attention?

It can. CRA may ask whether the activity is a real business with a profit intention.

8) How do I reduce audit risk without under-claiming?

Claim what you’re entitled to—but document it well and use reasonable allocation methods.

9) Is a CRA review the same as a full audit?

Not always. Many CRA contacts are limited reviews of specific items.

10) What’s the smartest move before filing?

Do a pre-filing consistency check: income slips vs reported income, and deductions supported by logs and clear calculations.

Final Note (AMH – GTA Focus)

At AMH Chartered Professional Accountant, we help GTA businesses simplify corporate tax obligations, reduce risks, and take advantage of every tax-saving opportunity available.
📞 Call: 416-900-6079
📧 Email: info@amhtaxes.com
🌐 Website: https://amhtaxes.com/