CRA Tax Review: What Does the CRA Check for Self-Employment?

Many self-employed individuals report Business Income and Business Expenses each year using Form T2125, Statement of Business or Professional Activities, but may never have seen a CRA letter reviewing their self-employment activities.

Below is a real CRA review letter with the taxpayer’s personal information removed.

The CRA requested additional information and supporting documents relating to the taxpayer’s self-employment activities.

In this particular review, the CRA focused on several common areas:

Motor Vehicle Expenses — Vehicle expenses and business use of the vehicle

Meals and Entertainment — Meal and entertainment expenses and their business purpose

Business-Use-of-Home Expenses — Home office expenses and how the business-use percentage was calculated

Form T2125 — Business or professional income and expenses reported on the tax return

Supporting Documents — Receipts, records, questionnaires and other documents supporting the amounts claimed

At first glance, these may look like ordinary business expenses.

But a CRA Self-Employment Review may involve much more than simply providing receipts.

For motor vehicle expenses, why might receipts for gas, insurance and repairs not be enough?

For Meals and Entertainment, why would the CRA want to know who was entertained, their business relationship to you, the purpose of the meeting, and even what was discussed?

For Business-Use-of-Home Expenses, why might the CRA ask for the square footage of the residence and a diagram showing how different areas of the home are used?

These are common expenses for many self-employed individuals, but once they are selected for CRA review, the difficult question is often not simply:

“Do you have the receipt?”

The more important question may be:

“Can you show how this expense relates to your business and support the amount reported on your tax return?”

This article is based on a real CRA review letter. Personal information has been removed. It is provided for general tax information only.