Eric Sonego breaks down the CRA mistakes that trigger audits, and what business owners need to do differently at tax time.
GROWTH PILLAR: Sales & Revenue
WHO THIS IS FOR: SMB owners / Solopreneurs / Incorporated professionals / Anyone with rental income, business income, or investment activity
WHAT THEY'LL GAIN: Practical CRA audit-proofing strategies, hard-won accounting insights, and clear guidance on when to stop filing your own taxes
Most business owners don't know they're waving a red flag at CRA until the nine-page letter shows up.
Eric Sonego from Côté and Associates Professional Corporation has spent 30 years helping Canadians navigate the tax system — and in this Phoenix Business Exchange session, he tells it straight. CRA relies on computers and co-op students. That combination catches things that look wrong, even when they aren't. And if you're running a business, have rental income, or make investments, the odds of triggering a review go up fast.
Eric walks through who should never do their own taxes, why popular tax software is currently facing a class action suit, and how a single mismatched postal code can kick off a full audit. He also covers the charity donation trap, the summer audit delay strategy, the disability tax credit most sick Canadians leave on the table, and why splitting a large donation across five years can keep you completely off CRA's radar.
Côté and Associates operates across 11 offices in Canada and the US. Eric and his team handle everything from personal returns to corporate files — and they make sure your personal finances line up with your corporate picture before anything goes to the government.
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Eric (00:29)
Eric Sonego from Côté and Associates Professional Corporation. we're located in eight offices across Canada. We have three offices in the US. And last Thursday I was stumped with the idea of what am I gonna tell you? And then I got a call from somebody that made that answer self-evident.
what I'm gonna tell you today you might not like to hear.
But it's the world as we know it today. ⁓ be careful with C R A.
CRA employs people who do not know the tax act and has computers to help them.
When someone who doesn't know the tax act checks something against a computer, they envision the worst or they don't know what the computer is saying. That leads me to discuss who should be doing their taxes and who shouldn't.
So if you have a reportable income that is slipped oriented, in other words, you have a T4, you have a T four A, you have a T three, you have a T five, if you have all of that kind of stuff, you can do your own taxes. Why can you do your own taxes? That's because the people who give you those slips have also filed them with CRA who has computerized the results.
So when you send your taxes in, they match them. So as long as you have the same T4 slip that the Kanata Food Cupboard gave you, you know, it it it it's no problem. Sometimes there's a problem that what the employer sends is not the same thing that they give the employee, but that is that is solvable. But the people who should not do their own taxes
are the people who make money without telling the government during the year. That's people who run businesses, people who have commissioned income, people who sell homes, people who do all that kind stuff. And who are not incorporated. If you're incorporated, you are forced to talk to the government more often and more more officially. But if you're not incorporated, you just follow in like a happy moron the whole year and then at the end of the year you you
You would you you you you tabulate all your income and so on and you send it to the government. They said to the government, see, I sold, you know, I don't know, fifteen houses, I made a hundred thousand dollars and by the way I made no money.
Or the the the what prompted this discussion today, I have rental income, I am a civil servant, I have rental income and I made no money. In fact I lost money, so you have to return to refund me the taxes I paid. That is a ⁓
A plan to get audited.
And the audit will come with a nine page letter.
And the first thing they assume is that you live in in a house that you're renting.
And the f and that the and that and that you made a mistake in the address and they should be the same address as your address. So that's you know, having to send all kinds of official information that says that that house is located somewhere else. That's one page that of of of of information that they need to know. Why do they need to know that? Because they're stupid. I don't have any word to say it. It's because they can see the the postal code in the in page one and the postal code in the rental income are not the same.
So rather than asking the client why is there a difference, they assume that the client made a mistake in the postal code of the rental income and and under in the street name. So am I being nasty with them? No, well it's it's not it's not that I don't think they're smart. They rely too much on a computer who who gives who gives these kinds of of of ⁓ warnings. Okay, let's take Tony.
Let's say Tony has rental income, he rents a house in Kempville. So he sends his taxes in, and the computer, rather than saying, you know, check it, the computer will say the the taxpayer has rental income in another location than he lives at. And we don't have any proof of that.
So that that then a human being takes the let takes that that answer and translates it into the one-page letter saying to you, Where we're where where are you renting this house? Give me the deed, give me this, give me that. Some some things that you might not have as a as a house owner, you know, they that maybe at your lawyers, maybe at your mortgage broker, all of that kind of stuff you need to get to get to them just to just to
to to prove that you have a house at another location than you're living at. Then, you know, the the other problem that that ⁓ we you know we came across the one that came in Friday after I was I was stumped to say what I would I was gonna tell you is people who are smart and do their own taxes. And the tax programs that we have as accountants and the
pro tax programs that you have as individual, I know because, you know, some of my staff use those tax programs to do their own taxes, make a lot of mistakes.
And the because of that, you should never have your taxes done with a computer program if they're complicated. You should go to an accountant or someone qualified to do your taxes because those programs make mistakes. And Intuit is facing a class action suit right now because of the mistakes they made in twenty twenty four and twenty twenty five on on on on on reportable stuff.
So if you use a tax programme that you buy at staples, have your taxes reviewed by someone qualified.
you know, and I'm saying people who have other income, not not not people who have T4 income, you know, T4 or a retirement income and things like that. Things that they already have on you there. So the other thing that that happens with CRA is that they give Slack to the banks and not to the taxpayer.
Up until twenty twenty five that ended.
For years the banks were sending your T threes and T fives after February twenty eighth.
So when we sent your taxes to the government, they sat there until the bank sent their taxes, or they would re they would tell you that they don't have you know, you have to prove that you made that interest or that you had that capital gains loss or the or or or that that kind of of attitude. So in twenty twenty five, you know, at the big ⁓ the beginning of twenty twenty five, the government said to the financial sector of Canada
If you send these slips late, it's gonna cost you a hundred thousand dollars a day. And lo and behold, everybody sent them before February twenty eighth. And that's why we don't have any late stragglers in twenty twenty-five. That's why you know, that's why the slips are on time, with the exception of financial institutions in the US who you know
think of us as an afterthought and send them ⁓ whatever time they want. But I don't have I don't have them that many clients that depend on that and they report that as Canadian income anyway, so we we we send something something to verify that. Now what why is what is the problem with how CRA interprets these the
business income or or ⁓ rental income or you know capital gains. You know, let's say capital gains. In a f perfect world, we don't have to prove how much you paid for your house or for your building. We have to prove how much you made at the end.
My arguments in the last year is on the costing and what you pay it for. Why? Because we have people in their twenties not believing that a house costs four hundred fifty thousand dollars in nineteen ninety seven.
And now you have to send proof that you spent four hundred and fifty thousand dollars on the house. And a lot of us don't have that proof. We have to go back to the real estate agent if they're still there. We have to go back to the mortgage broker, and and we have to send purchase agreements. Not, you know, my real estate agent says that the streets sold for you know at that time for four hundred and fifty thousand dollars. I have never argued on costing before.
I have never threatened to go to tax court on a costing issue. And that's happening today.
it's easy to to it's easy to quantify and prove sale because that happened last week. But it's very difficult to prove purchase if it happened in nineteen eighty six.
Or if you were willed the the the property in nineteen eighty six and and you you moved into the house and you know you you sell it now. That that is that that creates a lot of issues with them because they are not smart enough to go and look at statistics statistics from the area. The ⁓ the another thing that happens with them is that they measure what you make and what you spend in charity.
Now most of us have no issue with that.
Eric (08:57)
Thank you.
Eric (08:57)
But if
you have a client like I have who has a ⁓ a T four for a hundred and seventy five thousand dollars and donates a million dollars to a charity
They give me a they give them a receipt for a million dollars, they are going to say, Where did you get the money to to give a million dollars? Because you only making one hundred and seventy five thousand dollars a a year. So
That person
has rich parents that live in a house that he bought for them.
And it has a wife that doesn't work and make and makes lots of donations.
And what the government does, you know, and they and and and it it is not is not a problem with computers or twenty somethings that don't know how to read a statement. So if you do not look like your expenses, if you you know live in a s in a three bedroom house
And that you know, you and that you bought for a hundred and fifty thousand dollars fifty years ago, and you're donating those millions of dollars to to charity, they are going to audit the charity and they're going to audit you because they don't believe that either one of you is telling the truth. And that prompts a very special letter from them. In in thirty-five years, in thirty years of practice.
It's only happened once to me. And they send it to everybody that works for you. So if you are running the company, do all of your employees get the same letter. And they send it to the embassies outside of Canada if the charity was outside of Canada.
Now, what should that guy have done? Well, he should have gone to an accountant first. We would have told them, you know, be careful with with the million dollars because that's too much money for what you say you're making. And sometimes we would have not made the taxes. We would have not we would have said to him, Don't send a tax return like this, split that that donation over five years, you know, go under the radar. So
You know, it it it sometimes it looks like it's a self evident thing, but it's not self evident, you know, some sometimes. The other the other thing that people do is investments. If you have a hundred dollars in fifty thousand places, you are going to have a very difficult tax return. If you have a million dollars in one place, you're gonna have a very easy tax return.
But most people that I've done this year have five hundred bucks, six hundred bucks in a lot of places. So they get twenty five five thousand and eights. So if you get twenty five, five thousand and eights with, you know, bought for two hundred dollars, sold for three hundred bucks, kind of tw five thousand and eight, you know, which which d which do not advance your financial state, you know, you're still, you know, poor.
you know to to to for lack of a better term then you have a horrendous tax return to do and you should never do it yourself because they already have those five thousand and eights there and they're gonna match and and and to do you know that many five thousand and eight you're going to get into trouble. We have a partner in my firm that
that cheats with the government in reporting the five thousand and eight. One of his staff's members adds all of them up them up by a computer tape. He puts in the in the tax return fifty five thousand and eights, purchase price as much, cost as much the total, you know, and he sends it to the government. And so far they haven't said anything. But I I don't have the the guts to do that because I live in Ottawa and in Ottawa is where head office is.
and head office has more time than the people in Toronto do. And has l has co op students working there who know nothing.
Right. I've I've had I've had to explain, you know, rules of the tax act to co op students who are who are from University who who are going to be, you know, accountants six years from now.
So if you have a problem with them and it's a big problem, stay away from the summer.
Stay away from the summer, give them a date in September. Do whatever whatever you want to do is stay away from the summer. Tell that you're away, tell that you're you have a sick aunt in Hungary that you have to to go look at. Tell them whatever you want. But tell that stay away from them because they're gonna sick these students on you because they're cheap and they're gonna run you nuts.
And lastly, lastly, if you are very sick, tell the government through other means on your tax return.
Which means send them an a disability tax credit form signed by your doctor. Because the government does not believe that you need all of those drugs to stay alive.
So if you if you have if you're really sick, you know, and it's affecting your mobility or your thoughts or whatever, go to your doctor and get a discipline tax credit and then send tell your doctor that you've been like that for the last five years and and you'll backdated it to five years ago and and you get a you get several thousand bucks from the government. But if you're not really sick, do not fake medical expense.
Now there are dental expenses are believable because dentists
are not covered by the Health Act to to ⁓ you know up until recently. So dental expenses like bridges, ⁓ like false teeth, all of that kind of stuff, they're easy to to claim because the dentist is claiming as a as income and you can claim it as an expense. But anything else, be careful.
Supplements are not a medical expense.
And and they're good for you, they do wonders but they do not do anything to CRA. They do not captivate their intelligence. if you have all of these things that I buy from ⁓ people who sell, better water for soccer players or vitamins and things like that.
unless they are prescribed by your doctor, do not put them in your tax return. And the reason you don't put them on your tax return is because if they catch you there, they will put a red flag on you for the next seven years. And for the next seven years you'll get letters saying, with send us ⁓ proof of this, send us proof of that. You know, all all of those all of those things that are self evident, they will ask you for because they don't trust you anymore.
So buy those condiments, buy those ⁓ a additives, buy everything you wanna buy to make you feel better, but do not tempt yourself with declaring it as an expense, as a medical expense, unless you've talked to your doctor and he has sent you a prescription.
And lastly
What do we do when people like that come to us? Well, the one that prompted this discussion, I forgot the the name of the program that but it's the one in two with rights, sh she did their taxes with that. The first thing I did is take the letter, call the CRA and say, I'm on holidays until September seventeenth, I cannot deal with this. That's the first thing I did.
And the client said, Well, is it gonna take that long time? I said, No, But I'm not s I'm not talking to these guys in in the summertime.
Second thing I did is I s I gave the letter back to the client. It's it's an eight page letter and I said, in your own words, answer as many of these questions as you can by yourself and bring it back to me.
Because I don't want to lose I don't want to fight a cause that it doesn't need to be fought. And I wanna fight with the client's words and not with my words, because my words are gonna be more dartful than the client.
And and I'm gonna lose my patience faster than the client is, 'cause the client is afraid.
So I the most of that letter will be done. I will I will do the rest and I will start the per first paragraph of that letter saying you should employ people who know Canadian geography and know the difference between the Niagara region and the Ottawa area.
That's that's how how I'm gonna start that that's already in the draft.
Now, am I gonna get enemies for that? No, because their bosses are going to say,
You know, we should be careful with the people we get as co op students and we should not be assuming that they know Canadian geography.
But the next step that that letter will prompt is after she sends the thing, if they ask one question on it, one question, I threaten to go to tax court.
I threaten to go to tax court and I say and I go when I go to tax court, I say to CRA, you know, we cannot discuss this between you and I. We cannot we cannot see f face to face what what what is wrong here. Let let a judge this discuss it. Then 20 somethings lose the file and it goes to an older person, and the older person then calls me and says, What is the problem? And then I discuss it the problem with them.
and then they might revisit and they might assign it to somebody who's an expert in the area. But
What the taxpayer is getting today is the lowest common denominator and are people who don't know a they might not even be speaking English or French. Two, they might not know the Tax Act. Three, they might not know the Tax Act of their own country where they come from.
So that's that's that's who who we're getting today. And I I feel sorry for some of my clients because that's the people that they have to deal with before they come here. And I have lots of clients who are corporate clients who do their taxes and now we have the rule say you can do your own taxes, but you have to give them to us by the end of May, because we want to make sure that you look like your corporation.
We wanna make sure that you look that the picture that you send the government of your face, you know, of Jacqueline's face, looks like Jacqueline's corporation. That Jacqueline is not very is not poor in a very rich company or is very rich in a very poor company. That that's that's what we do. And that's why we charge what we