Introduction
Construction companies are audited by the CRA at a higher rate than many other industries. The combination of subcontractor payments, mixed-use vehicles, significant cash transactions, and variable revenue makes construction returns a natural target for review. These four errors are the ones that create the largest, most avoidable audit adjustments.
Mistake 1: Subcontractor Payments Without Contracts or T4As
A general contractor who pays subcontractors in cash or by cheque without written contracts and without issuing T4As at year end has a documentation problem that an auditor will identify immediately.
The CRA's standard review of a construction company includes matching the T4As filed by the company against the subcontractor expenses claimed on the T2. Where $200,000 in subcontractor costs is claimed but only $80,000 in T4As was issued — and no written contracts exist for the balance — the auditor will question the legitimacy of the uncorroborated payments.
A subcontractor who does not exist, or a subcontractor payment that was actually made to the shareholder personally, is a serious finding. But even legitimate subcontractors who were not issued T4As create an audit risk that is entirely avoidable.
Fix: Maintain a written subcontract agreement for every subcontractor relationship. Issue T4As for every subcontractor paid more than $500 in the year, by the last day of February. File T4A summaries to the CRA at the same time.
Mistake 2: Personal Expenses Running Through the Corporate Account
The construction industry involves significant personal and corporate overlap — the contractor drives a truck that is used for both work and personal travel, has a phone used for both business and personal calls, and may use tools and equipment that occasionally serve personal purposes.
The CRA expects these mixed-use items to be allocated correctly — business portion claimed, personal portion excluded. What auditors frequently find instead is a corporate expense claim for 100% of the truck, 100% of the phone, and 100% of fuel costs — with no allocation for the personal component and no logbook to support the business use percentage.
In the same review, the auditor may find home renovation invoices, personal grocery store charges, and family vacation airfare run through the corporate account and booked as business expenses.
Fix: Maintain a vehicle logbook. Document business use percentages for shared-use assets. Keep personal expenses completely out of the corporate account. Review the corporate credit card and bank statements monthly with the bookkeeper for personal expense contamination.
Mistake 3: Revenue Not Matching HST Returns
A construction company that files its HST return reporting $1.2 million in taxable supplies but files a T2 showing $2.1 million in total revenue has a reconciliation gap the CRA will ask about. The HST return and the T2 should be reconcilable — the taxable supplies on the HST return should correspond to the taxable revenue on the T2, after adjusting for HST-exempt revenues (if any) and timing differences.
Where the gap is not explainable — where some of the T2 revenue does not appear to have generated HST obligations — the auditor will treat the difference as underreported taxable supplies and assess the resulting HST.
Fix: Perform an HST-to-T2 revenue reconciliation as part of the year-end close. The CPA preparing the T2 should confirm that the HST filed matches the revenue reported. Any gap should be identified and documented before filing, not discovered by the CRA on audit.
Mistake 4: Borrowing From the Shareholder Loan Account Informally
The shareholder loan account in a construction company is often a casualty of irregular cash flow — the owner takes draws in slow months with the intention of repaying from the next project payment, and the balance accumulates without a formal repayment plan.
As discussed in Article 95, a shareholder loan balance that is not repaid within one year of the corporate year-end is included in the shareholder's personal income under section 15(2). For a contractor with a $120,000 shareholder loan balance that has been accumulating for two years, the CRA may assess $120,000 of additional personal income in the year the repayment obligation was missed — plus interest on the resulting personal tax.
Fix: Monitor the shareholder loan balance monthly. Before fiscal year end, ensure any balance owing within the repayment window is either formally repaid, converted to salary (with proper payroll), or converted to a declared dividend. Do not allow the balance to roll over without a plan.
When to Speak With a CPA
For a construction company that has one or more of these patterns in its current year's books, a year-end review before filing — specifically looking at subcontractor T4As, expense allocation, HST reconciliation, and shareholder loan — is the difference between a clean return and an invitation to a more detailed review.