Retired Professor's Consulting Firm Avoided a Costly CRA Reassessment

The situation

Kajan retired from a long career teaching at a university, and within a year he had turned what he expected to be occasional guest lectures into a full consulting practice, advising graduate programs and corporate training departments on curriculum design. The business grew faster than he planned. Within three years it was generating enough income that it no longer looked like a retiree's side project on paper — it looked like a full operating business, with the deductions to match.

His spouse, Andre, a pharmacist, kept their household finances organized and had watched Kajan's business expenses climb: mileage to client sites across the region, a dedicated office in a converted upstairs bedroom, software subscriptions, and travel to deliver in-person workshops. Their bookkeeper, Keisha, prepared the annual filings from what Kajan gave her, but she had started flagging something in their yearly check-ins — Kajan was claiming a lot of vehicle use and a lot of home-office space, and she was not entirely sure the records behind those numbers would hold up if the Canada Revenue Agency ever asked to see them.

Keisha was not a lawyer and did not want to guess. She recommended Kajan get a proper legal and tax risk review before another filing season went by, particularly given how much the business had grown. Kajan came to Treadstone Law not because he was under audit, but because he wanted to know, honestly, whether he was exposed if he ever was.

What the review found

Under the Income Tax Act, a business expense is deductible only if it was incurred to earn business income and can be supported with adequate records. For vehicle expenses, that means a logbook or equivalent record showing the business purpose, destination, and distance of each trip, not just a running estimate of "business use percentage" applied to total mileage. For a home office, the space claimed has to be used principally for the business, or used regularly and exclusively to meet clients, and the expenses claimed have to be calculated against a defensible share of the home — square footage of the office measured against the home's total finished space, applied consistently to utilities, property tax, insurance and, where relevant, mortgage interest.

When our team reviewed three years of Kajan's records, two problems stood out. First, the vehicle expenses were being claimed at a flat business-use percentage that Kajan had settled on in his first year and never revisited, with no contemporaneous log to back it up — no dates, no client names, no odometer readings. CRA auditors treat an unsupported percentage claim as one of the easiest adjustments to challenge, because the taxpayer has no way to prove the number was ever accurate, let alone that it stayed accurate as the business changed. Second, the home-office claim had been calculated using the square footage of the converted bedroom against only the home's above-ground living space, which overstated the business-use percentage compared to a calculation that included the finished basement the couple also lived in day to day.

Individually, either issue might have produced a modest adjustment if CRA ever looked closely. Together, across three reassessable years and the income level the business had reached, our team estimated the exposure if CRA disallowed the unsupported portions of both claims at somewhere between roughly $150,000 and $400,000 in tax, interest and penalties, depending on how aggressively an auditor read the record and how far back a review reached. That range reflected genuine uncertainty rather than a single hard number — Kajan's actual filing position had never been tested, and the point of the review was to close the gap before it was.

What we did

1. Reconstructed the vehicle record where it could still be supported. Kajan's calendar, invoicing history and client correspondence let our team rebuild a defensible trip-by-trip log for the prior year, cross-referenced against actual client engagements rather than a flat estimate. Where the record could not be reliably reconstructed for earlier years, we advised amending the business-use percentage on those returns downward to a figure the surviving evidence could actually support, rather than leaving an inflated claim standing.
2. Recalculated the home-office percentage against the home's full finished space. Bringing the basement into the denominator dropped the claimed business-use percentage meaningfully. It was a smaller deduction going forward, but it was one that matched the space Kajan actually used and could be explained to an auditor in one sentence.
3. Set up a going-forward logbook and documentation practice. Rather than leave Kajan to guess what "adequate records" meant, our team gave him and Keisha a simple template — dates, destinations, business purpose, distance — along with a yearly reminder to review the home-office calculation if the household's living space changed. The fix only holds if the habit continues.
4. Filed voluntary adjustments for the affected prior years. Where the earlier vehicle claims could not be substantiated, amending the returns proactively put Kajan in a materially better position than waiting for CRA to find the gap on its own. A taxpayer who corrects a return before being asked is treated very differently from one caught after the fact, both in how much tax ultimately comes due and in whether penalties apply at all.
5. Documented the basis for every figure that remained. For every deduction that survived the review, our team made sure there was a written explanation — the business purpose, the calculation method, the records behind it — kept together in one file, so that if CRA ever did open an audit, the position could be explained calmly and quickly rather than reconstructed under pressure.

The outcome

CRA never opened a file on Kajan's business. That is, in a sense, the entire point of the engagement — there is no reassessment to describe, no negotiated settlement, no appeal. What happened instead is that a business with genuine but poorly documented deductions became a business with modest, well-supported ones, before anyone outside the household ever looked at the numbers.

The correction was not free. Amending the prior years' vehicle claims meant Kajan owed some additional tax and interest on the reduced deductions for those years, and the going-forward home-office percentage was lower than what he had been claiming, which trimmed his deduction in future years too. But that cost was a small fraction of the roughly $150,000 to $400,000 range our team had identified as the exposure if CRA had found the same gaps on its own, with penalties for unsupported claims layered on top of the tax and interest. Kajan described it afterward as the difference between a bill he could plan for and one that could have unwound years of what he thought was a well-run retirement business.

Keisha's instinct to flag the issue before another filing season passed was, in the end, the reason there was time to fix it properly. A business audit review works best when it happens on the taxpayer's schedule, with time to rebuild records and make considered corrections, rather than on CRA's schedule, with a response deadline and an auditor already forming a view.

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