TL;DR
If CRA sends you an audit letter, don't panic. Most audits are routine. Here's what to expect, what to prepare, and how to get through it with minimal pain.
The letter arrives from CRA. Your stomach drops. But here's what most business owners don't know: the vast majority of CRA audits are routine reviews of specific items, not full investigations of your entire life. Knowing what to expect takes most of the fear out of it.
According to CRA's annual report, they complete over 300,000 small and medium business audits per year. The chances of being audited in any given year are significant. Being prepared is just good business practice.
What to Expect
CRA audits come in a few forms. A desk audit is the most common. CRA sends a letter asking for documentation on specific items: receipts for a large deduction, proof of a claimed expense, or details on a specific transaction. You respond by mail or through My Business Account. These are usually straightforward.
A field audit is more involved. An auditor comes to your place of business (or your accountant's office) and reviews your records in detail. They may look at several years of books and examine specific areas like GST/HST compliance, payroll, or expense deductions.
A T2 corporate audit examines your corporate tax return. This can include reviewing intercompany transactions, shareholder benefits, salary and dividends paid, and whether expenses are properly classified.
Before the Audit: Get Organized
Organization is the single biggest factor in how smoothly an audit goes. Here's what to have ready.
All source documents for the audit period. Bank statements, credit card statements, invoices (both sent and received), receipts, contracts, lease agreements. If CRA is looking at a specific year, have every piece of paper for that year organized and accessible.
Reconciled financial statements. Your P&L and balance sheet should match your tax return. If they don't, find out why before CRA does. Discrepancies between your books and your filed return are red flags.
Payroll records. T4s, T4A-NRs, ROEs, payroll registers, and evidence of source deduction remittances. Payroll is one of the most commonly audited areas because unremitted source deductions are a high priority for CRA.
GST/HST documentation. Input tax credits must be supported by invoices that include the supplier's GST/HST number. If you claimed ITCs without proper documentation, this is where it shows up.
Vehicle logs. If you claim automobile expenses, CRA expects a detailed log of business versus personal kilometres. Without a log, the entire deduction can be denied. This catches more business owners than almost anything else.
During the Audit: The Rules
Work through your accountant. You have the right to have your accountant represent you. Use it. They know what CRA is looking for and how to present information in the most favourable way.
Answer only what's asked. Don't volunteer information CRA hasn't requested. If they ask about your vehicle expenses, don't start explaining your home office deduction. Stay on topic.
Be responsive. CRA sets deadlines for providing information. Meet them. Delays extend the audit timeline and can escalate the review. If you need more time, ask for it formally in writing.
Keep records of every interaction. Note the date, who you spoke to, and what was discussed. If you send documents, send them by registered mail or keep electronic confirmation.
Don't lie or hide anything. CRA has access to your bank records, your clients' records, third-party data from Intuit and Stripe, and provincial databases. They will find discrepancies. Cooperation leads to better outcomes than obstruction.
After the Audit
CRA will issue a Notice of Reassessment if they make changes. You have 90 days to file a Notice of Objection if you disagree. This is where your accountant earns their fee. Many audit adjustments are negotiable, and a well-documented objection can reduce or eliminate the additional tax assessed.
Reducing Your Audit Risk
- File on time. Late filings attract attention.
- Be consistent. Large year-over-year swings in income or deductions without explanation trigger reviews.
- Keep records for 7 years. CRA can go back 6 years in most cases. Keep everything for 7 to be safe.
- Separate personal and business. Personal expenses running through the business account is one of the top audit triggers.
- Report all income. CRA receives data from banks, payment processors, and platforms. Unreported income will be found.
What to Do This Week
- Check your record retention. Do you have organized records going back 7 years? If not, start now.
- Review your vehicle log. If you claim auto expenses, is your log current? If not, reconstruct what you can and start logging going forward.
- Confirm GST/HST documentation. Pull 5 random expense receipts. Does each include the supplier's GST number? If not, get proper invoices.
- Talk to your accountant. Ask them if there are any areas in your most recent filing they'd flag as higher risk.
The Bottom Line
CRA audits are a normal part of doing business in Canada. Preparation and organization are your best defence. Keep clean records, file on time, and work with a good accountant. If you've received an audit letter and need help getting organized, book a free call.
Next step: browse the free small business tax deduction guide.
Frequently Asked Questions
- What triggers a CRA audit?
- Common triggers include large or unusual deductions relative to income, consistent losses year after year, industry-wide audits targeting specific sectors, random selection, inconsistencies between returns and third-party data, and significant year-over-year changes in reported income.
- How long does a CRA audit take?
- A simple desk audit reviewing specific items can be resolved in a few weeks. A comprehensive field audit can take 6 to 18 months. The timeline depends on how organized your records are, how responsive you are to CRA requests, and the complexity of your business.
- Do I need a lawyer for a CRA audit?
- For most routine audits, your accountant can handle it. You may want a tax lawyer if the audit involves potential fraud allegations, very large assessments, or if CRA is examining personal benefits or shareholder transactions. Your accountant can advise when legal counsel is warranted.
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