CRA Audit: Summary

A CRA audit checks your tax returns and supporting records. Being selected does not itself mean you did something wrong.

• Initial contact: An auditor contacts you by phone or mail to arrange the audit.
• Records and questions: Expect requests for relevant accounting records, receipts, invoices, contracts, and bank statements, plus explanations of discrepancies. Relevant personal or related-party records may also be examined.
• Proposed findings: You generally have an opportunity to respond to proposed adjustments, usually within 30 days, before the audit is finalized.
• Outcome: There may be no change, a refund, or additional tax, potentially with interest and penalties. You can object to a reassessment; check the applicable deadline promptly.

Action Items

• Confirm the tax years, issues, requested documents, and response dates.
• Organize records by request and retain copies of all submissions.
• Answer accurately; verify anything you are unsure about.
• Consider having your accountant coordinate communications.
• Use the secure submission method provided by the auditor, not ordinary email.

Reducing Audit Risk

You cannot guarantee that you will avoid a CRA audit. CRA uses risk assessment to select files. Focus on accurate reporting and supporting records, rather than trying to avoid attention.

• Report all income: Keep complete income records, including cash sales, and check that the amounts reported agree with your records.
• Claim only eligible expenses: Keep supporting receipts, document the business purpose, and exclude personal expenses. For mixed-use costs, support the business portion claimed.
• Keep business and personal finances separate: As a practical control, use separate accounts and clearly explain transfers or non-business deposits. CRA identifies mixed accounts and unreliable records as reasons it may use indirect income-verification methods.
• Review your bookkeeping regularly: Reconcile bank and credit card accounts, resolve missing records, and explain differences between your books and tax filings. These are recommended controls, not guarantees against an audit.
• Get advice on uncertain items: Consider a tax professional’s review of complex transactions or unusual claims. You remain responsible for adequate records even when someone else maintains them.

CRA guidance: Business audits; Business records; Business expenses; Keeping records.

Documents to Have Available

Keep the following records where applicable to your circumstances. The auditor’s request determines what you need to submit.

• Tax filings and accounting: Copies of filed returns, financial statements, ledgers, journals, and working papers supporting the reported figures.
• Income: Sales invoices, cash register records, receipts, deposit slips, fee statements, and contracts showing the date, amount, and source of income.
• Expenses: Detailed supplier invoices and receipts describing purchases, plus proof of payment and relevant contracts or leases.
• Banking and financing: Business bank and credit card statements, cancelled cheques, and loan agreements. Personal bank, credit card, mortgage, or related-party records may also be requested where relevant.
• Property and equipment: Purchase and sale documents showing cost, dates, and proceeds, together with records supporting capital cost allowance claims.
• Vehicle claims: A trip log with dates, destinations, business purposes, and kilometres; total annual kilometres and opening and closing odometer readings; and supporting vehicle expense receipts.
• GST/HST, if applicable: Filed returns, sales records showing tax treatment, and purchase invoices or receipts supporting input tax credits.
• Payroll, if applicable: Employee hours, amounts withheld for tax, CPP and EI, TD1 forms, issued information slips, filed returns, and registered pension information.
• Electronic records: Retain the underlying accounting and point-of-sale data as well as supporting documents, not just summary reports, and ensure you can provide the records on request.

How Long to Keep Records

Generally, keep required records for six years from the end of the last tax year they relate to. For a late-filed income tax return, retain records for six years from the filing date. Some long-term property, share registry, and historical business records must be kept indefinitely.

For an objection or appeal, retain the necessary records until the latest of: resolution of the dispute, expiry of the deadline for any further appeal, or expiry of the normal six-year retention period. Follow any CRA direction to retain records longer.

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Disclaimer:

This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal or tax advice nor can it or should it be relied upon. All tax situations are specific to each individual. If you have specific tax questions you should book an appointment for a 1 on 1 consultation.