CRA Audit: What to Expect and How to Prepare

Types of CRA Reviews and Audits

Not all CRA correspondence is an audit. The CRA conducts several types of reviews, ranging from routine to comprehensive:

• Processing review — a routine check of your return, usually resolved by providing documentation
• Desk audit — a limited review of specific items, conducted by correspondence
• Field audit — a comprehensive review conducted at your place of business or your accountant's office
• Net worth audit — used when the CRA suspects unreported income, compares lifestyle to reported income

What Triggers a CRA Audit?

The CRA uses sophisticated risk assessment tools to select returns for audit. Common triggers include:

• Significant changes in income or deductions from prior years
• Unusually high expense ratios for your industry
• Consistent losses over multiple years
• High home office or vehicle expense claims
• Cash-intensive businesses (restaurants, contractors, retail)
• Discrepancies between T4 income reported by employers and income reported on your return
• Tips from third parties (former employees, business partners)

Your Rights During an Audit

You have important rights during a CRA audit. You have the right to be represented by an accountant or tax lawyer, to receive a clear explanation of what is being audited, to have a reasonable amount of time to provide documentation, and to dispute the auditor's findings through the objection process.

You are not required to answer questions beyond what is necessary to verify your return. If an auditor asks questions that seem to go beyond the scope of the audit, consult with your accountant before responding.

How to Prepare

The best preparation for a CRA audit happens long before you receive an audit notice:

• Keep all receipts and supporting documentation for at least six years
• Maintain a mileage log if you claim vehicle expenses
• Document the business purpose of all meals and entertainment expenses
• Keep a home office log if you claim home office expenses
• Ensure all income is reported — including cash sales
• Reconcile your HST/GST account to your filed returns
• Keep corporate minutes and resolutions up to date

Working with a Professional During an Audit

We strongly recommend engaging a professional accountant or tax lawyer to represent you during a CRA audit. A professional can communicate with the auditor on your behalf, ensure you don't provide more information than required, identify and challenge unreasonable assessments, and navigate the objection process if needed.

The cost of professional representation is almost always less than the additional tax, penalties, and interest that can result from an unrepresented audit. And the peace of mind is invaluable.

If You Disagree with the Audit Results

If the CRA proposes adjustments you disagree with, you have the right to file a Notice of Objection within 90 days of the Notice of Assessment. The objection is reviewed by the CRA's Appeals Division, which is independent of the auditing division.

If the objection is unsuccessful, you can appeal to the Tax Court of Canada. Most disputes are resolved at the objection stage without going to court.