Receiving a letter from the Canada Revenue Agency (CRA) notifying you of an audit can be an unsettling experience for any individual or business owner. However, understanding the CRA audit process — what it involves, why it happens, and how to respond — can significantly reduce your stress and improve your outcome. At BOMCAS Canada, our Professional Tax Accountants in Edmonton have extensive experience representing clients through CRA audits of all types, from simple desk reviews to complex field audits.
This comprehensive guide explains the CRA audit process from beginning to end, including your rights as a taxpayer, what auditors look for, and the steps you should take to prepare effectively.
What Is a CRA Audit?
A CRA audit is an examination of a taxpayer's financial records and tax returns to verify that income has been accurately reported and that the correct amount of tax has been paid. The CRA has broad powers to audit individuals, corporations, trusts, and other entities under the Income Tax Act and the Excise Tax Act.
An audit does not necessarily mean the CRA believes you have done something wrong. Many audits are selected randomly or as part of industry-wide compliance initiatives. However, all audits require your full cooperation and careful preparation to achieve the best possible outcome.
Types of CRA Audits
The CRA conducts several types of audits, ranging from simple correspondence reviews to comprehensive on-site examinations:
- Desk Audit (Correspondence Audit): The most common type. The CRA sends a letter requesting specific documents or information to verify items on your return, such as receipts for charitable donations or medical expenses. You respond by mail or through My Account.
- Office Audit: You are asked to bring your records to a CRA office for review. These audits typically focus on a specific issue or a limited number of items.
- Field Audit: A CRA auditor visits your home or business to review your records on-site. Field audits are more comprehensive and are often used for businesses with complex financial affairs.
- GST/HST Audit: A specific audit of your GST/HST filings, input tax credits, and remittances. These are common for businesses in industries with high GST/HST volumes.
- Payroll Audit: Reviews your payroll records, source deductions, and T4 filings to ensure compliance with employment tax obligations.
Why Was I Selected for an Audit?
The CRA uses a sophisticated risk-assessment system to select returns for audit. Common triggers include:
- Unusual deductions or credits that are significantly higher than average for your income level or industry
- Large business expenses relative to reported revenue, especially in cash-intensive industries
- Discrepancies between reported income and information slips (T4s, T5s, T3s) filed by third parties
- Repeated losses from a business or rental property over multiple years
- High charitable donations relative to income
- Unreported income detected through the CRA's underground economy initiatives
- Random selection as part of a compliance program
- Industry-specific initiatives targeting sectors with known compliance issues
- Third-party information from informants or other government agencies
The CRA Audit Process Step by Step
Understanding each stage of the audit process helps you respond appropriately and protect your interests:
- Initial Contact: The CRA contacts you by letter (or phone for field audits) to notify you of the audit. The letter identifies the tax years under review and the specific issues or documents required.
- Document Request: The auditor provides a list of documents and information required. This may include bank statements, receipts, invoices, contracts, payroll records, and financial statements.
- Document Submission: You gather and submit the requested documents within the specified timeframe. For field audits, the auditor reviews records at your premises.
- Auditor Review: The auditor examines your records, cross-references them with your tax return, and may ask follow-up questions.
- Proposed Adjustments: If the auditor identifies discrepancies, they issue a Proposal Letter outlining proposed changes to your tax return and the resulting tax, interest, and penalties.
- Response Period: You have the opportunity to respond to the proposal, provide additional documentation, and dispute any proposed adjustments.
- Notice of Reassessment: If the CRA proceeds with adjustments, it issues a Notice of Reassessment showing the revised tax owing, plus interest and any penalties.
- Appeals: If you disagree with the reassessment, you have 90 days to file a Notice of Objection with the CRA's Appeals Division.
Your Rights During a CRA Audit
As a Canadian taxpayer, you have important rights during a CRA audit, protected by the Taxpayer Bill of Rights:
- Right to be informed: You have the right to know why you are being audited and what information the CRA requires.
- Right to professional representation: You have the right to have a Professional Tax Accountant or lawyer represent you throughout the audit process. You are not required to deal with the CRA directly.
- Right to privacy: The CRA can only request information that is relevant to the audit. You are not required to provide information beyond what is legally required.
- Right to dispute: You have the right to object to any reassessment you believe is incorrect, and to appeal to the Tax Court of Canada if necessary.
- Right to confidentiality: Your tax information is confidential and cannot be shared without your consent, except as permitted by law.
How to Prepare for a CRA Audit
Proper preparation is the key to a successful audit outcome. Our CRA audit representation team recommends the following steps:
- Engage a Professional Tax Accountant immediately. Do not attempt to handle a CRA audit alone. An experienced accountant can manage all communications with the CRA on your behalf.
- Gather all requested documents. Organize your records systematically — bank statements, receipts, invoices, contracts, and financial statements — for the years under review.
- Review your original tax return. Understand what was claimed and why. Identify any areas that may be difficult to support with documentation.
- Do not volunteer information. Only provide what is specifically requested. Volunteering additional information can expand the scope of the audit.
- Respond within the deadlines. Missing CRA deadlines can result in automatic reassessments or additional penalties.
- Keep copies of everything. Retain copies of all documents submitted to the CRA and all correspondence received.
What Happens After the Audit?
After the audit is complete, one of three outcomes is possible:
- No changes: The CRA accepts your return as filed. This is the best outcome and means your records were sufficient to support all claims.
- Reassessment in your favour: The audit reveals that you overpaid tax, resulting in a refund.
- Reassessment with additional tax owing: The CRA adjusts your return to increase your tax liability, plus interest and possibly penalties. You can pay the amount owing, negotiate a payment arrangement, or file a Notice of Objection if you disagree.
If you receive a Notice of Reassessment you disagree with, you have 90 days to file a Notice of Objection. If the objection is unsuccessful, you can appeal to the Tax Court of Canada. Our team can guide you through every stage of this process.
Frequently Asked Questions
How long does a CRA audit take?
The duration varies widely depending on the type and complexity of the audit. A simple desk audit may be resolved in a few weeks. A comprehensive field audit of a business can take 6–18 months or longer.
How far back can the CRA audit me?
The CRA can generally reassess your return within 3 years of the original assessment date (the "normal reassessment period"). However, if the CRA suspects fraud or misrepresentation, there is no time limit. This is why maintaining records for at least 7 years is strongly recommended.
Can I be audited more than once?
Yes. There is no limit to the number of times the CRA can audit you, though the same tax year cannot be reassessed after the normal reassessment period without evidence of fraud or misrepresentation.
What if I cannot find all the requested documents?
If original documents are unavailable, you may be able to provide alternative evidence such as bank statements, credit card records, or statutory declarations. A Professional Tax Accountant can help you identify acceptable alternatives and present them effectively to the CRA.
Get CRA Audit Representation from BOMCAS Canada
Facing a CRA audit is stressful, but you do not have to face it alone. BOMCAS Canada's Professional Tax Accountants in Edmonton provide expert CRA audit representation for individuals and businesses across Alberta and all of Canada. We manage all communications with the CRA, organize your documentation, and advocate for the best possible outcome on your behalf. Contact us today for a confidential consultation.
