What to Expect During a CRA Audit and How to Prepare

A CRA audit can feel like a storm cloud. The thought of your records being pored over can keep you up at night, but knowing what to expect and how to prepare can make it more manageable. This will walk you through the CRA audit process, give you practical tips to prepare and show you how to be fearless.

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What is a CRA tax audit?

A CRA tax audit is a thorough review of your financial records by the Canada Revenue Agency. CRA auditors play a crucial role in reviewing these records to ensure compliance with income tax laws. They want to make sure your tax returns accurately reflect your income, deductions and credits. Credit card statements, for example, may be reviewed during the audit to support expense claims. In other words, they want to confirm you’re complying with tax laws, meeting your tax obligations and not making mistakes or fraud.

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During an audit the CRA will compare your reported income and deductions to your records. If they find discrepancies they may adjust your tax return which could result in additional taxes owed, penalties or in some cases a refund.

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Why Will My Tax Returns Be Audited?

You might be wondering “Why me?” Certain industries are considered high risk for non-compliance, which can lead to audits. Here are some common reasons why the CRA might audit your tax return:

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Audits may specifically target deductions or expenses related to a taxpayer's business, ensuring that all claims are legitimate and compliant with tax laws.

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Random Selection

• Some audits are done randomly as part of the CRA’s effort to keep the tax system honest.

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Risk Assessment

• The CRA uses sophisticated risk assessment tools to identify tax returns that may have errors or discrepancies. If your return raises red flags – such as large deductions relative to your income – it could be selected for an audit.

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Red Flags

• Certain items on your tax return will trigger an audit. For example:

• Unusually high business expenses

• Inconsistent income reporting

• Significant deductions not matching your income

• High taxable benefits claimed for personal use of company-owned assets

• Could prompt a closer look.

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Industry Averages

• If your tax return is significantly different from others in your industry or profession, the CRA might flag it for review. This is especially common in industries with cash transactions like hospitality or construction.

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Previous Audits

• If you’ve been audited before and issues were found, you might be audited again to ensure you’re compliant with tax laws.

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Discrepancies

• If there are discrepancies between your reported income and information the CRA receives from third parties (like employers or financial institutions), an audit may be triggered.

 

Knowing these will help you be more aware when filing your taxes and avoid the traps that lead to an audit.

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Types of CRA Audits

Not all audits are the same. The CRA does different types of audits depending on the scope of the review and how it’s done. Here are the main types:

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Desk Audit

The least invasive type of audit, done by mail or phone. The CRA will request additional documentation to verify specific deductions or credits. For example, they may ask for receipts to support a large charitable donation you claimed. Desk audits are usually straightforward and can be resolved quickly if you provide the requested information. The auditor may also use Form T20, Audit Report, to document significant actions and discussions during the audit process.
 

Field Audit

More in-depth, the auditor will visit your home or business to review your records in person. This type of audit covers more of your tax return. During a field audit the auditor will thoroughly review your records for discrepancies. Cooperation is key – be open and provide accurate information and it will be smoother.

 

​Office Audit

You’ll bring your records to a CRA office for review. More hands-on than a desk audit but less invasive than a field audit. The CRA will request specific documents and you’ll meet with an auditor to go over your records. Office audits are for more complex issues like business expenses, capital gains or rental income.

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Knowing what type of audit you’re facing will help you prepare better and know what to expect.

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What to Expect During an Audit

Being prepared will reduce the anxiety during the audit process. Here’s what happens during each stage of the audit:

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Audit Notification

The audit process starts with a notification from the CRA, either by phone or mail, telling you that you’ve been selected for an audit. The notification will include:

• The scope of the audit.

• The tax years being reviewed.

• A list of documents and information required.

• The auditor’s contact information.

 

Read the notification carefully to know what’s being asked of you. This is your chance to get organized and start preparing for the audit.

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Preparation and Document Gathering

Gathering the required documents is key. The CRA will provide a list of documents they want to see which may include:

• Your tax returns for the years being audited.

• Receipts, invoices and bank statements to support your reported income and deductions.

• Payroll records (if you’re a business owner).

• Contracts and agreements related to your income or deductions.

• General ledger to verify financial records and track transactions and expenses.

• T2020 Memo for file to document audit activities and discussions.

• Any other financial documents that support your tax return.

 

Having all your documents in order and easily accessible will make the audit process smoother and show the CRA you’re serious about compliance.

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Initial Interview

If you’re doing a field or office audit the process will start with an initial interview between you and the auditor. During this meeting:

• The auditor will explain the audit process and what they’re looking for.

• You can ask questions and clarify any concerns you have.

• The auditor may request additional documents or information based on their initial review.

 

The initial interview is your chance to build a good relationship with the auditor. Being open and cooperative will set a positive tone for the rest of the audit.

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Record Review

The meat of the audit is the record review where the auditor will review your financial records to verify your tax return. During this review the auditor will:

• Compare your records to what’s on your tax return.

• Look for discrepancies, red flags or unusual items.

• Verify your deductions and credits.

• Use indirect verification of income (IVI) to assess personal banking records.

 

For high net worth individuals, the auditor may also assess compliance and audit programs tailored to their specific financial situations.

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This can take some time, especially if your return is complex or if the auditor needs more information. Be patient and responsive during this stage.

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Audit Results

Once the auditor has reviewed your records they’ll present their findings. This could include:

• Changes to Your Tax Return: If discrepancies or errors are found the auditor may adjust your tax return, which could result in additional taxes owed or in some cases a refund.

• Additional Taxes Owed or Refund Due: Depending on the findings you may owe additional taxes or be entitled to a refund if the CRA finds you overpaid.

• Penalties and Interest: If significant errors or underreporting are found the CRA may impose penalties and interest on the additional taxes owed.

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Response and Resolution

Once you receive the audit results you’ll have the opportunity to respond. Depending on the outcome you can:

• Agree with the Results: If you agree with the auditor’s findings you can accept the changes and pay any additional taxes owed.

• Disagree with the Results: If you don’t agree with the audit results you can provide more evidence or explanations to support your case.

• Appeal the Results: If you’re unhappy with the outcome and think there’s been an error you have the right to appeal. This involves filing an objection with the CRA and if necessary taking your case to the Tax Court of Canada.

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How to Prepare Your Books and Records for a CRA Audit

To ensure a smooth audit be prepared. Here are some practical steps to get your books and records in order before the CRA comes knocking:

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Get Your Records in Order

First get all your financial records in order and make them easily accessible. This includes:

• Keeping Receipts and Invoices: Make sure all receipts, invoices and supporting documents are organized. The CRA requires accurate accounting records for at least 6 years.

• Using Accounting Software: Consider using accounting software to track your income and expenses. This makes record keeping easier and allows for electronic copies when needed.

  • Utilize the Integras Template Library for standardized forms and letters necessary for documenting audit processes.

• Separating Personal and Business Accounts: If you’re a business owner keep personal and business accounts separate. This avoids confusion and makes it easier to track business expenses.

• Utilizing Electronic Library Compliance Programs: Access compliance documentation, letter templates, and guidelines through electronic library compliance programs to ensure your records are up-to-date.

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Being organized shows the CRA you are on top of your records which will help during the audit.

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Review Your Tax Returns

Before the audit starts review the tax returns being audited. Look for any errors, discrepancies or red flags that might catch the auditor’s attention. If you find any issues be prepared to explain or provide more information to support your claims.

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Know the Red Flags

Knowing what can trigger an audit will help you avoid common mistakes. Some common red flags:

• Large Deductions Compared to Income: Claiming deductions that are out of proportion to your income will raise flags.

• Significant Changes in Income or Expenses: Year over year changes in income or expenses will get your return looked at more closely.

• Business Expenses Higher than Industry Average: If your business expenses are way higher than industry average the CRA will flag your return for review.

 

 

By knowing these red flags you can avoid them and reduce your chances of being audited.

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Get a Tax Pro

If you’re being audited by the CRA get a tax pro, such as a Tax Accountant or tax attorney. They can help in:

• Explaining the Audit Process: A tax pro can walk you through the audit process and what to expect.

• Preparing Documents: They can help organize your records and make sure you have all the necessary documents for the audit.

• Representing You: If you don’t want to deal with the CRA directly a tax pro can represent you and communicate with the auditor on your behalf. They can also assist in managing taxpayer relief during civil reassessments, especially if criminal investigations are pending.

• Coordinating Audit Efforts: A tax pro can act as a team leader, providing guidance, approving audit plans, and consulting on major decisions to ensure compliance and proper audit procedures.

 

Having a tax pro on your side will give you peace of mind and help the audit go as smoothly as possible.

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Be Transparent and Cooperative

Honesty and cooperation are key to a good audit outcome. Be open with the auditor, provide the documents requested promptly and answer the questions truthfully. If you’re cooperative the auditor will work with you to resolve any issues quickly and fairly.

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Don’t Do This During a CRA Audit

While being prepared and cooperative is important, there are also things you should not do during a CRA audit:

• Don’t Panic: An audit is not an accusation of wrongdoing. It’s a review process to ensure you’re complying with tax laws. Panicking won’t help; staying calm and focused will.

• Don’t Hide Information: Withholding information or being less than transparent can lead to significant non-compliance issues, including penalties or legal action from the CRA.

• Don’t Ignore Deadlines: The CRA has specific timelines for submitting documents and responding to their requests. Missing deadlines will complicate the audit and create more issues.

• Don’t Make Assumptions: If you’re unsure about something during the audit ask for clarification. Making assumptions or guessing will get you into trouble.

  • Each audit is unique, and auditors will consider the particular situation of your case, so provide all relevant information.

• Don’t Be Confrontational: Audits are stressful but being confrontational with the auditor won’t help. Stay professional and respectful even if the process is tough.

 

 

FAQs

How long does an audit take?

The length of an audit will depend on the complexity of your return and type of audit. It can take weeks to months.

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What if I disagree with the CRA’s audit findings?

If you disagree with the audit findings you can provide more evidence to support your case. If you’re still not satisfied you can file an objection and take your case to the Tax Court of Canada.

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Can I avoid a CRA audit?

While there’s no way to guarantee an audit won’t happen, keeping accurate records, filing your taxes correctly and avoiding red flags will reduce your chances of being audited.

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What if I can’t find the documents the CRA is asking for?

If you can’t find specific documents be honest with the auditor. They may be able to suggest alternatives or give you more time to find the documents.

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What documentation do I need for travel expenses?

Ensure you have detailed invoices and receipts for all travel-related costs, as recent auditing standards require comprehensive documentation.

 

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Audits can be tough but with the right preparation and attitude, you can get through it. Knowing what to expect, being organized and having a tax pro on your side will make the audit go as smoothly as possible. Remember the CRA’s goal is to ensure tax laws are being followed—not to make your life miserable. Be transparent and cooperative and you’ll get through the audit and back to what matters.