CRA Audits & Compliance
Understanding CRA audit processes, compliance requirements, and how to protect yourself from penalties and disputes.
Types of CRA Reviews
| Review Type | Scope | Probability | Duration |
|---|---|---|---|
| Processing Review | Basic verification of information | ~5-10% | 2-6 weeks |
| Correspondence Audit | Specific items/deductions via mail | ~2-3% | 2-6 months |
| Office Audit | Meeting at CRA office | ~1% | 3-12 months |
| Field Audit | On-site business examination | ~0.5% | 6-18 months |
| Criminal Investigation | Suspected tax evasion | <0.1% | 1-3 years |
What Triggers a CRA Audit
High-Risk Factors
- • Large charitable donations relative to income
- • Significant business losses year over year
- • High home office or vehicle expenses
- • Cash-intensive businesses
- • Inconsistent reporting patterns
- • Large one-time capital gains/losses
- • Self-employed with complex deductions
- • Tips or complaints from third parties
Random Selection Factors
- • Statistical sampling by income bracket
- • Industry-specific compliance projects
- • Geographic targeting
- • Computer-generated selection
- • Data matching discrepancies
- • Cross-referencing with third-party data
- • Previous audit history
- • Filing pattern changes
The Audit Process: What to Expect
Phase 1: Initial Contact
CRA Will:
- • Send official audit notification letter
- • Identify auditor and contact information
- • Specify years and areas under review
- • Request initial documentation
- • Set timeline for response
Your Rights:
- • Right to professional representation
- • Right to understand the audit scope
- • Right to reasonable timelines
- • Right to courteous treatment
- • Right to appeal audit results
Phase 2: Information Gathering
Common Document Requests:
- • Bank statements and cancelled cheques
- • Business books and records
- • Receipts and invoices
- • Contracts and agreements
- • Travel logs and expense diaries
- • Employment records (T4s, T4As)
- • Investment statements
- • Property records and legal documents
- • Credit card and loan statements
- • Personal financial information
Phase 3: Examination & Analysis
• Document Review: Auditor examines all provided materials
• Interviews: May include meetings or phone discussions
• Third-Party Verification: Contact with banks, employers, customers
• Site Visits: For business audits, inspection of premises
• Computer Analysis: Use of specialized software to detect patterns
Record-Keeping Requirements
Retention Periods
Best Practices
- • Keep records in organized, accessible format
- • Maintain both physical and digital copies
- • Document business purposes for expenses
- • Separate personal and business records
- • Use cloud storage with backup systems
- • Take photos of receipts immediately
- • Create expense logs with details
- • Review and update systems annually
Common Audit Issues & Penalties
| Violation Type | Penalty Rate | Interest Rate | Common Causes |
|---|---|---|---|
| Late Filing | 5% + 1% per month | Current rate (7%) | Missing deadline, incomplete returns |
| Failure to Report Income | 10% federal penalty | Compounds daily | Unreported T4s, investment income |
| False Statements | 50% of tax avoided | From original due date | Inflated deductions, hidden income |
| Gross Negligence | 50% of tax avoided | From original due date | Willful blindness, careless mistakes |
| Third-Party Penalties | $1,000 minimum | N/A | Preparers enabling false claims |
Best Practices During an Audit
Do's
- • Respond promptly to all CRA requests
- • Provide complete and accurate information
- • Maintain professional, courteous communication
- • Keep detailed records of all interactions
- • Ask for extensions if you need more time
- • Consider professional representation early
- • Be honest about any mistakes or omissions
Don'ts
- • Never ignore CRA correspondence
- • Don't provide false or misleading information
- • Avoid being confrontational or argumentative
- • Don't destroy any documents during audit
- • Never fabricate records or receipts
- • Don't make admissions beyond the facts
- • Avoid discussing unrelated tax years
Dispute Resolution & Appeals
Appeal Process Timeline
Notice of Objection
90 days from notice of assessment
CRA Appeals Division Review
Typically 6-12 months
Tax Court of Canada
90 days from confirmation/new assessment
Federal Court of Appeal
30 days from Tax Court decision
Alternative Dispute Resolution
• Mediation: Voluntary process for complex disputes
• Settlement Discussions: Direct negotiation with CRA
• Large File Case Management: For files >$250,000
• Voluntary Disclosures Program: Proactive error correction
• Fairness Provisions: Relief from penalties and interest
Facing a CRA Audit or Compliance Issue?
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