Canada Revenue Agency
www.cra.gc.ca
Common menu bar links
Chapter 7: Audits
On this page...
What is an audit?
Auditing is a way for the CRA to monitor and inspect GST/HST and income tax returns, excise taxes and duties, and payroll records. Although there is a high standard of compliance with the law in Canada, audits help us maintain public confidence in the fairness and integrity of Canada's tax system.
How we select files to audit
Your tax return is recorded in a computer system that enables us to select returns to be audited. The system also allows us to sort returns into various groups to help with our selection.
In some cases, we compare selected financial information for current and previous years of taxpayers engaged in similar businesses or occupations. From computer-generated lists of returns for potential audit, we then choose specific returns. Most returns are selected in this way. But there are four common ways of selecting files.
1. Computer-generated lists
Most returns are selected for audit review from computer-generated lists. For example, the computer system can compare selected financial information of taxpayers engaged in similar business or occupations and generate lists of returns with audit potential. From these lists, we choose specific returns to be audited.
2. Audit projects
In some cases, we test the compliance of a particular group of taxpayers. If the test results indicate that there is significant non-compliance within the group, we may audit its members on a local, regional, or national basis.
3. Leads
Leads include information from other audits or investigations, as well as information from outside sources.
4. Secondary files
Sometimes we select files for audit because of their association with other previously selected files. For example, if you are in partnership with another taxpayer, and that person's file has been selected for audit, it is usually more convenient to examine all the records at the same time.
How we conduct audits
If your return is selected, an auditor will review your records at a CRA office (office audit) or at your place of business (field audit). The audit usually includes an examination of the following documents:
- information on file at the CRA, such as the returns selected for audit, financial statements, audit reports from previous audits, if any; and
- your business records including your ledgers, journals, bank accounts, sales invoices, purchase vouchers, and expense accounts.
The auditor will contact you and either request that you send specific records to a CRA office, or arrange a convenient date and time to start the audit at your place of business.
If a field audit is required, upon arriving at your place of business, the auditor will present an identification card. Before examining your records, the auditor may want to discuss the general nature of your business, or tour the premises to get a better understanding of the transactions recorded in your books.
Throughout the process, the auditor may need to get information and help from your employees, particularly those who do your accounting.
Delays in the audit, and how to avoid them
The time an audit takes depends on the state of your accounting records and related documents, as well as the size and complexity of your business. Your co-operation will help keep this time to a minimum.
Well-kept records will reduce the time required to complete the audit. Refer to the record‑keeping guidelines of this guide.
Finalizing an audit
When the audit is completed, the auditor may propose certain adjustments to your return. He or she will prepare a summary of the proposed adjustments.
Initially, the auditor will discuss this with you or your representative. If you request it, or if it is reasonable to expect that you will need some time to analyze the proposed adjustments, the auditor will confirm the proposal in writing and allow a reasonable time for your reply.
If you provide additional information within this period, the auditor will consider it and will issue a new proposal letter, if applicable.
If there are no proposed adjustments to your return, the auditor will inform you of this when the audit is completed.
If there are changes, you will be issued a notice of assessment or a notice of reassessment.
Note
The auditor's role is to determine the correct amount of duty or tax payable. This may mean that your taxes will be reduced and you will get a refund as a result.
Underground economy
The underground economy typically involves commercial activity that is unreported for tax purposes. It is of concern to the CRA, as well as provincial, territorial and municipal jurisdictions, and all law‑abiding businesses and individuals across the country.
The underground economy hurts all Canadians. Those who participate in the underground economy avoid their tax responsibilities at your expense, and place an unfair burden on all law‑abiding taxpayers. Unpaid taxes mean less money for programs, such as health care, childcare, employment insurance and pensions.
Know the businesses and individuals with whom you are dealing, and use the information at your disposal, including our Web site to recognize those who are participating in the underground economy. For more information, go to The underground economy.
Tax Alert
Protect yourself!
The CRA knows that most taxpayers, given the proper tools and information, will voluntarily meet their tax obligations.
The CRA web site contains information that will help taxpayers understand how to protect themselves against tax schemes, and understand the consequences they might face.
For example, some taxpayers don't realize the financial and personal risks they are exposed to by paying cash for home renovations. And some taxpayers don't know that participating in certain tax shelter schemes to avoid paying taxes could mean not only a loss of their principal, the repayment of taxes owed, and penalties and interest – it could also lead to fines and imprisonment.
Information is the key! For more information about how to protect yourself against tax schemes, go to Tax Alert.
