Video series: CRA tax audit
- Why do we audit? | 3:59 min. | Transcript
- What happens during an audit? | 4:46 min. | Transcript
- What are your rights? | 3:23 min. | Transcript
During business audits, the Canada Revenue Agency (CRA) closely examines books and records of small and medium-sized businesses to make sure they fulfill their obligations, apply tax laws correctly, and receive any amounts to which they are entitled.
Although there is a high level of compliance with tax laws in Canada, auditing processes help maintain public confidence in the fairness and integrity of Canada's tax system.
If you have been selected for a business audit, here is what you need to know.
How does the CRA select files for business audits?
The CRA’s risk-assessment system selects files to audit based on a number of conditions such as the potential for errors in tax returns or indications of non-compliance with tax obligations. The CRA also looks at the information it has on file and may compare that information to similar files or consider information from other audits or investigations.
How does the CRA conduct business audits?
What is the first step in the audit process?
A CRA auditor will write to you or call you, or both, to begin the audit process and inform you of where the audit will take place. Normally, it is expected that the audit take place at your place of business (on-site audit). This allows questions to be addressed quickly and minimizes delays in completing the audit. In certain rare situations, the audit may be conducted at a CRA office (office audit).
If the audit is on site, the auditor will arrive and present you with a valid identification card, then start the audit.
When an audit takes place at a CRA office, the auditor will request that you bring or send any supporting documents required. The CRA centralizes the assignment of audit files to maximize the use of its available resources. Consequently, you may be assigned an auditor outside your geographic region.
In some situations, the auditor will borrow your documents and give you a detailed receipt for the borrowed documents. It may also be necessary to make copies of your electronic records.
Sending your records online to the CRA
For information about how you can save time by sending your records online using the CRA’s secure online services, ask your assigned auditor. Auditors are not permitted to receive records by email.
What does an auditor examine during a business audit?
The auditor will examine books and records, documents, and information (collectively referred to as records) such as:
- information available to the CRA (such as tax returns previously filed, credit bureau searches, or property database information);
- your business records (such as ledgers, journals, invoices, receipts, contracts, and bank statements);
- your personal records (such as bank statements, mortgage documents, and credit card statements);
- the personal or business records of other individuals or entities not being audited (for example, a spouse, family members, corporations, partnerships, or a trust [settlor, beneficiary, and trustee]); and
- adjustments made by your bookkeeper or accountant to arrive at income for tax purposes.
Did you know?
- Your personal records and the personal or business records of other individuals or entities are legally considered to be part of the items that relate, or may relate, to the business being audited.
- An auditor can examine the records of family members.
- An auditor may ask questions of the employees who do your accounting entries or know about the operations of your business.
During an audit, the auditor will identify issues and discuss them with you. At any time, you can also raise your concerns with the auditor.
Once the auditor completes the examination of the records provided, the outcome will determine the next steps.
- Correct assessment: If the auditor finds that your previous assessment is correct, nothing more has to be done. You will receive a completion letter and the audit will be closed.
- More taxes owed or a refund: If the auditor finds that your return has to be reassessed (which means you will have to pay more taxes or you are entitled to a refund), you will receive a proposal letter explaining the reason for the reassessment. You will have 30 days to agree or disagree with the proposed reassessment. The auditor can further explain the reassessment if necessary.
If you disagree with the proposal, you are encouraged to contact the auditor to try and resolve factual disagreements. The auditor will carefully consider your explanations and respond to your questions about the proposal. If issues remain unresolved, you can contact the auditor’s team leader to discuss them further.
What happens at the end of the audit?
At the end of the audit, a final letter will be sent to you and one of three things will occur:
- no adjustments will be made to your previous assessment;
- an adjustment resulting in more tax will be made (reassessment) and you will have to pay the balance owing; or
- an adjustment resulting in less tax will be made (reassessment) and you will be entitled to a refund.
If the adjustment results in more taxes being owed, the auditor can provide you with an estimate of the amount before the CRA issues a notice of assessment or notice of reassessment. This will give you the opportunity to prevent more interest charges from accruing by paying all or part of what you owe right away. For more information, go to Make a payment.
What if I don’t agree with the reassessment?
If you disagree with the reassessment, you have the right to appeal. For more information, go to Objections and Appeals.
How much time does it take to complete a business audit?
Completing a business audit
The time it takes to complete a business audit varies. Factors that influence the time it takes include the state of the records, the size and complexity of the business, and potential delays for missing records.
Well-kept records and co-operation with the auditor will reduce the time it takes to complete an audit. For more information, go to Keeping records.
Your file may be selected for an internal quality review before it is finished to make sure CRA audit standards have been met. As a result of the quality review, the auditor may contact you to get more information or make changes to the proposed adjustments.
What causes delays during an audit?
Delays may be caused if you do not provide records as requested. If you no longer have certain records, get copies from the parties that originally created them (for example, financial institutions or suppliers). If this is not possible, speak with the auditor or the auditor’s team leader to find alternative methods to confirm the amounts reported on your return.
In certain situations, auditors may need to consult other CRA tax specialists. These consultations may cause the audit to take longer than anticipated.
Your rights and responsibilities
What are your rights?
To learn more about your rights and what you can expect when you deal with the CRA, see Guide RC17, Taxpayer Bill of Rights Guide: Understanding your rights as a taxpayer.
You also have the right to file a complaint if you are not satisfied with the service you received from the CRA. For more information, visit Complaints and disputes.
What are your responsibilities?
By law, you have to keep adequate books and records to determine your tax obligations and your entitlements. Generally, books and records must be kept for a minimum of six years.
If you use a computer for your accounting records, you must keep your books and records in an electronically readable format, even if you also keep them on paper. Using the services of a tax professional does not relieve you of your responsibilities.
For an audit, please make available to the auditor your records (both paper and electronic), any supporting documents, and explanations to the questions the auditor will have.
Need more information?
To get more information about CRA audit programs and policies, or to comment on audit processes, contact your tax services office. To find the address and telephone number of your tax services office, go to Tax services offices and tax centres.
The CRA encourages you to view the three videos that explain its tax audit process:
- Why do we audit and what is a tax audit?
- What are your responsibilities and what happens during an audit?
- What are your rights?
To help businesses understand their tax responsibilities, watch other videos and recorded webinars for businesses.
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