Information for Canadian Small Businesses: Chapter 6 – Audits

From: Canada Revenue Agency

What is an audit?

Auditing is a way for the CRA to monitor and inspect GST/HST, income tax and benefit returns, excise taxes and duties, and payroll records. 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 choose returns to audit

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.

For more information, go to Audit

How we conduct audits

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).

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])
  • adjustments made by your bookkeeper or accountant to arrive at income for tax purposes
Note

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 also 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.

For more information, go to Audit.

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, and the size and complexity of your business. Your co-operation will help keep this time to a minimum.

Finalizing an audit 

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.

For more information, go to Audit

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 online 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 digital), any supporting documents, and explanations to the questions the auditor will have.

Underground economy

The underground economy typically involves economic activity that is not reported or that is under-reported for tax purposes.

The activities that classify as underground economy include failure:

  • to file
  • to register
  • to report a business activity
  • to report business income
  • to report employment income

 For more information, go to About the underground economy.

Tax alert

Protect yourself!

Most taxpayers, given the proper information and tools, will voluntarily meet their tax obligations.

Our website 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 jobs for home renovations. Other taxpayers don't know that participating in certain tax shelter schemes to avoid paying taxes could mean a loss of their principal, the repayment of taxes owed, penalties and interest, and lead to fines and imprisonment.

For information about how to protect yourself against tax schemes, go to Tax Alert.

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