Business audits
When the Canada Revenue Agency (CRA) audits a business, it closely examines the business’ books and records to make sure they support the amounts as filed in tax returns, which in turn ensures the business pays the appropriate amount of taxes and receives any amounts to which it is entitled.
Although there is a high level of compliance with tax laws in Canada, audits help maintain 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 the CRA selects a file for audit
The CRA’s risk-assessment systems identify tax returns that are considered to be at high risk for non-compliance. When a return is identified as high-risk, a CRA officer will review information from various sources to determine whether an audit is needed to address the risks identified.
How the CRA will contact you
A CRA auditor will usually contact you by phone to begin the audit process. The auditor will also send you a letter confirming details of the audit.
You may not be comfortable speaking to the auditor until you have confirmed that they are from the CRA. In that case, you may end the call, and then call the auditor or the team leader back. You can also wait until you receive the audit confirmation letter before providing additional information.
Once you are satisfied regarding the identity of the auditor, it is recommended that you answer the auditor’s questions to the best of your ability and, when required, provide the auditor access to the place of business and books and records. Collaborating with the auditor will lead to a smooth and efficient audit.
Where the audit happens
Normally, the auditor will work at the place of business.
Occasionally, the auditor will borrow documents to complete the audit at a CRA office or an alternate location, such as your accountant’s office. The auditor will make arrangements to speak with you to discuss any questions that arise during the audit.
Documents that are required
During the audit, the auditor will look at various documents, which may include:
- the business records (such as ledgers, journals, invoices, receipts, contracts, and bank statements);
- the personal records of the business owner(s) (such as bank statements for personal accounts, mortgage documents, and credit card statements); and
- the personal or business records of other individuals or entities related to the business owner(s) (such as a spouse, family members, corporations, partnerships, or a trust).
In addition to these documents, the CRA may ask for input from your accountant, book-keeper, and/or employees, about information that relates to the books and records and what was reported in the tax returns.
How to provide your documents
If your books and records are available electronically, the auditor will normally ask for your electronic records before meeting with you. This usually speeds up the audit process and leads to less time spent at your place of business.
If electronic records are not available, or physical records are required, the auditor will either:
- review the documents at your place of business or representative’s office; or
- borrow the documents that are required for further review. In this case, the auditor will provide you with a detailed receipt for any borrowed documents.
You can also deliver your supporting documents to a CRA tax services office, send them by mail, or submit them online using the CRA’s secure online services. For information, see submit documents online.
For security reasons, auditors cannot receive files by email.
Information about indirect verification of income
The CRA often uses alternative methods to ensure that the income reported by the business is correct. This is referred to as "indirect verification of income".
The CRA will generally use an indirect verification of income method when there are indications of one or more of the following:
- The books and records are prone to error. This can be the case when one person does most of the accounting, or when the main functions in a business are done by one person or by a small group of related persons.
- The business and personal bank accounts may have been used interchangeably.
- The taxpayer’s lifestyle does not seem to match the income reported to the CRA.
- The business is in a sector that is considered to be at high risk for unreported income.
- The business consistently reports income lower than other similar businesses in the same sector.
In preparing for an indirect verification of income, the CRA will work with the business and its owner(s) (and any representative chosen by the business) to make sure that all relevant information is considered when determining the accuracy of reported income.
The net worth method is the most common method of indirect verification of income used by the CRA. When the net worth method is used, the auditor considers changes in assets and liabilities, personal spending, and other relevant information, such as non-taxable sources of income (including gifts, inheritances, and lottery winnings). The income according to the net worth calculation is then compared to the information reported on the business owner’s tax return to make sure that all income has been reported accurately.
The net worth method goes beyond the books and records of the business and involves a comprehensive review of the business owner’s lifestyle using their personal financial records and other verifiable information, such as motor vehicle registration information and land title information.
In cases where the CRA uses the net worth method, it is important that the CRA have a complete financial picture of the business owner’s family unit. Therefore, in addition to reviewing the business owner’s personal financial records, the CRA will ask for the personal financial records of the business owner’s spouse, as well as any other contributing member of the household.
Information about the economic entity audit approach
In some cases, the CRA uses an economic entity audit approach which involves grouping related, associated, and/or otherwise connected legal entities into one group, known as an economic entity. This grouping ensures that complex business structures are reviewed in a holistic manner. The CRA looks at the risks that arise as a result of the economic entity’s structure and transactions among its members.
Audits of multiple members of the economic entity may occur when the group is identified to have a high risk of non-compliance.
Additional entities will be contacted separately where applicable.
The requirements for documents for an audit using the economic entity approach are the same as for a regular business audit.
How long the audit will last: avoiding delays
The time it takes to complete a business audit varies.
There may be delays if you cannot provide records as asked. If you no longer have certain records, speak with the auditor or the auditor’s team leader to find alternate methods to confirm the amounts reported on the return(s).
There may also be delays caused by the CRA: for example, the auditor may need to consult other CRA tax specialists or the auditor may be absent for personal reasons. In some cases, it may also be necessary for the CRA to assign a new auditor to the business audit.
After the audit
After the auditor finishes reviewing the records provided, the auditor will provide you with a written summary of the audit findings. If the auditor finds that no changes need to be made to the return(s), then nothing more has to be done and the audit will be closed.
If the auditor determines that changes need to be made to the tax return(s), you will have 30 days to respond to the auditor’s written summary of the audit findings. You may agree or disagree with the proposed findings.
If you disagree
If you disagree with the adjustments proposed by the auditor, you are encouraged to contact the auditor to try and resolve disagreements. If issues remain unresolved, you can contact the auditor’s team leader to discuss them further.
In cases where changes are made to your taxable income or taxes payable, you will receive a Notice of Reassessment. If changes are made to a loss you claimed, you will receive a Notice of Redetermination.
If you want to dispute your reassessment, you have the right to object. When you file an objection, you have to explain why you disagree and include all relevant facts and supporting documents. Once the CRA makes a decision on your objection, you must pay any remaining amounts you owe, including taxes, penalties, and interest. Note that, in most cases, interest charges still apply to an amount owing while it is in dispute.
For more information, go to File an objection or a CPP/EI appeal to the Minister.
Your rights during an audit
To learn about your rights and what you can expect when you deal with the CRA, see 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, objections, appeals, disputes and relief measures.
More information
For more information about CRA audit programs and policies, contact your tax services office. For the address and telephone number, go to Tax services offices and tax centers.
The CRA encourages you to visit the Businesses video gallery to view videos and recorded webinars for businesses.
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