Confirm what is being asked before you collect anything
An audit usually starts with a phone call, a letter or both. The CRA says the auditor will tell you which period is being audited and how to send documents. Read that letter first and write down the tax programs, the periods and the delivery method. Gathering five years of records when two years were requested wastes time, and gathering the wrong years can leave the real request unanswered.
If you are unsure the caller is from the CRA, the CRA says you may end the call and phone the auditor or team leader back, or wait for the confirmation letter before giving more information. Once you are satisfied, answer questions as accurately as you can and ask for requests in writing. If an accountant will deal with the auditor for you, set up the authorization with the CRA first, and tell the auditor who your representative is.
Gather the business records first
The CRA lists business records as ledgers, journals, invoices, receipts, contracts and bank statements, and its audit pages for small and medium businesses also name payroll records. Start with the accounting file for each period under review: the general ledger, a trial balance, the sales and expense reports, and the bank and credit card statements that tie to them. Add the support behind the larger or unusual entries, such as sales contracts, supplier invoices and loan agreements.
If you are a GST/HST registrant or an employer, add the returns, input tax credit support and payroll files for the same periods. Where a figure on a return came from an adjustment by your bookkeeper or accountant, keep the working paper that explains it. The CRA includes those adjustments among the records an auditor may examine.
Expect questions about personal and related records
Many owners are surprised by this part. The CRA says an auditor may look at the personal records of the business owner, for example personal bank statements, mortgage documents and credit card statements. It may also ask for records of related people and entities, such as a spouse, family members, corporations, partnerships or a trust. These records are treated as items that relate, or may relate, to the return being audited.
The CRA says it uses indirect verification of income in some cases, for example when business and personal accounts appear to be used interchangeably or when records are prone to error. The most common method is the net worth approach, which looks at changes in assets, liabilities and personal spending, so it may involve the records of a spouse or other household members. You cannot always prevent this, but clean separation of business and personal money and a short explanation of any large non-taxable receipts, such as a gift or inheritance, make the conversation easier.
Deal with missing records honestly
Most owners find gaps. The CRA says that if you no longer have a record, you should try to get copies from the parties that created it, such as your bank or a supplier. If you cannot, speak with the auditor or the team leader, who will work with you on other ways to confirm the amounts reported. Telling the auditor early is better than letting a deadline pass in silence, because missing or hard-to-find records are a common cause of delay in an audit.
Remember the retention rules for the future. In general, books and records must be kept for a minimum of six years. If you keep accounting records on a computer, they must be kept in an electronically readable format, even if you also keep paper copies. Using a tax professional does not remove that responsibility from you.
Send, track and respond
If your books are electronic, the auditor will normally ask for the electronic records before meeting you. Auditors cannot receive files by email, so use the secure method the auditor gives you, or deliver paper to a CRA tax services office. If the auditor borrows originals, the CRA says you will get a detailed receipt and the documents come back as soon as possible. Keep a simple log of what you sent, when, how and who asked for it.
After the review, you will either get a completion letter or a proposal letter. The CRA gives you 30 days to agree or disagree with a proposal. If you disagree, contact the auditor with your reasons and any supporting documents, then the team leader if the issue stays open. If your assessment is changed, you will receive a notice of reassessment, and you keep the right to object. Do not leave that deadline to the last day, and ask your accountant what it is for your notice.
Your conversation checklist
- Audit letter, audit period and the auditor’s contact details
- General ledger, journals and trial balance for each period
- Bank, credit card, loan and payment processor statements
- Sales invoices, supplier invoices, receipts and contracts
- GST/HST returns, payroll records and tax account statements
- Accountant working papers and year-end adjustments
- Owner and household personal bank, mortgage and card statements
- Related corporation, partnership or trust records, where requested
- Log of items sent, dates, methods and borrowed originals
Further reading & sources
- CRA: What you should know about audits (RC4188)
- CRA: Business audits
- CRA: Small and medium business audits: What you need to know
Tax rules and administrative requirements can change. Check the applicable official guidance and confirm your circumstances with a qualified adviser. This guide is not an assessment of your filing, payment or legal obligations.