How to Respond to a CRA Audit in Canada

By Amit Ummat, Principal Counsel, Ummat Tax Law PC

This is basic information and not intended as legal advice.

Start with the letter. Identify the taxpayer, the tax under review, the years or reporting periods, the records requested and the response date. A CRA audit of a corporation’s GST/HST returns calls for different evidence than a review of its owner’s foreign accounts. If both are underway, keep a separate response file and calendar for each.

What to do when the audit letter arrives

  1. Confirm the request and assign one point of contact. If the audit starts with a phone call, verify the caller independently through the CRA before sending records. Give the letter to your accountant and confirm who will deal with the auditor. Ask the auditor to confirm any unclear period, entity or request in writing.
  2. Preserve the original records. Keep the accounting backup, bank statements, source documents and relevant emails. Build any schedules or reconciliations from copies. If you discover an error in the ledger, preserve the original entry and document the correction.
  3. Make a request list. Give each CRA request a row with the item number, the person gathering it, the deadline, the documents sent and anything outstanding. Number your attachments to match the request. Keep the submission confirmation and a copy of exactly what CRA received.
  4. Ask for more time before the deadline if you need it. Say which items you can deliver on time, what is delayed, why, and when you expect to deliver the rest. Ask for written confirmation. Keep the original date on your calendar until CRA confirms the extension. If the letter invokes a specific statutory power, check whether a separate legal deadline applies.

CRA has broad powers to obtain relevant records and require answers to proper questions. If the auditor requests an interview, ask for the topics and who they want to speak with. Arrange for your representative to attend where appropriate. Answer from personal knowledge, identify estimates as estimates and follow up promptly in writing if you need to check a date or amount. If a request captures confidential legal advice, have counsel review that material before production. CRA guidance on audit requests and interviews

Domestic audits and the records that answer common questions

Unreported sales or unexplained deposits. Build a deposit-by-deposit reconciliation. Use columns for the date, amount, source, treatment and supporting document. If CRA counts a $20,000 deposit as sales and it was a transfer between your own accounts, show the matching withdrawal and deposit on both statements. For a loan, show the agreement and the movement of funds. If CRA starts with payment processor deposits, reconcile gross sales to net payouts through fees, refunds, chargebacks and timing differences.

GST/HST input tax credits. Match each disputed credit to the supplier invoice, ledger entry and reporting period. Check whether the invoice contains the required information, including the supplier’s GST/HST registration number where applicable. If CRA questions whether the purchase relates to commercial activity, add the purchase order, job record or other evidence showing how it was used. A bank statement helps establish payment. The invoice and business records help establish entitlement. CRA guide to documentary requirements for input tax credits

Real estate sales. If CRA questions whether a home sale generated business income or whether GST/HST applies, build a chronology from acquisition through sale. Collect the purchase and sale agreements, financing documents, permits, occupancy records and contemporaneous correspondence about the purchase or decision to sell. Explain changes in plans with dated evidence. Address income tax and GST/HST separately because each applies its own rules.

When CRA asks for the entire QuickBooks backup

Ask your accountant to identify what the software can reliably export for the periods under review. If the only usable backup contains other years, tell the auditor that in writing. Offer a defined package of transaction-level exports, the chart of accounts, trial balances and any audit trail the software can provide. Ask whether those files meet CRA’s needs and what additional functionality a full backup would provide.

If CRA maintains the request, ask how the backup will be handled, who will access it and whether CRA’s electronic audit team can extract the records for the stated periods. Request written confirmation of any handling arrangement CRA agrees to. Preserve the original and get advice promptly if the scope remains disputed or the backup may contain privileged material. Continue to respond to the other requests and keep track of the applicable deadlines. CRA guidance on electronic record keeping

International audits and how to build the evidence

Start requesting foreign records immediately. Identify who holds each record, which years are available and whether originals, translations or archive retrieval are needed. Preserve the original-language records alongside any translations. In your working schedule, show the original currency, the Canadian-dollar amount and the exchange rate source and date.

If CRA is asking about Start with these records
Foreign accounts and Form T1135 Full bank and brokerage statements, acquisition cost records, interest and dividend statements, prior T1135 filings and a schedule tying income to the Canadian return. Trace transfers between accounts so the same funds are counted once. Work through income reporting and T1135 separately. The general T1135 threshold turns on whether the total cost amount of specified foreign property exceeded C$100,000 at any time in the year, subject to applicable exceptions.
Tax residence or a treaty claim A dated travel and residence chronology, housing records in both countries, family and employment records, and foreign returns or residence certificates. Identify which years are in dispute and what the applicable treaty says if both countries treat you as resident.
Payments to non-resident contractors Contracts, invoices, payment records and evidence of where the work was performed. For a contract covering work inside and outside Canada, document the allocation. Check Regulation 105 withholding, generally 15% on payments for services rendered in Canada, and locate any applicable waiver or reduction.
Related-party transactions across borders Intercompany agreements, invoices, payment flows, evidence of services actually provided, allocation schedules, pricing support and any contemporaneous transfer pricing documentation. Match the actual conduct and charges to the agreement. Check the deadline on any specific documentation request immediately.

CRA guidance on Form T1135 · CRA guidance on tax residence when leaving Canada · Income Tax Regulations, section 105 · CRA guidance on Regulation 105 waivers

Check whether you received a formal foreign information requirement

An audit questionnaire about a foreign account and a notice under section 231.6 of the Income Tax Act can carry different deadlines. A section 231.6 notice must allow at least 90 days for production. The recipient has 90 days from the date the notice was sent or served to apply to a judge for review. Calendar both dates. If the recipient fails to comply substantially and the notice has not been set aside, the Minister can move to prevent the recipient from introducing the covered records in a later civil tax proceeding.

If a bank, foreign affiliate or former business partner holds the documents, record each retrieval attempt and keep their replies. Get advice promptly if access is blocked, local law restricts disclosure or you are considering judicial review. Income Tax Act, section 231.6

How to respond to a CRA proposal letter

CRA generally allows 30 days to respond to an audit proposal. Check the date in your letter and ask promptly for any missing schedules or calculations. Request more time if needed and obtain written confirmation. Work through the proposed adjustments one at a time. For each, state what CRA proposes, which fact or calculation you dispute, what document proves your point and what amount you say should be assessed.

For example, if CRA proposes to add $86,000 in unreported revenue, identify the $20,000 transfer on both bank statements and the $8,000 deposit already included in sales. Attach the ledger entry for the second amount and ask CRA to reduce the proposed adjustment by $28,000. Address the balance on its own evidence. If CRA proposes gross negligence penalties, respond to the penalty allegations separately. If CRA seeks to reopen an older year, ask for the statutory basis and address it directly. CRA guide to audits and proposal letters

What changes once CRA reassesses

Save each notice of reassessment and calculate the objection deadline for each year or period. For corporations’ income tax and for GST/HST, the deadline is generally 90 days from the date CRA sent the notice. For most individual income tax assessments, it is generally the later of 90 days from the date CRA sent the notice and one year after the filing due date for the return. A response to the auditor or a request to reconsider the adjustment does not preserve your objection rights. File the objection through the appropriate CRA channel and save proof of filing. CRA guide to income tax objections · CRA GST/HST objection guide

If you need help with a CRA audit, send Ummat Tax Law PC the audit letter or proposal and identify the next deadline. The letter, any CRA schedules and a copy of what has already been submitted are the most useful starting documents.