What to Do When You Receive an Audit Letter from the CRA

What is CRA

CRA stands for Canada Revenue Agency. It is the federal government agency in Canada that is responsible for collecting taxes and running key benefit programs.

What to Do When CRA Contacts for Audit

CRITICAL FIRST STEP: Never give out personal or financial information over the phone or email until you have confirmed the person’s identity. Scammers often pose as the CRA.

How the CRA contacts you: They usually begin the audit process with an official letter by mail, which outlines the scope and the documents required. They may follow up with a phone call.

What to do: If you receive a phone call, ask for the auditor’s name, phone number, and ID number. Do NOT call back the number they called from.

Instead, hang up and call the CRA’s main line for enquiries to confirm that an audit is, in fact, being conducted on your file.

Review the Audit Scope

Read the letter from the CRA carefully to understand exactly what they are looking at.

• What years are being audited?
• What specific claims or areas are they reviewing? (e.g., business expenses, rental income, capital gains, or specific credits/deductions).
• What documents are they requesting? (This is usually a list of required documents).

Seek Professional Help

Highly Recommended: The best step is to hire a tax professional (like a specialized accountant or tax lawyer) to act as your representative.

Benefits: A representative can handle all communication with the auditor, understand the technical tax laws, organize your documentation, and ensure you only provide what is legally required, which can significantly reduce your stress and the scope of the audit.

Your Right: You have the right to professional representation during an audit.

(Looking for a professional to consult with. Click Here)

Gather and Organize Your Records

This is the most time-consuming part. The CRA generally requires you to keep supporting documents for at least six years.

Collect only the documents requested in the letter (e.g., bank statements, invoices, receipts, ledgers, contracts).

Organize everything clearly by year and category. A well-organized submission makes the auditor’s job easier, which can lead to a smoother and faster audit process.

Communicate and Cooperate

Ignoring the CRA’s request is the worst thing you can do, as it may result in the CRA making an arbitrary (and likely unfavorable) reassessment of your taxes.

Respond promptly: Acknowledge the letter and provide the requested information by the deadline, or contact the auditor to request a reasonable extension if you need more time to gather documents.

Be courteous and factual: If you or your representative interact with the auditor, be polite.

Only provide the documents and information that have been specifically requested. Do not volunteer extra information or engage in casual conversation about your finances. 

Review and Appeal (If Necessary)

After the auditor reviews your records, they will send you a Proposal Letter that explains their findings and any proposed changes (reassessments).

Review: Go over the findings with your tax professional.

Dispute: If you disagree with the proposed adjustments, you have the right to discuss them with the auditor and their supervisor, providing further evidence to support your original claim.

Appeal: If the issue is not resolved, and the CRA issues a formal Notice of Reassessment, you have the right to file a formal Notice of Objection to appeal the decision.

Why individuals and businesses are selected for CRA Audit

The CRA (Canada Revenue Agency) does not select files for audit randomly (though some very small number are), but primarily uses sophisticated systems to identify taxpayers who pose a high risk of non-compliance (meaning, they might have made a mistake or underreported income).

Automated Risk Assessment & Red Flags

The CRA uses powerful computer programs to check every tax return against a variety of metrics. They look for things that seem unusual compared to the average in your area or industry.

Red Flag	Individual Example	Business Example
Industry Norms	Your deductions for vehicle expenses are much higher than others in your profession (e.g., a teacher vs. a travelling salesperson).	A restaurant’s cost of goods sold is unusually low compared to its reported sales (suggesting unreported cash income).
Year-over-Year Fluctuation	Your reported income or expenses suddenly jump or drop significantly compared to your previous tax returns without a clear reason.	A business claims high expenses in a single year to offset a large profit.
Discrepancies	The income you report does not match the T4, T5, or other information slips the CRA received from your employer or financial institutions.	Your GST/HST filings don’t align with the revenue reported on your income tax returns.
Large/Unusual Claims	Claiming a 100% deduction for a vehicle or home office, which suggests no personal use.	Claiming consistent business losses for many years in a row (the CRA may question if it’s truly a business or just a hobby).

Targeted Industries and Groups

The CRA often launches audit projects that target specific industries where non-compliance (especially with cash transactions) is historically higher.

Cash-Intensive Businesses: Restaurants, construction, trades, hospitality, and small retail operations are often scrutinized more closely due to the risk of unreported cash income.

Self-Employed Individuals/Freelancers: Since their income is not automatically tracked by an employer (like a T4 slip), their expenses and reported income are subject to a higher level of scrutiny.

Real Estate Activity: Frequent flipping of properties, claiming principal residence exemptions improperly, or large rental loss claims often draw attention.

Lifestyle vs. Income (Indirect Verification)

The CRA has sophisticated methods to indirectly check if your reported income supports your apparent lifestyle.

If you report a low income but buy a luxury vehicle or a second home, the CRA may audit you to see if you have undisclosed income (like large unreported business earnings or foreign income).

They may use a “Net Worth” analysis, comparing your assets, liabilities, and spending over time to your reported income.

Information from Other Sources

The CRA receives information from many places that can directly trigger an audit.

Third-Party Information: The CRA receives tips from the public through its Informant Leads Program about potential tax cheats.

Auditing Related Parties: If a business partner, supplier, or spouse is audited, your tax filings may be pulled in for review as well, especially if there are large or unusual transactions between the parties.

International Agreements: Information received from foreign tax authorities about offshore bank accounts, income, or assets can trigger an audit.

The core reason for all audits is to ensure the fairness and integrity of the tax system.

While no one is audit-proof, keeping excellent and detailed records for all income and expenses is the best way to reduce your risk and make the process smoother if you are selected.

Types of audits (desk audit, field audit, GST/HST audit, payroll audit)

Audit Type	Focus Area	Location & Method	Scope & Complexity
Desk Audit (or Office Audit)	Income Tax (T1/T2) for individuals or small businesses, focusing on specific claims (e.g., medical expenses, business deductions, or specific credits).	CRA Office. The taxpayer is asked to mail, fax, or upload documents (receipts, invoices, logbooks) to the auditor. No in-person visit to the taxpayer’s home or business.	Narrow and specific. It is typically the most common and least intrusive type of audit.
Field Audit	Comprehensive review of a business’s entire financial situation or a complex individual file (e.g., large businesses, self-employed individuals with high revenue).	Taxpayer’s Place of Business or the office of their authorized representative (e.g., accountant/lawyer).	Broad and extensive. Involves in-person meetings, potentially interviewing staff, and a deep review of all records, ledgers, and accounting systems.
GST/HST Audit	Compliance with the Goods and Services Tax / Harmonized Sales Tax. Checks if a business correctly: 1) Collected the right amount of GST/HST from customers, 2) Claimed the Input Tax Credits (ITCs) accurately, and 3) Remitted the correct balance to the CRA.	Can be conducted as a Desk Audit (documents submitted) or a Field Audit (on-site visit).	Specific to sales tax rules and requirements, which can be complex depending on the industry (e.g., real estate, imports/exports).
Payroll Audit	Compliance with Employer obligations. Checks if an employer correctly: 1) Deducted (withheld) income tax, CPP (Canada Pension Plan), and EI (Employment Insurance) from employee paycheques, and 2) Remitted these deductions (including the employer portion of CPP/EI) to the CRA on time.	Typically conducted as a Field Audit (on-site) for complex cases, or documents may be requested.	Specific to employment rules, T4 slips, employee/contractor classification, and remittance schedules.

Conclusion

A CRA audit can feel stressful, but it becomes manageable when you know what to do. Stay calm. Read every letter carefully. Keep your records organized. Respond on time. And always verify who you are speaking with before sharing any information.

Good documentation and professional guidance can make the entire process smoother. If you disagree with the CRA’s findings, remember. You have the right to question, discuss, and appeal.

Need support for tax audits, compliance, or professional representation? Bizincs is here to help you handle it with confidence.