CRA Audit Net-Worth Method: How to Defend Yourself + CRA Net Worth Audit Canada: How to Protect Your Income, Rebuild Evidence, and Overturn Assumptions — A Montreal CPA Firm Near You Explains

Understanding the CRA net-worth audit method is essential for taxpayers facing aggressive lifestyle audits, unexplained bank deposits, cash-flow reviews, or CRA claims that your spending does not match your reported income. Net-worth audits are one of the most severe and often inaccurate audit techniques used by CRA and Revenu Québec. They are commonly applied to contractors, restaurateurs, gig workers, landlords, crypto traders, self-employed individuals, and anyone with irregular or cash-based income. This guide explains how CRA performs a net-worth audit, how to defend yourself, how to rebuild missing evidence, and how to overturn incorrect CRA assumptions before they become a reassessment.

What Is a Net-Worth Audit?
A net-worth audit estimates your income by calculating the increase in your assets minus the increase in your liabilities, plus personal spending. CRA uses this method when:
bank deposits appear higher than reported income
taxpayer keeps poor records
CRA suspects unreported cash
crypto wallets show unexplained transfers
real-estate or assignment sales are not properly declared
personal lifestyle appears inconsistent with declared earnings
Net-worth audits often produce inflated income unless defended properly.

How CRA Performs a Net-Worth Audit
CRA will calculate:
your net worth at the beginning of the audit period
your net worth at the end of the audit period
the increase or decrease in assets
your personal living expenses (estimates)
CRA then claims the difference is “unreported income.”
But CRA’s calculations often include mistakes such as misclassified loans, gifts, transfers, or business-related deposits.

Common CRA Net-Worth Audit Errors
CRA frequently makes critical mistakes during lifestyle audits, including:
treating loans received as income
counting gifts or family support as income
double-counting transfers between accounts
treating crypto wallet transfers as taxable gains
including GST/QST collected as personal income
ignoring business expenses
overestimating living costs
misvaluing real estate or vehicles
These errors can inflate your “income” by tens or hundreds of thousands.

Step 1: Get CRA’s Full Net-Worth Working Papers
CRA must provide their spreadsheets and calculations. These documents reveal:
incorrect assumptions
wrong asset values
missing liabilities
duplicate entries
inaccurate personal spending estimates
A CPA carefully reconstructs these documents to identify audit errors.

Step 2: Reconstruct Your Actual Income and Spending
A proper defense requires organizing:
bank statements
credit card statements
loan agreements
gift letters
crypto wallet logs
transfers and inter-account movements
vehicle financing statements
rental agreements
mortgage and HELOC records
This proves which deposits are income versus non-income items.

Step 3: Challenge CRA’s Assumptions
CRA must prove their assumptions are reasonable. A CPA challenges:
inflated living expense assumptions
incorrect valuation of assets
failure to include debts
incorrect crypto calculations
incorrect treatment of business deposits
CRA often uses generic living-cost tables that do not reflect reality.

Step 4: Explain Non-Taxable Sources of Funds
You must provide proof for:
loans from friends or family
down-payment gifts
inheritances
insurance payouts
non-taxable crypto wallet transfers
inter-company transfers
CRA must remove these from income if documentation is provided.

Step 5: Correct CRA’s Business-Income Assumptions
CRA often:
ignores expenses
treats business deposits as personal income
misunderstands cash-flow cycles
fails to separate GST/QST collected from revenue
Proper bookkeeping reduces inflated income.

Step 6: File a Strong Objection if Reassessed
If CRA issues a net-worth reassessment, you must file a Notice of Objection within 90 days. Your objection must include:
corrected calculations
supporting documents
legal arguments
bank and crypto reconciliation schedules
A well-documented objection can reverse the entire reassessment.

Step 7: Take the Case to the Tax Court of Canada if Needed
Tax Court is often more favorable than CRA Appeals because judges understand financial evidence better than auditors. Many net-worth reassessments are overturned in Tax Court due to faulty assumptions.

Examples of Net-Worth Audit Wins
crypto transfers mistaken for income overturned
real estate down-payment gifts accepted as non-taxable
loans documented and removed from income
duplicate account transfers removed from CRA calculations
living-cost assumptions corrected with real data
vehicle loan proceeds removed from income
bank deposits reclassified as business revenue, not personal income
These cases dramatically reduce assessed income and penalties.

When CRA Is Correct
CRA may be correct if:
income was actually omitted
records are missing and cannot be rebuilt
audit assumptions match your actual lifestyle
Even then, a CPA can help reduce penalties and interest.

Penalties in Net-Worth Audits
CRA may try to assess:
gross-negligence penalties (50 percent)
repeated failure to report income penalties
late-filing penalties
A CPA can challenge these aggressively since they require CRA to prove intent.

Mackisen Strategy
Mackisen CPA Montreal specializes in defending net-worth audits. We reconstruct bank deposits, analyze CRA’s working papers, eliminate incorrect assumptions, rebuild crypto ACB schedules, prepare legal arguments, and file strong objections or Tax Court appeals. We focus on reducing tax, removing penalties, and correcting CRA errors before they escalate.

Real Client Experience
A Montréal contractor overturned a $180,000 net-worth reassessment after CRA misclassified loan proceeds as income. A crypto investor eliminated $95,000 of “unreported income” after proving wallet-to-wallet transfers. A family receiving parental support removed $40,000 of deposits from CRA’s calculation. A restaurant owner reversed gross-negligence penalties after Mackisen reconstructed cash-flow evidence.

Common Questions
Is a net-worth audit legal? Yes, but CRA must prove assumptions are reasonable.
Can CRA guess my income? Only if bookkeeping is weak — and we can challenge it.
Are gifts and loans taxable? No — but documentation is required.
Do crypto transfers count as income? No unless they are sales or gains.
Do I need a CPA? Always — net-worth audits are highly technical.

Why Mackisen
With more than 35 years of combined CPA experience, Mackisen CPA Montreal protects taxpayers against inflated CRA net-worth calculations, incorrect assumptions, and unfair reassessments. We rebuild evidence, defend your rights, and ensure CRA’s numbers reflect reality — not guesswork.