CRA Cash Income Audits: When CRA Suspects Unreported Cash, E-Transfers, or Off-Book Sales — How CRA Reassesses “Unnamed Sources of Income” (Montreal CPA Firm Guide)

Cash income audits are one of CRA’s toughest and most aggressive audit programs.
When CRA believes you are not reporting all your income—especially cash sales or e-transfer payments—they launch specialized audits targeting restaurants, construction crews, retail stores, barbers, nail salons, contractors, Uber/Lyft drivers, and self-employed workers.
CRA uses indirect auditing methods such as bank deposit analysis, markup tests, lifestyle audits, and net-worth audits to identify unreported income.
These audits often result in large reassessments, gross negligence penalties, GST/QST corrections, and immediate enforcement action such as bank freezes, garnishments, receivable seizures, and liens.

This guide explains how CRA audits cash income, why certain industries are targeted, and how Mackisen defends businesses from these high-risk assessments.

Legal and Regulatory Framework

CRA relies on the Income Tax Act and Excise Tax Act to review off-book income.
CRA is authorized to:
• demand books and records
• analyze bank deposits
• compare industry profit margins
• use indirect methods (net-worth, markup, projection)
• rely on e-transfer histories
• review personal finances
• request POS data
• access third-party disclosure from banks and platforms

CRA does not have to prove exact amounts—estimates are allowed when records are incomplete.

Key Court Decisions

Courts consistently support CRA in cash income audits. They have ruled that:
• indirect audit methods are valid
• CRA can reverse the burden of proof
• taxpayers must disprove CRA’s assumptions
• deposit analysis is sufficient evidence of income
• unreported cash counts as taxable income
• poor bookkeeping can justify large reassessments
• gross negligence penalties apply to repeated underreporting
• lifestyle inconsistent with income is strong evidence
• missing invoices justify GST/QST corrections

Courts take cash underreporting extremely seriously.

Why CRA Targets Cash Income

CRA selects files for cash audits when:
• a business reports very low profit margins
• cash sales appear unusually small
• wages are low compared to sales
• GST/QST refunds are high in cash-heavy industries
• T2/T1 filings show inconsistencies
• e-transfer deposits exceed reported income
• tip-heavy business activity exists
• suppliers report high purchases but sales seem low
• lifestyle does not match declared income
• repeated late filings occur
• businesses have poor bookkeeping

Industries with the highest audit rates:
• restaurants
• construction and renovation
• retail boutiques
• barbers & hair salons
• Uber, Lyft, DoorDash
• massage/beauty/nail spas
• mechanics & auto services
• real estate flipping
• small contractors
• tutoring/daycare providers
• Airbnb and short-term rentals

Quebec is the strictest province for cash income audits due to additional Revenu Québec enforcement.

How CRA Conducts Cash Income Audits (Deep Expansion)

1. POS System Review

CRA reviews:
• daily sales summaries
• voids and adjustments
• cash vs credit ratios
• tipping records
• Z-reports

Suspicious patterns trigger deeper review.

2. Bank Deposit Analysis

CRA examines:
• cash deposits
• e-transfer deposits
• ATM deposits
• personal accounts
• business accounts
• loan deposits

Unexplained deposits = unreported income.

3. E-Transfer Analysis

CRA uses e-transfer histories from:
• online banking
• payment processors
• digital wallets

E-transfers with no invoices are treated as unreported revenue.

4. Supplier Purchase Comparison (Markup Test)

CRA calculates:
• cost of goods sold
• expected profit margin
• expected sales based on inventory purchases

If purchases imply higher sales than declared, CRA assumes understatement.

5. Net-Worth and Lifestyle Audits

CRA reconstructs:
• personal spending
• real estate activity
• travel
• vehicles
• bank and credit card use

If lifestyle exceeds reported income, CRA assesses the difference.

6. GST/QST Adjustments

CRA reassesses:
• output tax on unreported sales
• denied ITCs
• GST/QST trust penalties

7. Enforcement After Reassessment

CRA may:
• seize refunds
• freeze bank accounts
• garnish wages
• garnishee client payments
• register Federal Court certificates
• place liens on property

Cash income audits escalate quickly.

Immediate Financial Risks

Cash income audits can cause:
• large income tax reassessments
• GST/QST reassessments
• multi-year adjustments
• 50 percent gross negligence penalties
• interest compounding daily
• bank freezes
• wage garnishments
• receivable seizures
• liens
• reputational damage
• business closure risk
• payroll trust fund complications

Businesses with cash or e-transfer flow are especially vulnerable.

Mackisen Strategy

Cash income audits require forensic accounting and aggressive legal defence. Mackisen uses a multi-stage strategy.

Step 1 — Reconstruct Revenue Accurately

We rebuild:
• POS data
• sales logs
• daily cash sheets
• online platform payouts
• supplier purchase reconciliation
• deposit tracking schedules
• missing invoices

Accurate reconstruction challenges CRA’s assumptions.

Step 2 — Identify Non-Taxable Deposits

We document:
• loan transfers
• family support
• reimbursements
• inter-account transfers
• refunds and reversals
• insurance payouts
• vendor credits
• error corrections

These can significantly reduce alleged unreported income.

Step 3 — Correct CRA’s Markup and Industry Ratios

CRA often uses:
• unrealistic margins
• incorrect industry data
• wrong cost structures
• inappropriate seasonality assumptions

We produce accurate business-specific profitability models.

Step 4 — GST/QST Defence

We demonstrate:
• proper GST/QST calculations
• corrected ITCs
• accurate taxable vs exempt sales
• misapplied audit formulas

Step 5 — File Notices of Objection

We submit detailed objections with:
• legal arguments
• documented evidence
• corrected income schedules
• GST/QST defence
• reconstructed sales

Step 6 — Stop Collections

We negotiate:
• enforcement holds
• partial freeze lifts
• garnishment pauses
• flexible payment plans

This protects taxpayers during the dispute.

Step 7 — Long-Term Compliance

We implement:
• better POS systems
• proper bookkeeping
• cash control systems
• GST/QST reconciliation
• payroll compliance

This prevents future cash income audits.

Real Client Experience

A Montreal restaurant owner was audited because CRA believed sales were too low for the location. CRA assessed $112,000 in “unreported sales.” Mackisen reconstructed POS data, corrected markup assumptions, and proved supplier purchase mismatches. The reassessment was reduced by 78 percent.

Another client, a construction contractor, was audited based on e-transfer deposits. CRA assumed $65,000 of unreported revenue. Mackisen demonstrated that many deposits were reimbursements and loan transfers. The reassessment was reduced to $4,200.

Common Questions

• Can CRA assume every e-transfer is income? Yes.
• Can CRA audit personal accounts? Yes.
• Can CRA estimate income without receipts? Yes.
• Can CRA freeze my bank account for cash audits? Yes.
• Can CRA re-open 3–7 years? Yes.
• Can GST/QST be reassessed too? Yes.
• Can CRA add gross negligence penalties? Very often.
• Can cash audits be reversed? Yes, with proper reconstruction.

Why Mackisen

With more than 35 years of combined CPA experience, Mackisen CPA Montreal helps businesses stay compliant while recovering the taxes they’re entitled to. Whether you’re filing your first GST/QST return or optimizing multi-year refunds, our expert team ensures precision, transparency, and protection from audit risk.