CRA Corporate Audits: How the CRA Audits Small Businesses, Corporations, and Self-Employed Taxpayers — GST/QST, Payroll, Expenses, and Shareholder Loan Risks (Montreal CPA Firm Guide)

Corporate audits are among the most intensive and disruptive reviews conducted by the Canada Revenue Agency.
When CRA audits a corporation, every part of the business can be examined:
• income reporting
• GST/QST compliance
• payroll deductions
• subcontractor payments
• shareholder loans
• dividends
• real estate transactions
• bookkeeping accuracy
• business expenses
• cash sales
• director activity

A corporate audit can quickly lead to major reassessments, denied expenses, GST/QST corrections, payroll trust penalties, and immediate CRA enforcement such as bank freezes or garnishments.
This guide explains how CRA conducts corporate audits, why certain businesses are targeted, and how Mackisen builds a strong defence to protect companies and their directors.

Legal and Regulatory Framework

Corporate audits are governed by:
• the Income Tax Act
• the Excise Tax Act (GST/HST)
• the Quebec Sales Tax Act (QST)
• payroll legislation (CPP, EI)
• corporate record-keeping regulations

CRA may legally:
• demand corporate books and records
• review personal accounts of directors
• request GST/QST documentation
• assess unreported income using indirect methods
• deny expenses
• reassess multiple years
• impose penalties and interest
• refer matters to Collections immediately

A corporate audit can expand into personal audits for shareholders and directors.

Key Court Decisions

Courts consistently support CRA’s broad audit rights. Important rulings confirm that:
• CRA can audit both corporate and personal accounts
• CRA can use bank deposit analysis and net-worth methods
• estimates are allowed when records are missing
• undocumented expenses can be denied entirely
• shareholder loans must be repaid or treated as taxable benefits
• GST/QST claims require strict documentation
• payroll remittance errors create trust fund liability
• directors may be assessed personally for payroll and GST/QST

These rulings show that documentation—not explanations—determines audit outcomes.

Why CRA Audits Corporations

CRA targets corporate taxpayers when red flags appear:
• inconsistent corporate income
• cash-heavy industries
• large GST/QST refunds
• negative income for multiple years
• aggressive deductions
• missing or late filings
• e-commerce or digital platform income
• high subcontractor payments
• undocumented payroll
• shareholder loan issues
• rental properties held in corporations
• real estate flips
• corporate credit cards used personally
• large deposits unexplained

Quebec corporations are audited more frequently due to CRA–RQ information sharing.

How CRA Conducts a Corporate Audit (Deep Expansion)

1. Audit Launch & Information Request

CRA sends:
• initial audit letter
• request for books and records
• request for GST/QST support
• request for bank and credit statements
• questionnaire for business operations

CRA may ask for:
• general ledgers
• sales journals
• purchase journals
• payroll records
• bank statements
• merchant statements
• invoices
• contracts
• real estate documents
• corporate minute books

2. Sales Verification

CRA examines:
• point-of-sale systems
• merchant deposits
• e-transfer income
• cash sales
• platform income (Uber, Shopify, Amazon)
• delivery platforms
• real estate sale proceeds

Undeclared income triggers reassessment.

3. Expense Examination

CRA reviews:
• meals and entertainment
• vehicle expenses
• home office expenses
• subcontractors
• travel
• advertising
• repairs vs capital improvements
• real estate renovations
• undocumented purchases

Expenses not backed by proper receipts are denied.

4. GST/QST Verification

CRA checks:
• supplier registration
• invoice validity
• ITC documentation
• commercial activity tests
• mixed-use assets
• subcontractor ITC eligibility
• expenses incorrectly coded

GST/QST denials often create large reassessments.

5. Payroll & Source Deduction Audit

CRA reviews:
• T4s
• salaries vs dividends
• contractor vs employee relationships
• CPP/EI under-deductions
• payroll remittances
• undocumented subcontractors

Trust fund penalties can be added immediately.

6. Shareholder Loan Review

CRA examines:
• shareholder withdrawals
• personal expenses paid by the corporation
• loan balances
• undocumented repayment
• corporate credit card use

These often trigger shareholder benefit reassessments.

7. Director Audit Risk

When the corporation has trust fund issues or poor bookkeeping, CRA may evaluate director liability.

8. Reassessment & Enforcement

After completing the audit, CRA may:
• reassess income
• deny expenses
• deny GST/QST
• assess payroll penalties
• apply gross negligence penalties

CRA Collections may immediately:
• freeze bank accounts
• seize refunds
• garnish receivables
• register liens

The corporation and directors face immediate financial exposure.

Immediate Financial Risks

Corporate audits often lead to:
• large multi-year reassessments
• denied GST/QST refunds
• payroll trust penalties
• shareholder benefit penalties
• liens against business assets
• frozen operating accounts
• client payment seizures
• garnished contracts
• credit problems
• delayed financing
• director liability exposure

A single audit can destabilize an entire corporation.

Mackisen Strategy

Corporate audits require high-level CPA intervention. Mackisen uses a multi-layered strategy involving financial reconstruction, legal argumentation, and negotiation.

Step 1 — Corporate File Reconstruction

We rebuild:
• bookkeeping
• revenue schedules
• GST/QST ledgers
• payroll calculations
• shareholder loan accounts
• capital asset schedules
• rental statements

This creates accurate financial evidence.

Step 2 — Correct CRA’s Audit Findings

We challenge:
• misclassified income
• denied expenses
• incorrect ITC denials
• payroll assessment errors
• inappropriate gross negligence penalties
• double-counted deposits
• net-worth method errors

Proper documentation often reverses CRA findings.

Step 3 — Comprehensive Legal & Accounting Response

We prepare:
• audit rebuttal briefs
• reconciliation schedules
• annotated bank statements
• proof packages
• alternative calculations
• legal argument summaries

This forces CRA to reconsider its assessment.

Step 4 — Filing the Notice of Objection

We submit a detailed objection with:
• case law citations
• technical arguments
• recalculated amounts
• evidence binders

CRA Appeals is far more reasonable than the audit division.

Step 5 — Stop Collections

We negotiate to:
• halt enforcement
• remove bank freezes
• pause garnishments
• release refunds
• create payment plans

This protects the corporation’s cash flow.

Step 6 — Ongoing Compliance

We implement:
• monthly bookkeeping
• GST/QST monitoring
• payroll compliance
• shareholder loan management
• annual tax planning

This prevents future audit risk.

Real Client Experience

A Montreal construction company was assessed $162,000 after CRA denied subcontractor expenses and ITCs. Mackisen reconstructed financial records, obtained subcontractor documents, challenged GST/QST denials, and reduced the reassessment to $18,000.

Another corporation, an e-commerce seller, was reassessed after CRA added platform deposits as income. Mackisen proved refunds, chargebacks, and transfers were misclassified. The reassessment dropped by over 70 percent.

Common Questions

• Can CRA audit both corporate and personal accounts? Yes.
• Does CRA assume undocumented expenses are personal? Yes.
• Can CRA deny ITCs if invoices are missing? Yes.
• Can a corporate audit trigger a personal audit? Yes.
• Can CRA freeze a corporation’s bank account after an audit? Yes.
• Can directors be personally liable? Yes, for payroll and GST/QST.
• Can CRA audit 3–7 past years? Yes, and more if fraud suspected.
• Can corporate audits be reversed? Yes, with proper documentation.

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.