CRA GST/HST & QST Audit: What Triggers It and How to Defend Yourself + Sales Tax Audit Canada: How to Protect Your Business, Avoid Penalties, and Fix Compliance

CRA and Revenu Québec GST/HST & QST audits are among the most disruptive and financially dangerous audits a business can face. Unlike income tax audits, sales-tax audits focus on every transaction — every invoice, every ITC/ITR claim, every dollar collected and remitted, and every administrative process in your accounting system. These audits often result in tens of thousands of dollars in reassessments due to denied input tax credits, incorrect tax coding, missing invoices, unregistered sales, or accounting errors.

GST/HST and QST rules are complex, unforgiving, and full of technical requirements. Even honest mistakes — such as using the wrong tax rate, mixing zero-rated and exempt rules, or missing customer proof — can lead to severe penalties and interest. This guide explains why businesses get selected for GST/HST/QST audits, how CRA and ARQ conduct them, what documents you must prepare, and how a Montreal CPA firm near you can defend, correct, and prevent future sales-tax exposure.

Legal and Regulatory Framework
GST/HST & QST audits follow:
• The Excise Tax Act (federal GST/HST rules)
• The Québec Taxation Act (QST rules)
• CRA and ARQ audit manuals
• Input Tax Credit (ITC) and Input Tax Refund (ITR) requirements
• Place-of-supply rules for multi-province businesses
• Exempt and zero-rated supply classifications
• Documentation rules for ITCs/ITRs

Under these laws, businesses must:
• charge GST/HST and QST correctly
• remit collected taxes by strict deadlines
• claim ITCs/ITRs with full supporting documentation
• maintain proper invoicing and bookkeeping systems
• apply tax rules consistently across products and regions
• keep historical records available for audit

Failure in any of these areas leads to reassessment — often with penalties and interest added.

Key Court Decisions
Courts overwhelmingly support CRA and ARQ in denying ITCs/ITRs when documentation is weak, invoices are missing, or the business cannot prove GST/QST was actually paid. Decisions establish that:
• ITCs/ITRs are a privilege, not a right
• taxpayers must maintain complete invoices to claim credits
• errors in tax coding justify reassessment
• incorrect place-of-supply classification is the taxpayer’s responsibility
• the burden of proof is always on the business
• intent does NOT matter — even honest mistakes lead to tax owing

This is why sales-tax audits are extremely dangerous without CPA defence.

Why CRA & Revenu Québec Target GST/HST & QST

1. High error rates across businesses
   Common mistakes include:
   • claiming ITCs without invoices
   • incorrect tax rates
   • applying GST to exempt supplies
   • not charging QST to Québec clients
   • inappropriate ITC claims for mixed-use expenses
   • incorrectly coding imports/exports

2. GST/QST is collected money — not your income
   Governments treat it as trust money. Any misuse or delay is considered a compliance breach.

3. Sales-tax audits produce immediate revenue
   CRA and ARQ collect far more money per hour of audit on GST/QST files than income tax audits.

4. Data analytics catch mismatches
   CRA compares:
   • GST collected vs remitted
   • sales reported vs POS systems
   • GST returns vs corporate income tax filings
   • ITC claims vs vendor data
   • cross-province sales data
   • import records vs GST self-assessment

If numbers don’t align, your business is flagged.

5. Common industries with high audit rates
   • construction
   • restaurants
   • transportation
   • retail and e-commerce
   • beauty and wellness
   • real estate
   • contractors and gig workers
   • professional firms with mixed tax coding

These sectors get audited repeatedly.

How CRA & ARQ Conduct GST/HST & QST Audits
Sales-tax auditors review every component of your business’s financial system, including:
• invoices issued
• invoices paid
• bank deposits
• customer lists
• supplier invoices
• POS system exports
• Shopify/Amazon data
• contracts
• export documentation
• GST/QST coding maps
• ITC/ITR support files

They often demand:
• 3–4 years of records
• immediate access to accounting software
• inventory movement records
• proof of place of supply
• proof customers were charged correctly

If documentation is missing, the credit is denied automatically.

Top Reasons for GST/HST & QST Reassessments
• ITCs/ITRs denied due to missing invoices
• GST/HST charged incorrectly for out-of-province clients
• QST not charged to Québec customers
• Vague vendor descriptions on invoices (“services”, “consulting”, “supplies”)
• claiming credits for personal or mixed-use expenses
• exporting without proper proof of zero-rated status
• not self-assessing on imports
• real estate transaction misclassification

These errors often happen unintentionally — but CRA still reassesses.

How to Defend Against a Sales-Tax Audit

1. Provide complete, organized documentation
Auditors look for:
• vendor invoices with all required fields
• proof GST/QST was paid
• proof the expense relates to commercial activity
• proper customer invoices
• matching payment records
Clear documentation prevents denial of credits.

2. Correct GST/QST coding before the audit begins
A sales-tax coding map must accurately classify:
• taxable
• exempt
• zero-rated
• mixed-use
• interprovincial
• export supplies
Incorrect coding is the #1 source of GST/QST reassessments.

3. Reconcile GST/QST returns to your general ledger
Auditors always cross-match:
• GL accounts
• GST returns
• bank deposits
• expense claims
Any discrepancy becomes an audit issue.

4. Prove exports and out-of-province sales
To claim zero-rated GST/HST, you must prove:
• customer location
• delivery outside Canada
• export documentation
Without this, CRA treats sales as taxable.

5. Demonstrate commercial reasonableness
If expenses appear personal, unrelated, or unsupported, credits are denied.

6. Challenge incorrect assumptions
CRA often misinterprets:
• intercompany transfers
• shareholder loans
• revenue timing
• prepaid expenses
• deposits vs revenue
A CPA must correct these interpretations.

7. Appeal immediately if reassessed
You have 90 days to file a Notice of Objection.
A strong objection can remove:
• denied ITCs/ITRs
• penalties
• interest
• incorrect assumptions

Sales-tax arguments must reference the Excise Tax Act and relevant jurisprudence.

Mackisen Strategy
Mackisen CPA Montreal uses a structured, defensive approach to sales-tax audits:

1. GST/QST Forensic Review
   We analyze coding, invoices, remittances, and ITC/ITR support to find vulnerabilities.

2. Pre-Audit Shield
   We correct errors before CRA audits, reducing exposure dramatically.

3. Audit Representation
   We deal directly with CRA and ARQ so you never speak to auditors. This prevents misinterpretation and over-exposure.

4. ITC/ITR Reconstruction
   We rebuild missing documentation, vendor records, and tax proofs to support credits.

5. Legal-grade Objection & Appeals
   We challenge CRA/ARQ reassessments with strong evidence, jurisprudence, and accounting analysis.

6. Future Compliance System
   We implement a tax-coding system that passes future audits.

Real Client Experience
A Montréal retailer faced a $72,000 GST/QST reassessment due to denied ITCs. Mackisen:
• rebuilt vendor invoices
• corrected coding
• provided export documentation
• filed a legal-grade objection

Outcome: reassessment reduced to $4,900.

Another client — a contractor — had QST denied because subcontractor invoices lacked required fields. Mackisen reconstructed missing compliance and reversed 80% of the reassessment.

Common Questions
Do I need invoices to claim ITCs/ITRs? Yes — mandatory.
What if a supplier didn’t charge GST/QST correctly? CRA will deny your ITC/ITR.
Can Shopify or Amazon data trigger audits? Yes — CRA matches platform data.
Can I fight a GST reassessment? Yes — with CPA support.
Why does CRA target small businesses? High error rates and high revenue recovery.

Why Mackisen
With more than 35 years of combined CPA experience, Mackisen CPA Montreal protects businesses from GST/HST & QST audit reassessments, strengthens compliance, reconstructs documentation, and negotiates favorable outcomes. We ensure CRA and ARQ see accurate, defensible financial evidence — not assumptions.