CRA Net Worth Audits: How the CRA Reconstructs Your Income, Assesses Hidden Revenue, and Issues Massive Tax Bills — A Complete Guide by a Montreal CPA Firm

A Net Worth Audit is one of the most aggressive and invasive audit methods used by the Canada Revenue Agency. When CRA believes that a taxpayer is underreporting income, living beyond declared means, failing to keep proper records, or operating in cash-heavy industries, they may reconstruct the taxpayer’s entire financial picture using lifestyle and bank-deposit analysis.
CRA compares your increase in net worth to your reported income. If your wealth or spending is higher than your declared income, CRA assumes the difference is unreported taxable income.
This method regularly results in large assessments, penalties, interest, and unrestricted collections enforcement—even when the taxpayer has legitimate non-taxable sources of funds.
This guide explains how Net Worth Audits work, why CRA uses them, what evidence CRA relies on, and how Mackisen defends clients caught in one of the harshest audit programs in Canada.

Legal and Regulatory Framework

The authority for a Net Worth Audit comes from the Income Tax Act, which allows CRA to assess taxes using assumptions if records are inadequate or inconsistent.
CRA may:
• perform lifestyle audits
• reconstruct asset increases
• analyze bank deposits and withdrawals
• use third-party data from banks, land registries, employers, and financial institutions
• demand bookkeeping records and personal financial statements
• issue assessments based on indirect methods

The law allows CRA to assume unreported income unless the taxpayer disproves it with evidence.

Key Court Decisions

Courts consistently uphold CRA’s power to use Net Worth Audits. Key principles include:
• CRA can perform a net worth assessment when books and records are inadequate
• the taxpayer carries the burden of disproving CRA’s assumptions
• CRA may use estimates when exact numbers are unavailable
• lifestyle increases are presumptive evidence of unreported income
• courts accept bank deposit analyses as valid audit evidence
• objections and appeals require full documentation, not explanations
• penalties may apply when the gap between lifestyle and income is large

Courts emphasize that Net Worth Audits are legal, even when taxpayers disagree with CRA’s methodology.

Why CRA Uses Net Worth Audits

CRA launches Net Worth Audits when certain risk indicators appear, including:
• high lifestyle relative to reported income
• large cash deposits
• real estate purchases with little reported income
• rental portfolios with low or negative net income
• self-employed contractors with fluctuating income
• inconsistent GST/QST filings
• missing records or poor bookkeeping
• foreign asset indications
• cryptocurrency trading
• investment activity not matching declared earnings
• repeated late filings
• prior audit adjustments

Montreal and Quebec taxpayers are audited more aggressively due to provincial information sharing.

How CRA Performs a Net Worth Audit (Deep Expansion)

1. Starting Net Worth Position

CRA calculates your net worth at the beginning of the audit period using:
• property ownership
• bank balances
• RRSP/TFSA balances
• investments
• vehicles and leases
• business assets
• mortgages and loan statements
• credit balances
• personal lines of credit

2. Ending Net Worth Position

CRA assesses the end-of-year position using the same categories.

3. Increase in Net Worth

CRA calculates:
Ending Net Worth – Beginning Net Worth = Increase in Wealth

4. Adjusted for Personal Expenses

CRA adds estimates for:
• mortgage payments
• groceries
• transport
• insurance
• childcare
• travel
• health expenses
• entertainment
• tuition
• cash purchases

These estimates often inflate the resulting “income.”

5. Income Declared vs. Income Indicated

CRA then compares:
Implied Income (based on lifestyle) vs. Reported Income

The difference becomes “unreported taxable income.”

6. Penalties and Interest

CRA commonly adds:
• gross negligence penalties
• late-filing penalties
• interest compounded daily
• instalment penalties

7. Collections Enforcement

After the assessment, CRA may:
• freeze bank accounts
• seize refunds
• garnish wages
• redirect client payments
• place liens on real estate
• intercept GST/QST refunds

Net Worth Assessments always lead to aggressive collection activity if not managed properly.

Immediate Financial Risks

Net Worth Audits create significant financial exposure:
• inflated income assessments
• large unexpected balances
• multi-year penalties
• cash flow disruption
• pressure on real estate portfolios
• delays in refinancing
• seized refunds
• payroll or GST/QST audits triggered
• CRA liens on property
• reputational damage for businesses
• director liability exposure for corporations

The longer a Net Worth Audit continues, the higher the risk of a catastrophic reassessment.

Mackisen Strategy

Net Worth Audits require the highest level of CPA intervention. Mackisen CPA uses a deep forensic and technical defence approach.

Step 1 — Full Financial Reconstruction

We examine:
• bank statements
• credit cards
• mortgages
• investment statements
• real estate transactions
• foreign assets
• cryptocurrency activity
• e-commerce deposits
• inter-family transfers
• personal loans and gifts

We rebuild the actual financial picture to challenge CRA’s estimates.

Step 2 — Identify Non-Taxable Sources of Funds

CRA often misclassifies legitimate non-taxable income as taxable.
We document:
• inheritances
• gifts from family
• shareholder loans
• loan repayments
• asset sales
• insurance payouts
• tax-free transfers
• intercompany transfers
• foreign remittances
• refunds or rebates

These reduce CRA’s “unreported income” claim.

Step 3 — Correct CRA’s Assumptions

CRA frequently:
• double-counts deposits
• misinterprets transfers
• mismatches joint account activity
• miscalculates property costs
• overestimates expenses
• ignores loan proceeds

We correct each error with documented evidence.

Step 4 — Filing & Objection Strategy

We prepare:
• amended returns
• Notices of Objection
• detailed schedules
• legal argument packages
• full financial reconciliation binders

This forces CRA to reconsider the assessment.

Step 5 — Stop Collections

We negotiate:
• instalment plans
• enforcement pauses
• freeze lifts
• leniency on penalties
• reconsideration of trust fund assumptions

This protects the taxpayer during the dispute.

Step 6 — Long-Term Compliance Protection

We implement:
• bookkeeping systems
• CRA compliance calendars
• GST/QST alignment
• payroll oversight
• annual tax planning

This prevents future Net Worth Audits.

Real Client Experience

A Montreal contractor was audited using a Net Worth method because CRA believed his lifestyle exceeded his reported income. CRA assessed $188,000 in “unreported income” across three years. Mackisen reconstructed his finances, identified over $120,000 in non-taxable family loans, corrected CRA’s double-counted deposits, and reduced the assessment to less than $14,000 with penalties removed.

Another client, a real estate investor, faced a $247,000 Net Worth reassessment because CRA misinterpreted refinance proceeds as income. Mackisen provided mortgage records and equity statements, and CRA reversed the assessment entirely.

Common Questions

• Can CRA guess my income based on lifestyle? Yes.
• Can CRA assess tax even if I have good bookkeeping? Yes, if they believe it is incomplete.
• Are Net Worth Audits legal? Yes.
• Can CRA use bank deposits as evidence of income? Yes.
• Can CRA seize my bank account after a Net Worth Audit? Yes.
• Can CRA audit my spouse or family? Yes, if accounts are linked.
• Can Net Worth Audits be overturned? 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.