CRA Net Worth Audits: Justifying Your Income to CRA

Introduction

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's reported income does not match their lifestyle, purchases, bank deposits, real estate holdings, or spending patterns, it may reconstruct the taxpayer’s entire financial life using the Net Worth Method. This method often leads to massive reassessments, penalties, and years of back taxes owed — especially for self-employed individuals, contractors, cash-based businesses, landlords, real estate flippers, crypto traders, and gig workers. This guide explains how CRA conducts net worth audits, why they are triggered, and how to defend yourself effectively.

What Is a Net Worth Audit?

In a net worth audit, CRA calculates:
Net worth at the end of the year
– Net worth at the beginning of the year

• Personal living expenses
  = Implied income
  If the implied income is greater than what you reported, CRA assumes unreported income and reassesses you accordingly. CRA may apply gross negligence penalties, interest backdated to the tax year, and expanded audits into multiple years.

Why CRA Uses the Net Worth Method

CRA uses this method when:
bank deposits exceed reported income
lifestyle appears inconsistent with income
large assets purchased with no clear source
business records are incomplete or suspicious
crypto activity is unreported
real estate transactions raise red flags
cash-intensive business activity is detected
The net worth method is CRA’s “last resort” audit tool — and one of its most powerful.

Top Triggers for a Net Worth Audit

bank deposits not matching reported revenue
cash lifestyle inconsistent with income
unexplained real estate purchases
multiple years of low reported income
rapid accumulation of assets
large gifts or loans with no documentation
crypto wallet activity unexplained
vehicle purchases without sufficient income
foreign income or remittances unreported
GST/HST discrepancies
CRA often uses AI-assisted risk scoring to detect inconsistencies.

What CRA Requests During a Net Worth Audit

CRA requests extensive documentation:
bank statements (all accounts, all years)
credit card statements
mortgage documents
loan agreements
vehicle purchase agreements
investment statements
real estate purchase/sale documents
crypto exchange and blockchain wallet reports
business invoices
payroll and GST/HST filings
personal living expense breakdown
CRA may review every financial transaction for multiple years.

How CRA Builds the Net Worth Calculation

1. Opening Net Worth

Assets: real estate, vehicles, investments, crypto, cash
Liabilities: mortgages, loans, credit cards

2. Closing Net Worth

Updated value of same assets/liabilities

3. Personal Living Expenses

CRA uses industry averages and may request detailed lists:
groceries
rent/mortgage
utilities
insurance
travel
education
entertainment
CRA often overestimates these numbers unless challenged.

4. Adjustments for Gifts, Loans, Family Transfers

Without documentation, CRA may treat deposits as income.

5. Determining “Unreported Income”

If CRA’s calculated income exceeds your filed income, the difference becomes the reassessed income.

Why Net Worth Audits Are So Dangerous

CRA assumptions are often:
inflated
incorrect
poorly documented
based on incomplete information
Taxpayers who do not defend themselves aggressively may face:
massive reassessments
gross negligence penalties
multi-year audits
garnishments and bank freezes
loss of benefits
CRA must be challenged with evidence and expert analysis.

How to Defend Yourself in a Net Worth Audit

1. Reconcile Bank Deposits

Show which deposits were:
transfers between accounts
loan proceeds
gifts
refunds
non-taxable amounts
Without proof, CRA treats ALL deposits as income.

2. Document Gifts and Loans

Signed loan agreements
bank transfer receipts
supporting emails
CRA will not accept verbal explanations.

3. Correct CRA’s Personal Spending Estimates

Challenge inflated CRA assumptions with:
actual receipts
utilities
insurance statements
groceries logs
CRA often uses inflated averages that overstate income.

4. Provide Crypto ACB and Transaction Logs

CRA may assume wallet deposits are taxable income unless ACB is proven.

5. Prove Real Estate Funding Sources

down payment sources
family loans
HELOC withdrawals
sale proceeds
mortgage refinancing

6. Rebuild Business Records

If business books were incomplete, CRA may assume 100% of deposits are income. Document:
cost of goods sold
business expenses
merchant fees
cash payouts
supplier invoices

7. Challenge CRA’s Assumptions

Net worth audits are assumption-heavy. You must rebut each assumption with evidence.

When to File a Notice of Objection

If CRA issues a net worth reassessment, file an objection within 90 days. Many net worth audits are overturned or reduced at the Appeals level because CRA:
misinterpreted deposits
miscalculated spending
ignored liabilities
missed loan evidence
overstated crypto income

When Taxpayer Relief Applies

Taxpayer Relief may reduce interest if:
illness
mental health issues
family crisis
CRA delays
But Relief cannot eliminate tax owing.

When VDP Is Better

If CRA has not yet contacted you, VDP may eliminate penalties completely. For net worth risks, acting early is crucial.

Mackisen Strategy

At Mackisen CPA Montreal, we specialize in defending net worth audits by reconstructing full financial records, matching deposits to non-taxable sources, documenting loans and gifts, correcting CRA’s assumptions, preparing personal expense analyses, and filing strong Notices of Objection. Our evidence-driven approach frequently reduces or eliminates reassessments.

Real Client Experience

A Montreal restaurant owner reversed a $120,000 net worth reassessment after we documented loans and family transfers. A contractor avoided gross negligence penalties by proving crypto deposits were transfers, not income. A landlord corrected CRA’s inflation of personal living expenses and reduced tax owing by 70 percent. A newcomer successfully defended unexplained deposits by showing foreign gift documentation.

Common Questions

Can CRA assume deposits are income? Yes unless you prove otherwise. Can a net worth audit cover multiple years? Yes — often 3 to 7 years. Are net worth audits accurate? Frequently not. Can I defend myself? Not recommended. Are these audits winnable? Yes with strong documentation.

Why Mackisen

With more than 35 years of combined CPA experience, Mackisen CPA Montreal provides aggressive, evidence-based defense for net worth audits, protecting taxpayers from inflated CRA assessments and unfair assumptions.