CRA Net Worth Audits: Justifying Your Income to CRA – A Complete Guide by a Montreal CPA Firm Near You

Introduction

A Net Worth Audit is one of the most aggressive and invasive tools used by the Canada Revenue Agency (CRA). Unlike traditional audits that review tax slips or business records, a net worth audit assumes your income is understated and reconstructs your taxable income based on your assets, liabilities, spending, lifestyle, and bank activity. These audits often lead to large reassessments, gross negligence penalties, and years of interest—especially for self-employed individuals, contractors, real estate investors, and cash-based businesses. This guide explains how net worth audits work, why CRA uses them, and how to defend yourself effectively.

Legal and Regulatory Framework

Net worth audits are permitted under section 152(7) of the Income Tax Act, allowing CRA to assess income using “any method” when books and records are incomplete, unreliable, or inconsistent with lifestyle indicators. CRA also relies on judicial precedents that approve indirect verification methods such as net worth, bank deposits, and markup audits. CRA may reassess up to three years for standard cases, but for net worth audits—which often involve misrepresentation—they typically go back six years or more.

Key Court Decisions

In R. v. Ling, the Supreme Court confirmed that CRA can use indirect audit methods like net worth calculations when it suspects unreported income. In Mohiuddin v. Canada, CRA’s net worth method was upheld even when small errors existed, because the taxpayer’s records were unreliable. In LeBlanc v. Canada, CRA’s methodology was overturned because they used incorrect assumptions. These cases show that CRA net worth audits are powerful but can be challenged with strong evidence.

What Is a Net Worth Audit?

A net worth audit calculates your income by examining:

• Your assets (real estate, vehicles, investments, crypto, business assets)

• Your liabilities (loans, mortgages, lines of credit)

• Your spending (groceries, travel, lifestyle, renovations)

• Deposits into your bank accounts
  CRA compares the increase in your net worth plus personal spending to the income reported on your tax return. If the amount is higher, CRA assumes the difference is unreported taxable income.

Who Is Targeted for Net Worth Audits?

• Self-employed individuals

• Contractors and gig-workers

• Cash-based industries (restaurants, trades, salons, retail)

• Real estate flippers and assignment sellers

• People with inconsistent income histories

• Taxpayers whose lifestyle does not match reported income

• Individuals with large bank deposits or unexplained wealth increases

• Crypto traders or users of foreign exchanges
  Net worth audits are common whenever CRA believes a taxpayer’s books are unreliable.

How CRA Performs a Net Worth Audit

CRA will analyze:

1. All bank statements (personal and business)

2. Credit card statements

3. Mortgage and loan documents

4. Real estate purchase/sale agreements

5. Vehicle and asset purchases

6. e-transfer histories

7. Crypto wallet activity

8. Travel spending

9. Business financials

10. Social media lifestyle indicators
    CRA assigns values to each asset and calculates net worth at the beginning and end of a period, then determines income using the formula:
    Increase in Net Worth + Living Expenses – Known Income = Unreported Income

Common CRA Assumptions That Cause Problems

CRA often makes incorrect assumptions such as: gifts treated as income, loans treated as income, personal transfers mistaken for business revenue, deposits double-counted, crypto transfers treated as deposits, family support treated as income, or real estate down payments misclassified. These assumptions often lead to inflated reassessments that must be contested.

How to Defend Yourself in a Net Worth Audit

1. Provide Complete Documentation

Show proof of loans, gifts, inheritances, insurance payouts, refunds, non-taxable transfers, and inter-account movements.

2. Correct CRA’s Assumptions Early

Many net worth assessments collapse when key assumptions are disproven with evidence.

3. Reconcile All Bank Deposits

Every deposit must be categorized as either income or a non-taxable source.

4. Challenge CRA’s Valuations

Real estate, crypto, and business valuations need to be accurate and supported.

5. Provide Lifestyle Explanations

If your spending was supported by savings, loans, or family assistance, document it.

6. Demonstrate Reliable Bookkeeping

Proving your records are complete helps undermine CRA’s justification for a net worth method.

Penalties and Interest in Net Worth Audits

CRA often applies:

• Gross Negligence Penalties (50% of tax)

• Repeated Failure to Report Penalties

• Late-filing penalties

• Compound daily interest
  Net worth audits can result in six-figure reassessments, making strong representation essential.

What to Do If You Disagree with the Results

You can:

• Provide rebuttal documentation

• Request reconsideration

• Escalate to the team leader

• File a Notice of Objection (within 90 days)

• Appeal to the Tax Court of Canada
  Most net worth assessments are negotiable when errors or assumptions are successfully challenged.

How to Prevent Net Worth Audits

Maintain separate business and personal accounts, keep receipts, document loans/gifts, avoid cash transactions, track crypto transactions, reconcile income monthly, and keep strong bookkeeping records.

Mackisen Strategy

At Mackisen CPA Montreal, we dismantle flawed net worth audits by challenging assumptions, correcting valuations, reconstructing financial timelines, documenting non-taxable sources, and preparing detailed submissions that expose calculation errors. We negotiate aggressively with CRA Appeals and pursue Notice of Objection or Tax Court appeals when necessary.

Real Client Experience

A Montreal contractor reversed a $145,000 net worth reassessment after we proved $90,000 of deposits were family loans. A real estate investor overturned CRA’s assumptions about property renovations and capital withdrawals. A crypto trader avoided penalties after we reconstructed wallet transfers. A small business owner reduced a six-figure assessment to near zero after we demonstrated lifestyle expenses were funded by savings, not income.

Common Questions

Can CRA examine my personal accounts? Yes. Can CRA assume I earned income without proof? Yes—under net worth rules. Can I fight a net worth assessment? Absolutely—with proper documentation. Does CRA look at social media? Yes, to compare lifestyle to income.

Why Mackisen

With more than 35 years of combined CPA experience, Mackisen CPA Montreal defends taxpayers against net worth audits with precision, evidence, and strategic tax law arguments. We protect your rights and ensure CRA assessments are fair, accurate, and legally defensible