GST/QST AUDIT PREPARATION CHECKLIST: BE READY FOR REVIEW

Receiving a GST/QST audit notice from Revenue Québec or a combined review by CRA and Revenue Québec can be stressful, even for businesses that try to stay compliant. An audit means your sales, purchases, documentation, and returns will be examined to determine whether you collected and remitted taxes correctly and claimed input tax credits properly. Many businesses are not truly prepared when the letter arrives. Files are incomplete, invoices are missing, and reconciliations have never been done. This guide explains how to prepare for a GST/QST audit using a practical, step-by-step checklist so your business is ready for review at any time.

Audit preparation is not something you do only after you receive a notice. The best defence is a system that keeps your GST/QST documentation audit-ready throughout the year. When your records are organized and reconciled, an audit becomes a manageable review rather than a crisis.

LEGAL AND REGULATORY FRAMEWORK

GST is governed by the Excise Tax Act, and QST is governed by the Quebec Taxation Act and administered by Revenue Québec. These laws give tax authorities broad powers to verify returns, examine records, and request supporting documents. Registered businesses must keep complete records of all transactions, including invoices, receipts, contracts, sales summaries, bank statements, and internal ledgers, generally for a minimum of six years.

During a GST/QST audit, Revenue Québec is entitled to review your books and records, inspect your premises, and ask questions about your operations. They may compare your GST/QST returns to your financial statements, income tax filings, payroll records, and bank deposits. Any discrepancy must be supported by documentation or it may result in an adjustment.

KEY COURT DECISIONS

Courts in Canada and Quebec have consistently confirmed that the burden of proof lies with the taxpayer in GST/QST matters. When Revenue Québec challenges a deduction, a credit, or a reported sale, it is up to the business to provide documentation and explanations. In many cases, courts have upheld reassessments where taxpayers failed to keep invoices with proper GST/QST registration numbers, clear descriptions, or proof of payment.

Courts have also affirmed that auditors are allowed to rely on sampling methods, third-party information, and indirect tests such as bank deposit analysis when records are incomplete. When documentation is weak, judges tend to side with the tax authorities. These decisions highlight the importance of audit preparation and proper record-keeping.

WHY CRA AND REVENU QUÉBEC TARGET THESE ISSUES

Revenue Québec and CRA focus on GST/QST audits because sales tax is a major source of government revenue and also one of the most error-prone areas for businesses. Common issues include under-reported sales, incorrect tax rates, misclassified exempt supplies, overclaimed input tax credits, and poor documentation. Businesses with cash-intensive operations, high refund claims, or inconsistent reporting patterns are more likely to be audited.

Red flags include repeated late filings, large swings in refunds or tax payable, discrepancies between GST/QST returns and income tax returns, and significant differences between bank deposits and reported sales. A strong audit preparation system reduces the risk that these issues will lead to costly adjustments.

GST/QST AUDIT PREPARATION CHECKLIST

1. Confirm your audit scope and period
   Carefully read the audit letter. Identify which tax years or periods are under review, which taxes are involved (GST, QST, or both), and whether the audit is focused on refunds, specific expenses, particular industries, or general compliance. Note any deadlines for providing documents and the auditor’s contact information.

2. Gather all GST/QST returns and assessments
   Print or download all filed FPZ-500-V combined returns, related notices of assessment, and any adjustments or previous correspondence from Revenue Québec or CRA for the periods under audit. Organize these in chronological order. This provides the baseline against which your records will be tested.

3. Prepare sales documentation
   Assemble your sales invoices, POS summaries, Z-reports, daily sales sheets, customer contracts, and any spreadsheets you use to track sales. Ensure invoices show your legal name, GST and QST registration numbers, invoice dates, client information, descriptions of goods or services, amounts before tax, and tax charged. For high-risk sectors like cash businesses, ensure cash summaries and deposits match your books.

4. Prepare purchase and expense documentation
   Gather all supplier invoices and receipts for the periods under review. These must show supplier name, address, GST and QST registration numbers where applicable, invoice date, description of goods or services, and tax amounts. Organize them by month and by supplier or account category. Flag large or unusual expenses that might draw auditor attention.

5. Reconcile tax collected and tax credited
   Reconcile GST and QST collected according to your accounting system with the totals reported on each return. Do the same for input tax credits and input tax refunds claimed. Any differences should be explained and documented now, before the auditor asks. This step is critical to understanding potential exposure before the audit starts.

6. Match bank deposits to sales
   Perform a bank reconciliation that links deposits to sales records. Auditors often compare bank deposits to reported sales to detect under-reporting. If deposits include loans, shareholder contributions, transfers, or non-taxable items, prepare a clear schedule explaining what each non-sales deposit represents.

7. Identify exempt, zero-rated, and taxable supplies
   Prepare a summary of your main products and services, indicating whether they are taxable, zero-rated, or exempt. Ensure your invoicing and tax coding match these classifications. If you make mixed supplies, prepare a brief written explanation for the auditor showing your understanding of the rules and how you applied them.

8. Review high-risk areas and unusual items
   Look for transactions that might trigger questions: large refunds, big capital purchases, adjustments, write-offs, related-party transactions, management fees, or unusual journal entries. Prepare supporting documentation and clear explanations for these items. Anticipating questions significantly improves audit outcomes.

9. Prepare an organized audit file
   Create a structured set of folders for the auditor: one for returns and assessments, one for sales, one for expenses, one for bank records, and one for other supporting documents such as contracts and internal reports. Label everything clearly by period. The easier it is for the auditor to verify your information, the smoother the process will be.

10. Assign an audit contact person
    Designate one individual to communicate with the auditor, answer questions, and provide documents. This avoids inconsistent answers from multiple staff members. Brief this person on the business operations, internal processes, and key documentation so they can respond calmly and accurately.

11. Review your rights and obligations
    Understand that you must cooperate, provide access to requested documents, and answer reasonable questions. At the same time, you have the right to ask for clarifications, to request time to gather records, and to consult your professional advisor before responding to complex issues. Knowing your rights helps maintain a professional, controlled relationship with the auditor.

12. Involve a professional advisor early
    A CPA with experience in GST/QST audits can review your records, identify exposures, and help you prepare explanations and documentation before the first meeting. Early involvement often reduces adjustments and prevents avoidable misunderstandings with the auditor.

MACKISEN STRATEGY

Mackisen CPA works with businesses before, during, and after GST/QST audits. Before an audit begins, we perform a pre-audit review of your GST/QST returns, reconciliations, documentation, and accounting systems. We identify potential weaknesses or exposure, help you correct errors, and prepare a comprehensive audit file. During the audit, we can act as your representative, manage communications with Revenue Québec or CRA, and ensure that questions are answered clearly and accurately.

After the audit, if adjustments are proposed, we analyze the findings, verify the calculations, and advise whether an objection or appeal is warranted. We also help implement improved systems and controls so that future audits, if they occur, are easier to manage and less likely to result in adjustments.

REAL CLIENT EXPERIENCE

A Montreal retailer received a QST audit notice focused on input tax refunds. Their receipts were scattered across several locations and their POS system did not tie cleanly into the accounting software. Mackisen consolidated their data, reconstructed reconciliations, and prepared a structured audit file. The audit concluded with minimal adjustments.

A consulting company was subject to a combined GST/HST and QST audit after reporting several large refunds. Mackisen reviewed their expense claims, removed a few non-eligible items, and prepared explanations for specialized services and cross-border work. Because the file was well documented, the audit closed quickly and the majority of refunds were maintained.

A construction firm faced a GST/QST audit of several years of returns. Documentation for subcontractors was incomplete, and Revenue Québec proposed significant adjustments. Mackisen obtained missing invoices, clarified contract structures, and corrected misclassifications. The final assessment was substantially reduced compared to the initial proposal.

COMMON QUESTIONS

How far back can Revenue Québec audit my GST/QST returns
Generally up to four years from the date of the notice of assessment, but this period can be extended in cases of misrepresentation or fraud.

Do I have to provide electronic records
If your accounting system is electronic, auditors may request digital exports. It is often more efficient to provide organized electronic files alongside printed summaries.

Can I negotiate during an audit
You can discuss methodology, documentation, and reasonable assumptions with the auditor. Formal disputes, however, are handled through the objection and appeal process after an assessment is issued.

Should I talk directly to the auditor or through my CPA
For complex files, having your CPA manage communications often leads to more precise responses and fewer misunderstandings.

Does an audit always result in adjustments
Not necessarily. Well-documented and reconciled files often pass with little or no change.

WHY MACKISEN

With more than 35 years of combined CPA experience, Mackisen CPA Montreal helps businesses navigate GST/QST audits with confidence. From pre-audit preparation and documentation review to active representation and post-audit strategy, our team ensures that your rights are protected, your exposure is minimized, and your systems emerge stronger and more compliant.