How a Montreal Startup Survived a QST Audit and Saved $50,000

A Montreal technology startup faced a sudden and aggressive QST audit that threatened its cash flow, credibility with investors, and ability to continue operations. Like many early-stage businesses, it had rapid growth, inconsistent bookkeeping, and a mix of taxable and zero-rated activities. When Revenu Québec began questioning input tax refunds (ITRs), deposits, and expense eligibility, the situation quickly escalated. This case study explains how the startup successfully navigated the audit and ultimately saved more than $50,000 through proper representation, documentation, and strategic intervention.

The Audit Trigger

Revenu Québec selected the business for review because:
• it claimed large ITRs relative to revenue
• accounting software contained miscoded transactions
• deposits did not match sales
• SaaS invoices were missing GST/QST numbers
• multiple periods included “nil sales + high expenses”

These red flags triggered a full-scale GST/QST audit covering two fiscal years.

Auditor Demands

The auditor requested:
• bank statements for all accounts
• supplier invoices for every expense over $100
• contracts and SOWs for subcontractors
• e-commerce platform reports
• cloud-service payment receipts
• POS or billing system exports
• explanations for each major deposit
• reconciliation of ITRs to the general ledger

The startup struggled to produce everything due to fast growth and scattered documentation.

Initial Findings by Revenu Québec

The auditor proposed:
• denying approximately $30,000 of ITRs
• reassessing sales on unexplained deposits
• adding penalties for “careless reporting”
• charging interest for late remittances

The total potential reassessment exceeded $50,000.

How the Situation Turned Around

1. Full Documentation Reconstruction

A CPA team reconstructed the startup’s records:
• downloaded missing SaaS invoices
• contacted suppliers for duplicates
• rebuilt ITR schedules
• matched deposits to investor funding, not sales
• corrected tax-code errors in accounting software

2. Clarifying Zero-Rated and Non-Taxable Revenue

The startup exported digital services to U.S. and EU clients.
These transactions were zero-rated, not taxable.
Once documented properly, taxable sales dropped significantly.

3. Correcting Misinterpretations

The auditor misclassified:
• shareholder loans as revenue
• reimbursements as taxable sales
• foreign service delivery as Quebec-based

Legal explanations and documentation reversed these errors.

4. Removing Penalties

The accountant demonstrated:
• no intention to misreport
• honest bookkeeping errors typical of early-stage startups
• immediate corrective action

Penalties were fully removed.

5. Final Reassessment

After negotiations and corrected filings:
• nearly all ITRs were accepted
• taxable revenue was adjusted downward
• penalties were eliminated
• interest was reduced

Total savings: Over $50,000

Lessons Learned for Startups

• Keep complete SaaS, software, and cloud-service invoices
• Track zero-rated international sales carefully
• Differentiate investor deposits vs. sales
• Maintain proper tax coding in accounting software
• Respond immediately to audit requests
• Use professional representation as soon as the audit escalates

Common Questions

Why do startups get audited?
Large ITR claims, inconsistent records, and zero-sales refund periods are common triggers.

Can investor deposits be taxed?
No but you must document them clearly.

Are digital exports taxable?
Most international digital services are zero-rated, not exempt.

Can penalties be removed?
Yes when errors are honest and documentation is provided.

Why Mackisen

With more than 35 years of combined CPA experience, Mackisen CPA Montreal helps startups defend against QST/GST audits, reconstruct records, correct filings, and protect cash flow. Our audit-ready systems ensure every business even fast-scaling startup stays compliant and confident.