How to Prepare for a CRA or ARQ Audit

Introduction
Understanding how to prepare for a CRA or ARQ audit is essential for businesses, self-employed individuals, corporations, real estate investors and professionals across Canada—especially in Québec, where Revenu Québec (ARQ) is known for intense scrutiny. Audits are never random. CRA and ARQ select taxpayers based on specific red flags, inconsistencies or risk markers. Preparing properly can dramatically reduce the financial, legal and emotional impact of an audit. This guide explains exactly how to prepare for a CRA or ARQ audit, what documents are required, common mistakes to avoid and how to protect yourself at every stage of the process.

Legal and Regulatory Framework
How to prepare for a CRA or ARQ audit begins with understanding auditor powers under:

• the Income Tax Act
• the Excise Tax Act
• the Tax Administration Act (Québec)
• CRA audit and enforcement policy
• Revenu Québec audit powers
• court decisions confirming taxpayer obligations

CRA and ARQ auditors may:

• inspect books and records
• request electronic data
• require supporting documentation
• conduct interviews
• visit business premises
• reconcile bank statements with reported income
• review GST/HST/QST filings
• analyze payroll compliance
• expand the audit to multiple years if issues are found

Taxpayers must cooperate—but only within legal boundaries. Understanding how to prepare for a CRA or ARQ audit ensures that rights are protected while compliance is met.

Step 1: Understand Why You Were Selected for Audit

CRA and ARQ audits usually result from:

• inconsistent filings
• unusually high deductions
• repeated business losses
• real estate transactions
• GST/QST discrepancies
• payroll issues
• lifestyle mismatches
• third-party reporting (banks, employers, platforms)
• industry risk benchmarks

Knowing the trigger helps focus your preparation.

Step 2: Gather All Required Documentation

The foundation of how to prepare for a CRA or ARQ audit is documentation.
You will need:

Income Documentation

• invoices, receipts and contracts
• Shopify, Stripe, PayPal, Uber, Airbnb reports
• bank statements and e-transfers
• T4, T5, T5018, RL-1, RL-3 slips
• rental agreements
• real estate closing documents

Expense Documentation

• receipts with full supplier details
• mileage logs
• home office calculations
• subcontractor invoices
• proof of payment
• GST/HST/QST paid
• payroll records

GST/HST & QST Documentation

• GST/HST returns
• QST returns
• sales tax collected vs remitted
• ITC/ITR documentation

Payroll Documentation

• pay stubs
• CRA PD7A statements
• QPP/QPIP remittances
• CNESST filings
• T4 and RL-1 slips

Proper organization is essential in how to prepare for a CRA or ARQ audit.

Step 3: Reconcile All Accounts Before the Audit Begins

A critical step in how to prepare for a CRA or ARQ audit is reconciliation.
Ensure:

• bank deposits match reported revenue
• expenses are coded correctly
• GST/QST collected equals remitted amounts
• payroll deductions match T4/RL-1 slips
• capital asset purchases reflect correct CCA claims
• shareholder loans are properly documented

CRA and ARQ auditors quickly detect inconsistencies.

Step 4: Correct Past Errors Proactively (If Needed)

If errors exist, correct them before the audit begins.
This can be done through:

• amended returns
• voluntary disclosure programs (VDP)
• corrected GST/QST returns
• payroll adjustments

Proactive correction often reduces penalties and interest.

Step 5: Do NOT Contact the Auditor Without Representation

One of the biggest mistakes taxpayers make when learning how to prepare for a CRA or ARQ audit is contacting the auditor directly.
Reasons to avoid this:

• auditors ask leading questions
• taxpayers often overshare
• inconsistent answers raise red flags
• anything said can be used to expand the audit

Always let a CPA or tax professional manage communication.

Step 6: Prepare a Strong Audit Response Package

A proper audit response includes:

• a clean summary of income
• categorized expense documentation
• supporting receipts organized chronologically
• GST/QST reconciliation
• payroll summaries
• explanations for unusual transactions
• legal support for complex items (e.g., real estate, crypto, grants)

Well-organized packages shorten audit timelines and improve outcomes.

Step 7: Protect Your Rights During the Audit

Taxpayers have rights:

• the right to professional representation
• the right to procedural fairness
• the right to know what is being reviewed
• the right to reasonable timelines
• the right to appeal reassessments
• the right to privacy for non-business documents

Auditors cannot:
• seize bank accounts without due process
• demand personal documents unrelated to the audit
• interrogate employees without permission

Understanding your rights is essential in how to prepare for a CRA or ARQ audit.

Key Court Decisions

Court rulings reinforce:

• CRA and ARQ can expand audits when inconsistencies appear
• taxpayers must produce documentation—even if accountant is unavailable
• missing receipts justify denial of deductions
• gross negligence penalties apply when records are inadequate
• unjustified business losses are disallowed
• GST/QST ITCs require full documentation
• personal vs business expenses must be clearly separated

Québec courts enforce strict compliance, especially for QST and payroll.

Why CRA and Revenu Québec Audit Aggressively

Audit intensity has increased because:

• digital platforms reveal undeclared income
• real estate flipping is widespread
• GST/QST misreporting is common
• payroll trust funds are high-risk
• web-scraping and AI detect lifestyle mismatches

Understanding how to prepare for a CRA or ARQ audit helps prevent costly reassessments.

Mackisen Strategy

Mackisen CPA offers a complete audit-preparation system:

• analyzing the audit letter
• identifying risks before CRA/ARQ finds them
• organizing audit-ready documentation
• preparing reconciliation reports
• handling all communication with auditors
• responding to audit questions professionally
• negotiating adjustments
• filing appeals or objections if needed
• preventing future audit exposure

This structured method is exactly how to prepare for a CRA or ARQ audit effectively.

Real Client Experience

Examples of how Mackisen resolved real audits:

• A freelancer was audited for three years of GST/QST returns. Mackisen reconciled sales platforms and preserved all ITCs.
• A Québec restaurant was reviewed for payroll inconsistencies. We corrected T4/RL-1 slips and defended CNESST filings.
• A real estate investor faced an ARQ audit over the principal residence exemption. Mackisen prepared occupancy evidence and won the case.
• A consultant underreported income due to missing PayPal deposits. We reconstructed records and reduced penalties through objection.
• A construction company faced a full audit for subcontractor payments. Mackisen provided proof of work, contracts, and compliance, minimizing the reassessment.

These cases show the power of being prepared before a CRA or ARQ audit begins.

Common Questions

• How long does a CRA or ARQ audit last?
Weeks to months, depending on complexity.

• Can I delay the audit?
Sometimes—if documentation is incomplete.

• Can auditors visit my home or office?
Yes, but you can require representation to be present.

• What happens if my receipts are missing?
Reconstruction may work—but CRA can deny deductions.

• Can CRA audit more than 3 years?
Yes—if suspicion of misrepresentation or negligence exists.

• Does ARQ audit more aggressively?
Yes—Revenu Québec is known for being stricter than CRA.

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 facing a CRA or ARQ audit or want to avoid one altogether, our expert team ensures precision, transparency and full protection. When assisting clients with how to prepare for a CRA or ARQ audit, Mackisen provides complete audit defense, documentation preparation, reconciliation, and long-term compliance strategies.