Preparing for a Corporate Tax Audit – A Complete Guide by a Montreal CPA Firm Near You

Preparing for a corporate tax audit in Canada is essential for protecting your business,

minimizing financial exposure, and preventing costly reassessments. CRA audits can

occur at any time and often span multiple years of corporate activity, including payroll,

GST/QST, income tax, shareholder transactions, and financial statements. Many

business owners believe that audits happen only when something is “wrong,” but CRA

uses advanced analytics, industry benchmarking, and automated red-flag detection

systems to select corporations—even when filings appear accurate. A corporate audit

can be disruptive, time-consuming, and expensive if the corporation is not ready.

Understanding how to prepare for a corporate tax audit in Canada helps your business

maintain compliance, avoid penalties, and retain control of the process.

Legal and Regulatory Framework

CRA audit powers are derived from the Income Tax Act, the Excise Tax Act, and the

Tax Administration Act (Québec). Key authorities include:

• Section 231.1 – gives CRA authority to inspect books, records, and documents.

• Section 231.2 – allows CRA to issue requirements for information or documents.

• Section 231.7 – permits CRA to seek court orders when taxpayers fail to comply.

• Section 152 – authorizes reassessments within the normal period (3 years for

CCPCs), with extended periods for negligence or unreported foreign income.

• Section 239 – outlines penalties for tax evasion and gross negligence.

CRA may audit:

• T2 corporate tax returns

• GST/HST & QST filings

• payroll source deductions

• shareholder loan transactions

• capital purchases & CCA

• transfer pricing

• intercompany transactions

• corporate reorganizations

• CEWS, CERS, and government assistance

• input tax credits

• trust accounts

• real estate activities

These laws define CRA’s authority during a corporate tax audit in Canada.

Key Court Decisions

Several court decisions shape how CRA audits corporations and how audits must be

conducted.

In Redeemer Foundation v. Canada, the Supreme Court confirmed CRA’s broad power

to request documents and information during audits.

In BP Canada Energy v. Canada, the Federal Court limited CRA’s access to

accountant’s working papers, confirming that CRA cannot use audits to compel tax

accrual working papers without justification.

In Hickey v. Canada, the court ruled that CRA must conduct audits in a fair and

reasonable manner but emphasized that taxpayers must provide full cooperation.

In Spruce Mills v. Canada, the court upheld reassessments when inadequate

documentation made it impossible to verify expenses.

These rulings show that corporations must maintain strong records, respect CRA

requests, and manage the audit strategically to mitigate risk.

Why CRA Targets This Issue

CRA audits corporations because they represent significant tax revenue and high

potential for non-compliance. CRA targets:

• corporations with large fluctuations in income

• repeated losses without commercial justification

• negative shareholder loan balances

• aggressive CCA claims

• high meals, travel, and subcontractor expenses

• unfiled or late GST/QST or payroll remittances

• discrepancies between corporate tax returns and financial statements

• corporations involved in real estate transactions

• high passive income or multiple associated corporations

• industries with high cash volume

• CERB/CEWS/CERS-related anomalies

• corporations with bookkeeping irregularities

CRA also uses benchmarking to identify corporations outside normal industry ranges.

Understanding audit triggers is essential for preventing CRA intervention.

Mackisen Strategy

At Mackisen CPA Montreal, we develop complete audit-preparation systems to ensure

corporations are always ready for CRA review. Our corporate audit strategy includes:

• conducting a pre-audit risk assessment to identify high-risk areas

• reviewing financial statements for inconsistencies

• reconciling GST/QST, payroll, and taxable income to ensure internal consistency

• analyzing shareholder loan accounts for compliance with section 15(2)

• verifying documentation for CCA, subcontractors, meals, travel, and vehicle expenses

• implementing proper recordkeeping and digital file organization

• preparing audit-ready working papers and schedules

• responding to CRA audit letters, requests, and questionnaires

• negotiating with auditors to resolve issues before reassessment

• appealing unfair reassessments through Notice of Objection (Form T400A)

• guiding clients through Voluntary Disclosure if past filings contain errors

• providing representation throughout the audit process

Our proactive approach ensures corporations remain protected, compliant, and fully

prepared before CRA arrives.

Real Client Experience

A construction company received a CRA audit letter targeting subcontractor expenses.

CRA requested contracts, proof of payment, WSIB/RBQ compliance, and tax slips. We

assembled complete documentation, reconciled all payments, and CRA closed the audit

with no adjustments.

Another corporation was selected for a GST/HST audit after claiming large ITCs. CRA

denied some due to missing invoices. We recovered the documentation, defended

eligibility, and restored the ITCs.

A third client faced a payroll audit where CRA questioned taxable benefits and

shareholder loans. We reconstructed payroll records, completed missing T4s, and

negotiated removal of penalties.

These examples demonstrate how expert audit preparation dramatically reduces stress

and protects your corporation.

Common Questions

Business owners often ask whether an audit means CRA suspects wrongdoing. It does

not—most audits are random or analytics-driven.

Others ask how long CRA audits take. Some last weeks; complex audits may last

months.

Some ask whether CRA can request old records. Yes—CRA generally reviews up to 3

years, but longer in cases involving negligence or foreign income.

Another question: Should I speak to CRA directly? It is usually best that your CPA

handles communications to avoid misinterpretation.

These questions highlight why understanding corporate audit preparation in Canada is

crucial.

Why Mackisen

With more than 35 years of combined CPA experience, Mackisen CPA Montreal helps

corporations stay compliant, protected, and audit-ready year-round. Whether

responding to a CRA audit letter, preparing documentation, or defending against

reassessment, our expert team ensures precision, professionalism, and protection from

audit risk.