Small Business Audit Survival Checklist: Preparing Your Records – A Complete Guide by a Montreal CPA Firm Near You

Introduction

A CRA audit can be overwhelming for any small business owner, but most of the stress comes from missing documents, disorganized records, and unclear financial processes. With the right preparation, you can significantly reduce the risk of reassessment, penalties, or gross negligence charges. A well-organized business not only survives a CRA audit—it passes it with confidence. This guide provides a complete Small Business Audit Survival Checklist to help you prepare your records, avoid red flags, and protect your business from costly mistakes.

Legal and Regulatory Framework

Small businesses are audited under the Income Tax Act, Excise Tax Act (GST/HST), and Tax Administration Act (Quebec). CRA auditors examine: income reporting, GST/HST compliance, payroll remittances, T2 corporate filings, subcontractor payments, real estate transactions, and source deduction obligations. Businesses must keep clear and accurate books for at least six years, and CRA may expand audits beyond that if they suspect negligence or misrepresentation.

Key Court Decisions

In R. v. Ling, the Supreme Court upheld CRA’s use of indirect verification methods (bank deposit analysis, net worth audits) when business records were unreliable. In Precision Gutters v. Canada, CRA’s denial of Input Tax Credits (ITCs) due to missing documentation was confirmed, proving the importance of proper invoices. In Mohiuddin v. Canada, CRA assumptions stood because the business owner failed to provide reliable bookkeeping. These cases underline that organized records are your strongest defense.

Small Business Audit Survival Checklist

1. Income Reporting

• Reconcile sales with bank deposits monthly

• Track cash sales and issue receipts

• Ensure e-commerce platforms (Shopify, Stripe, PayPal) match reported income

• Maintain sales ledgers and POS reports

• Document inter-company transfers

2. Expense Documentation

• Keep all receipts, invoices, and proof of payment

• Ensure supplier invoices include GST/HST numbers

• Categorize expenses consistently

• Separate business and personal expenses

• Avoid claiming personal items as business deductions

3. Bank and Credit Card Records

• Use separate business accounts and cards

• Reconcile accounts monthly

• Document any personal-to-business or business-to-personal transfers

4. GST/HST Compliance

• File returns on time

• Support all ITCs with invoices

• Maintain GST/HST working papers

• Ensure correct place-of-supply rules

• Reconcile GST collected to sales

5. Payroll Compliance

• Maintain employment contracts

• Keep payroll journals and remittance confirmations

• Report taxable benefits (vehicles, allowances, gifts)

• Avoid misclassifying employees as contractors

6. Vehicle and Mileage Records

• Maintain a CRA-compliant mileage log

• Track fuel, repairs, insurance, and maintenance receipts

• Separate business and personal use percentages

7. Home Office Records (if applicable)

• Store calculations for workspace-in-home deductions

• Provide utility bills, rent, mortgage interest, and repairs breakdown

• Document exclusive-use criteria when applicable

8. Subcontractor Documentation

• Keep contracts, invoices, and proof of payment

• Verify subcontractor GST/HST registration when applicable

• Maintain T5018 filings for construction businesses

9. Real Estate Transaction Records

• Keep purchase/sale agreements

• Track renovation receipts

• Document business vs personal portions

• Record property tax and mortgage information

10. Corporate Records

• Maintain minute books

• Keep shareholder loan records

• Track dividends vs salary

• Store financial statements and trial balances

11. Inventory Tracking (if applicable)

• Conduct year-end inventory counts

• Track COGS accurately

• Keep supplier invoices for all purchases

12. Crypto or Investment Activity

• Store transaction histories

• Document capital gains calculations

• Maintain exchange rate records

13. Audit-Ready Organization

• Number and label documents

• Store files digitally and physically

• Keep a clear bookkeeping system

• Maintain backup copies

• Prepare summary spreadsheets for auditors

14. Internal Controls

• Use accounting software (QuickBooks, Xero, Sage)

• Implement dual-approval processes for payments

• Review GST/HST and payroll before submission

What to Do When You Receive an Audit Letter

Respond immediately, request more time if necessary, avoid providing excessive information, and let a CPA handle communication. CRA audits escalate when records are disorganized or when taxpayers attempt to explain without documentation.

Consequences of Poor Record-Keeping

CRA may assess: additional income, denied expenses, GST/HST owing, payroll liabilities, gross negligence penalties (50%), repeated failure-to-report penalties, and daily compounded interest. Poor records also increase audit duration and stress.

Mackisen Strategy

At Mackisen CPA Montreal, we help small businesses become audit-ready by organizing financial records, reconstructing missing documents, implementing bookkeeping systems, correcting GST/HST and payroll issues, and defending against CRA assumptions. Our audit packages have successfully reversed six-figure reassessments.

Real Client Experience

A Montreal construction company avoided $130,000 in reassessments after we rebuilt two years of invoices and bank reconciliations. An e-commerce seller passed a GST audit after we reconciled merchant statements. A healthcare professional reversed denied expenses with our structured evidence package. A retail business passed a payroll audit through proper documentation of taxable benefits.

Common Questions

What is the biggest audit red flag? Missing documentation. Do I need a CPA to survive an audit? Strongly recommended. Does CRA accept digital receipts? Yes, if clear and complete. What if my records are messy? They can be reconstructed—but before CRA requests them.

Why Mackisen

With more than 35 years of combined CPA experience, Mackisen CPA Montreal prepares small businesses to pass CRA audits with confidence, organization, and strong documentation. We protect your business from costly reassessments and strengthen your financial foundation.