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

A young Montreal-based startup found itself facing a full-scale QST audit during its second year of operation right when investor discussions, staffing decisions, and product development were in full swing. The audit threatened not only its cash flow, but also its credibility and future growth. What began as a routine verification quickly escalated into a proposed reassessment exceeding $50,000.
This success story shows exactly how the business overcame the audit, cleaned up its books, and secured a positive outcome with zero penalties.

The Challenge

The startup experienced rapid growth and inconsistent bookkeeping. Several red flags triggered the audit:
• high ITR claims relative to revenue
• large software and SaaS expenses
• deposits that did not match recorded sales
• revenue from U.S. clients mixed in with Canadian activity
• missing supplier invoices
• incorrect tax codes in their accounting system

Revenu Québec sent a verification letter requesting:
• two years of GST/QST filings
• all supplier invoices
• proof of payment
• bank reconciliations
• POS and billing system exports
• contracts, statements of work, and subscription records

Within weeks, the verification escalated into a formal audit with a proposed adjustment of more than $50,000.

The Proposed Reassessment

The auditor questioned:
• whether certain expenses were eligible for ITRs
• unexplained deposits treated as taxable sales
• expenses without proper documentation
• foreign sales classification
• zero-rated export services

The startup risked:
• losing nearly all ITRs claimed for two years
• reassessed sales on non-taxable deposits
• interest and possible penalties
• cash-flow collapse during fundraising

How Mackisen Turned the Audit Around

Step 1 - Reconstructing Documentation

The accounting team rebuilt the startup’s books from scratch:
• contacted SaaS providers for missing invoices
• obtained duplicate receipts from multiple suppliers
• matched bank deposits to investor funding and not taxable revenue
• reconciled monthly sales, deposits, and expenses
• categorized foreign revenues as zero-rated under sales tax law

Revenu Québec received a complete, indexed audit binder.

Step 2 -Correcting Tax Coding and Bookkeeping Errors

The startup’s accounting system (QuickBooks and Stripe integrations) had:
• mixed tax rates
• incorrect QST codes
• duplicated entries
• untagged expenses

These were corrected to ensure compliance and prepare for future audits.

Step 3 - Demonstrating Zero-Rated Export Sales

A significant portion of the startup’s revenue came from foreign clients in the U.S. and Europe.

Mackisen prepared:
• contracts
• client addresses
• service delivery explanations
• proof that services were used outside Canada

This prevented the auditor from adding QST to foreign sales.

Step 4 - Negotiating With the Auditor

A CPA handled all communication with the auditor:
• clarified deposits
• challenged incorrect assumptions
• rejected improperly classified taxable transactions
• provided legal references for zero-rated services
• eliminated all penalties

The tone shifted from adversarial to collaborative.

The Result

After extensive work and negotiation:
• the reassessment was reduced by more than $50,000
• all ITRs were accepted with proper documentation
• no penalties were charged
• interest was significantly reduced
• the audit closed with a clean compliance record

The startup emerged stronger, with clean books, proper tax settings, and audit-ready systems.

Key Lessons

• Missing invoices or messy bookkeeping can trigger major reassessments
• International services are often zero-rated, but must be documented
• Unexplained deposits are assumed taxable unless proven otherwise
• A CPA-led defense drastically improves audit outcomes
• Reconstructed documentation must be complete, organized, and indexed

Common Questions

What happens if I don’t respond to audit letters on time?
Revenu Québec may issue estimated assessments or deny refunds.

Are zero-rated sales always accepted?
Only with full documentation.

Can a startup survive a $50,000 reassessment?
With proper intervention, yes and often the amount can be reduced or eliminated.

Why Mackisen

With more than 35 years of combined CPA experience, Mackisen CPA Montreal specializes in defending startups during audits, reconstructing financial records, and preventing crippling reassessments. We ensure compliance, protect cash flow, and safeguard your business through every audit stage.