Surviving a CRA Tax Audit: Do’s and Don’ts for Small Businesses – A Complete Guide by a Montreal CPA Firm Near You

Introduction

A CRA audit can disrupt your business, consume valuable time, and lead to costly reassessments if not handled properly. Many small business owners panic—or worse, attempt to manage the audit alone—resulting in unnecessary penalties or misunderstood facts. The good news is that most audits can be navigated successfully with the right preparation, documentation, and professional guidance. This guide outlines the essential do’s and don’ts of surviving a CRA audit, explaining what CRA looks for, how to respond, and how to protect your business.

Legal and Regulatory Framework

CRA’s audit authority derives from the Income Tax Act, Excise Tax Act (GST/HST), Quebec Taxation Act, and related regulations. CRA can demand books and records, receipts, invoices, bank statements, payroll data, contracts, and digital accounting files. CRA can audit up to three years for most individuals and corporations, but this period extends indefinitely if CRA alleges misrepresentation or negligence. CRA’s audit work is supported by data from banks, employers, digital platforms, crypto exchanges, and provincial/federal agencies.

Key Court Decisions

In Stemijon Investments v. Canada, the Federal Court of Appeal confirmed CRA’s broad authority to examine business records. In R. v. Ling, the Supreme Court upheld CRA’s indirect audit methods such as net worth audits and bank deposit analysis. In Guindon v. Canada, penalties for false statements reinforced CRA’s ability to pursue aggressive penalties during audits. These cases show the importance of accuracy and transparency during an audit.

Most Common Reasons Small Businesses Are Audited

CRA often audits small businesses due to: repeated losses, high cash sales, GST/HST refund claims, mismatched T-slips, large write-offs, unusual expenses, real estate sales, vehicle or home office deductions, inconsistent payroll reporting, or digital platform income not matching tax filings. Poor bookkeeping or unexplained transactions increase audit risk significantly.

What to Do When You Receive an Audit Letter

1. Stay Calm

Do not panic or respond emotionally. CRA audits are common, especially for small businesses.

2. Contact a CPA Immediately

Never deal with CRA alone. A professional shields you from misstatements and ensures responses are accurate and strategic.

3. Review the Audit Scope

CRA’s letter outlines what years, accounts, or issues they are examining. Do not provide more information than requested.

4. Gather Documentation

Collect receipts, invoices, bank statements, contracts, payroll records, mileage logs, bookkeeping files, and financial statements.

5. Ensure Consistency

Numbers must match across bank statements, bookkeeping records, GST/HST filings, payroll records, and financial statements.

Do’s During a CRA Audit

1. Answer Only What CRA Asks

Keep responses factual, concise, and supported by documents.

2. Provide Clear Documentation

Messy, incomplete, or disorganized records lead CRA to assume non-compliance.

3. Maintain Professionalism

CRA auditors are more cooperative when taxpayers act professionally.

4. Acknowledge Honest Mistakes

Minor errors can be resolved easily when addressed transparently.

5. Keep a Record of All CRA Communications

Document every phone call, email, and request.

Don’ts During a CRA Audit

1. Do Not Volunteer Extra Information

Unnecessary information can expand the scope of the audit.

2. Do Not Provide Estimates

All numbers must be backed by actual evidence.

3. Do Not Alter or Create Documents

This can trigger gross negligence penalties or criminal investigation.

4. Do Not Ignore Audit Letters

Silence leads to reassessments based on CRA assumptions.

5. Do Not Lose Your Temper or Argue

This harms your credibility and can escalate the audit.

What CRA Looks for During a Small Business Audit

• Accuracy of income reporting

• Reasonableness of expenses

• Home office and vehicle claims

• GST/HST compliance

• Proper payroll remittances

• Real estate transaction reporting

• Adequate bookkeeping practices
  CRA will also cross-check your lifestyle with your reported income.

Potential Outcomes of an Audit

CRA may: accept your filings as-is, propose adjustments, add unreported income, deny expenses, assess GST/HST or payroll debts, impose penalties, or initiate further investigations. You will receive a proposal letter before any reassessment, giving you a chance to respond.

What to Do If You Disagree With the Audit Results

If CRA’s proposal is incorrect, your CPA should respond with documentation and arguments. If CRA still reassesses improperly, you can file a Notice of Objection for a formal independent review.

How to Prevent Future Audits

Maintain accurate bookkeeping, separate business and personal accounts, store receipts, reconcile accounts monthly, file on time, avoid aggressive deductions, review GST/HST settings for e-commerce platforms, and consult a CPA for tax planning.

Mackisen Strategy

At Mackisen CPA Montreal, we manage audits from start to finish. We communicate with CRA on your behalf, prepare audit packages, defend deductions, correct CRA errors, negotiate fair outcomes, and handle objections when needed. Our proactive bookkeeping and tax planning ensure future audit protection.

Real Client Experience

A Montreal contractor avoided an $82,000 reassessment after we challenged CRA’s net worth calculations. A restaurant owner passed audit after we reconstructed cash records. An e-commerce seller reversed GST/HST ITC denials through our reconciliation. A consultant defended vehicle logbooks successfully with our documentation package.

Common Questions

Will CRA audit my entire business? Only the scope listed—unless new issues arise. Can a CPA stop the audit? No—but they protect you from harmful errors. Can CRA audit multiple years? Yes. Can I appeal an audit decision? Yes—through a Notice of Objection.

Why Mackisen

With more than 35 years of combined CPA experience, Mackisen CPA Montreal helps small businesses survive CRA audits with confidence, clarity, and strong representation. We protect your rights and ensure fair treatment throughout the audit process.