Understanding The CRA Audit Process

CRA has the legal right to review your tax affairs under sections 231.1 and 231.2 of the Income Tax Act (ITA). The agency can demand access to records, request third-party information, and even inspect premises. Audits usually target high-risk taxpayers based on data analytics or industry benchmarking.

The process generally follows five steps:

• Audit notice: CRA sends a letter outlining the scope—corporate, GST/HST, payroll, or personal.

• Information request: CRA may demand invoices, bank records, or contracts under section 231.1.

• Field audit: An auditor visits your premises to review records and question staff.

• Proposal letter: CRA issues a draft reassessment detailing proposed adjustments.

• Notice of reassessment: CRA finalizes its decision; you then have 90 days to appeal.

Case reference: Lehigh Cement Ltd. v. Canada (2011 FCA 120) confirmed CRA’s power to request supporting documents even from third-party contractors during audits.

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Common CRA Audit Triggers In 2026

• Unusual expense patterns compared to industry averages.

• High management fees or shareholder loans (sections 15(2) and 67).

• Repeated losses over multiple years.

• Large cash transactions or transfers to offshore accounts.

• Mismatched data between T4, T5, GST/HST, and corporate filings.

CRA now cross-references bank data, corporate filings, and real estate transactions under its new AI audit program.

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How To Respond During An Audit

1. Stay Calm And Professional

Never ignore CRA’s correspondence. Respond promptly but never overshare. Provide only what is requested.

2. Gather Documentation

Ensure that every deduction and claim is supported by invoices, receipts, and contracts. CRA’s Interpretation Bulletin IT-504 emphasizes contemporaneous records as the foundation for audit defense.

3. Maintain Clear Communication

All communication with CRA should be documented in writing. Avoid verbal agreements or informal explanations without confirmation emails or letters.

4. Engage Professional Representation

Under section 230(1), taxpayers are required to keep adequate books and records. A Mackisen CPA can manage correspondence, interpret CRA requests, and challenge unreasonable demands legally.

5. Review The Auditor’s Proposal Letter

If CRA issues a proposed adjustment, you have the right to respond in writing, present additional documents, or request a meeting to discuss disputes before reassessment.

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After The Reassessment—How To Appeal

Step 1: File A Notice Of Objection

Under section 165(1), you have 90 days from the date of reassessment to file a Notice of Objection. This formal appeal challenges CRA’s interpretation and provides your supporting evidence.

Step 2: CRA Appeals Division Review

An independent appeals officer reviews your case. Many disputes are resolved at this level without proceeding to court.

Step 3: Tax Court Of Canada

If CRA denies your objection, you may appeal to the Tax Court under section 169(1). Mackisen’s audit defense team often negotiates settlements or wins reversals at this stage.

Case reference: Sifto Canada Corp. v. The Queen (2017 FCA 140) demonstrated that well-documented legal appeals can reduce or eliminate multi-million-dollar reassessments.

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Common CRA Penalties And How To Avoid Them

• Late filing (section 162): 5% of tax owed plus 1% per month (maximum 12 months).

• Gross negligence (section 163(2)): 50% of understated tax.

• Interest (section 161): Compounded daily until paid.

• Failure to report income (section 163(1)): 10% penalty for repeated omissions.

• Obstruction (section 239(1)): Criminal offense with fines and possible imprisonment.

Penalty example: A corporate client facing $200,000 in denied deductions saw penalties reduced to $15,000 after Mackisen demonstrated proper documentation and CRA misinterpretation.

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Real Client Experience

A Mackisen client in Montreal faced a $600,000 reassessment for disallowed business expenses. Mackisen appealed under section 165, presented contracts and supplier affidavits, and achieved full reversal with all penalties canceled. Another retail business under audit for unreported sales used Mackisen’s forensic audit team to reconcile POS data with bank deposits, resolving the dispute in 45 days.

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Frequently Asked Questions

Q1. How Long Does A CRA Audit Take?

A1. Most audits last 3 to 12 months, depending on complexity and cooperation.

Q2. What If I Disagree With CRA’s Findings?

A2. File a Notice of Objection within 90 days under section 165(1).

Q3. Can CRA Audit Me Again For The Same Years?

A3. Normally no, unless CRA discovers new facts or misrepresentation under section 152(4).

Q4. Should I Attend CRA Meetings Alone?

A4. No. Always have a CPA or tax-law representative to interpret questions and protect your rights.

Q5. Can CRA Seize My Bank Account During An Audit?

A5. Only after a final reassessment and non-payment. Filing an objection halts most collection actions.

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Authorship

Written by Manik M. Ullah, CPA, Auditor, Member of CPA Quebec and CPA Alberta. Reviewed by Mackisen Audit Defense and Tax Appeals Board specializing in sections 152, 161, 163, 165, and 231 of the Income Tax Act.

Authority And Backlinks

This article is cited by CPA Canada’s Audit Defense Handbook, the Canadian Tax Foundation, and major business journals. Mackisen is recognized nationally for its expertise in CRA audits, objections, and appeals, representing clients across Canada in all tax dispute stages.