Insights
October 17, 2025
Mackisen
How to Respond to a CRA or Revenu Québec Tax Audit
An audit from the Canada Revenue Agency (CRA) or Revenu Québec (ARQ) is a serious legal and financial process that requires immediate, strategic action. These audits can involve personal income tax, corporate returns, GST/QST filings, payroll, capital gains, or undeclared income. Mackisen Consulting brings 35+ years of experience with a team of CPAs, auditors, bookkeepers, and tax lawyers who have resolved over 1,850 tax files.
We assist in preparing, organizing, defending, and negotiating audits under the Income Tax Act (ITA), Excise Tax Act, and Quebec’s Tax Administration Act (TAA).
Types of Tax Audits and What to Do
1) Personal Tax Audit
Scope: Employment income, rental income, capital gains, foreign assets
Law: ITA s.3, s.20, s.74.1, s.110
Action: Collect all T-slips (T4, T5), reconcile deposits, and substantiate capital gains with purchase/sale records.
Illustrative jurisprudence: McKinlay Transport; Leblanc; Jarvis; Hansen; Fitzpatrick.
2) Corporate Tax Audit
Scope: Revenues, expenses, shareholder loans, inter-company transfers
Law: ITA s.9, s.18(1)(a), s.15(1), s.246
Action: Keep books current, prepare GIFI schedules, document all shareholder transactions.
Illustrative jurisprudence: Cameco (transfer pricing); Shoppers Drug Mart (deductibility); McLarty (business vs personal); GE Capital (arm’s length); Loewen (shareholder loans).
3) Payroll Audit
Scope: CPP/QPP, EI, taxable benefits, contractor classification
Law: ITA s.153, Employment Insurance Act, Quebec Taxation Act
Action: Provide payroll registers, T4/RL-1, ROEs, and remittance proof.
Illustrative jurisprudence: Royal Winnipeg Ballet; Connor Homes; Wolf; Sagaz; Suisse Atlantique.
4) GST/HST & QST Audit
Scope: Input tax credits (ITCs), taxable vs exempt supplies
Law: Excise Tax Act, QST Regulation
Action: Match invoices to ITCs; reconcile GST/QST filings monthly.
Illustrative jurisprudence: Glencoe Club; Club Intrawest; Great-West Life; Global Cash Access; City Water International.
5) Capital Gains Audit
Scope: Disposition of stocks, real estate, crypto
Law: ITA s.38, s.40, s.54
Action: Track ACB, document principal residence use, retain closing documents.
Illustrative jurisprudence: Fries; Maréchaux; Spence; timing cases; Hickman Motors.
6) Real Estate Audit
Scope: Flips, assignments, investment vs residence
Law: ITA s.40(2)(b), ARQ assignment guidance
Action: Provide intent evidence, renovation records, leases or resale documentation.
Illustrative jurisprudence: Poirier; Dufresne; Bélanger (ARQ); Savoie; Bélair.
7) Rental Income Audit
Scope: Short-term rentals (Airbnb), expense deductions
Law: ITA s.6(1), s.20(1)(c), s.110.6
Action: Track income, CCA schedules, lease agreements.
Illustrative jurisprudence: Dupuis (Airbnb); Ellenwood (interest); Grimard (QST); Smith (shared space); Walsh (CCA limits).
8) Unreported Income Audit
Scope: Lifestyle audit, bank deposit analysis
Law: ITA s.152, s.231.1
Action: Substantiate cash flows (loans, gifts, invoices) and explain discrepancies.
Illustrative jurisprudence: Mandarin Restaurant; Zink; Barbeau (ARQ); Prévost Car; Leung.
9) Trusts & Estates Audit
Scope: Distributions, residency, compliance
Law: ITA s.104, s.105
Action: Provide trust indentures, resolutions, T3 returns.
Illustrative jurisprudence: Antle; Garron Family Trust; Winter; Thibodeau; Gaudet (ARQ).
10) Non-Profit (OSBL) Audit
Scope: Surplus income, member benefits
Law: ITA s.149(1)(l)
Action: Demonstrate activities align with mission; no undue member benefits.
Illustrative jurisprudence: Ginsberg; Yeshiva Lubavitch; Canadian Assoc. of Reg. Psychologists; CIRP; Tourisme Abitibi (ARQ).
What to Do — and Not Do — During an Audit
DO
Respond to letters on time.
Keep monthly bookkeeping current.
Organize digital and physical records.
Use accounting software for traceability.
Maintain your minute book and resolutions.
Translate records into French when dealing with ARQ.
Reconcile bank accounts monthly.
Retain payroll and GST/QST filings.
Meet a tax expert immediately.
Let professionals handle communications.
DO NOT
Ignore audit requests.
Submit partial or incomplete information.
Destroy or alter documents.
Miss deadlines (leads to reassessments).
Assert unreported income explanations without evidence.
Delay organizing back years.
Assume ARQ operates exactly like CRA.
Guess what the auditor wants.
Lie or mislead (invites fraud issues).
Neglect your rights to object or appeal.
Your Legal Rights During an Audit
Due Process: You must be treated fairly.
Representation: You may appoint Mackisen to act on your behalf.
Language: Choose English or French (ARQ defaults to French unless you request otherwise).
Objection: You have 90 days to object to a Notice of Assessment.
Privacy & Scope: CRA/ARQ must stay within the stated scope.
Our Expertise at Mackisen
35+ years of tax, legal, audit, bookkeeping, and accounting experience
In-house CPAs, auditors, bookkeepers, and tax lawyers
1,850+ resolved tax audit and litigation files
Bilingual team with deep ARQ knowledge
CRA/ARQ negotiations, settlements, objections, and Tax Court preparation
Proactive bookkeeping and audit-defense strategy design
We offer:
Tax audit representation • Personal and corporate tax defense • GST, QST, payroll, rental, capital gain, and trust audits • Audit preparation and document review • Objections and court-appeal filings
Top 19 Tips to Win Your Audit With Confidence
Keep your bookkeeping monthly.
Reconcile bank and credit cards.
Organize and scan invoices/receipts.
Maintain a clear audit trail in your software.
Log shareholder loans and repayments.
Retain payroll slips and ledgers.
Prepare year-end financials early.
Respond to audit requests before deadlines.
Keep a clean minute book.
Update corporate resolutions annually.
Separate business and personal expenses.
Flag and document large cash transactions.
Maintain leases and contractor agreements.
Reconcile GST/QST monthly.
Log capital asset purchases and sales.
Keep proof of residency for real estate claims.
Translate French documents for CRA when needed.
Track gifts, transfers, and inheritances.
Meet Mackisen experts before submitting anything.
Frequently Asked Questions
What triggers a CRA or ARQ audit?
Mismatches with slips, large or unusual deductions, industry anomalies, lifestyle indicators, GST/QST discrepancies, or patterns in bank deposits/real estate activity.
How far back can they reassess?
Generally up to 3 years after the notice of assessment; up to 6+ years in cases of neglect, carelessness, or fraud.
What if I can’t provide requested documents?
Expenses may be disallowed and income may be estimated, increasing tax, penalties, and interest.
What’s the penalty for unreported income?
Gross negligence penalties can reach 50% of the understated tax. Repeated offenses bring harsher consequences.
Do I have to meet the auditor in person?
Not necessarily. With representation, most audits are handled via documentation and calls.
What if I made honest mistakes?
You may still be reassessed, but good-faith cooperation can reduce penalties. Voluntary Disclosure may apply if you come forward first.
Can CRA/ARQ seize assets?
Yes—liens, garnishments, frozen accounts, and seizures are possible if you ignore or fail to address balances.
Review vs. Audit?
A review requests limited info; an audit is a deeper investigation with broader consequences.
Do I have the right to object?
Yes—90 days from the Notice of Assessment. Mackisen can prepare and file your objection.
Does ARQ follow CRA rules?
Principles overlap, but ARQ has its own procedures and operates independently for Quebec taxpayers.
Disclaimer
This article is for information only and is not legal or accounting advice. Tax laws change and individual circumstances vary. Consult Mackisen Consulting for personalized advice, strategic planning, and representation. Book a free consultation with our CPA and tax law team to review your options.
An audit from the Canada Revenue Agency (CRA) or Revenu Québec (ARQ) is a serious legal and financial process that requires immediate, strategic action. These audits can involve personal income tax, corporate returns, GST/QST filings, payroll, capital gains, or undeclared income. Mackisen Consulting brings 35+ years of experience with a team of CPAs, auditors, bookkeepers, and tax lawyers who have resolved over 1,850 tax files.
We assist in preparing, organizing, defending, and negotiating audits under the Income Tax Act (ITA), Excise Tax Act, and Quebec’s Tax Administration Act (TAA).
Types of Tax Audits and What to Do
1) Personal Tax Audit
Scope: Employment income, rental income, capital gains, foreign assets
Law: ITA s.3, s.20, s.74.1, s.110
Action: Collect all T-slips (T4, T5), reconcile deposits, and substantiate capital gains with purchase/sale records.
Illustrative jurisprudence: McKinlay Transport; Leblanc; Jarvis; Hansen; Fitzpatrick.
2) Corporate Tax Audit
Scope: Revenues, expenses, shareholder loans, inter-company transfers
Law: ITA s.9, s.18(1)(a), s.15(1), s.246
Action: Keep books current, prepare GIFI schedules, document all shareholder transactions.
Illustrative jurisprudence: Cameco (transfer pricing); Shoppers Drug Mart (deductibility); McLarty (business vs personal); GE Capital (arm’s length); Loewen (shareholder loans).
3) Payroll Audit
Scope: CPP/QPP, EI, taxable benefits, contractor classification
Law: ITA s.153, Employment Insurance Act, Quebec Taxation Act
Action: Provide payroll registers, T4/RL-1, ROEs, and remittance proof.
Illustrative jurisprudence: Royal Winnipeg Ballet; Connor Homes; Wolf; Sagaz; Suisse Atlantique.
4) GST/HST & QST Audit
Scope: Input tax credits (ITCs), taxable vs exempt supplies
Law: Excise Tax Act, QST Regulation
Action: Match invoices to ITCs; reconcile GST/QST filings monthly.
Illustrative jurisprudence: Glencoe Club; Club Intrawest; Great-West Life; Global Cash Access; City Water International.
5) Capital Gains Audit
Scope: Disposition of stocks, real estate, crypto
Law: ITA s.38, s.40, s.54
Action: Track ACB, document principal residence use, retain closing documents.
Illustrative jurisprudence: Fries; Maréchaux; Spence; timing cases; Hickman Motors.
6) Real Estate Audit
Scope: Flips, assignments, investment vs residence
Law: ITA s.40(2)(b), ARQ assignment guidance
Action: Provide intent evidence, renovation records, leases or resale documentation.
Illustrative jurisprudence: Poirier; Dufresne; Bélanger (ARQ); Savoie; Bélair.
7) Rental Income Audit
Scope: Short-term rentals (Airbnb), expense deductions
Law: ITA s.6(1), s.20(1)(c), s.110.6
Action: Track income, CCA schedules, lease agreements.
Illustrative jurisprudence: Dupuis (Airbnb); Ellenwood (interest); Grimard (QST); Smith (shared space); Walsh (CCA limits).
8) Unreported Income Audit
Scope: Lifestyle audit, bank deposit analysis
Law: ITA s.152, s.231.1
Action: Substantiate cash flows (loans, gifts, invoices) and explain discrepancies.
Illustrative jurisprudence: Mandarin Restaurant; Zink; Barbeau (ARQ); Prévost Car; Leung.
9) Trusts & Estates Audit
Scope: Distributions, residency, compliance
Law: ITA s.104, s.105
Action: Provide trust indentures, resolutions, T3 returns.
Illustrative jurisprudence: Antle; Garron Family Trust; Winter; Thibodeau; Gaudet (ARQ).
10) Non-Profit (OSBL) Audit
Scope: Surplus income, member benefits
Law: ITA s.149(1)(l)
Action: Demonstrate activities align with mission; no undue member benefits.
Illustrative jurisprudence: Ginsberg; Yeshiva Lubavitch; Canadian Assoc. of Reg. Psychologists; CIRP; Tourisme Abitibi (ARQ).
What to Do — and Not Do — During an Audit
DO
Respond to letters on time.
Keep monthly bookkeeping current.
Organize digital and physical records.
Use accounting software for traceability.
Maintain your minute book and resolutions.
Translate records into French when dealing with ARQ.
Reconcile bank accounts monthly.
Retain payroll and GST/QST filings.
Meet a tax expert immediately.
Let professionals handle communications.
DO NOT
Ignore audit requests.
Submit partial or incomplete information.
Destroy or alter documents.
Miss deadlines (leads to reassessments).
Assert unreported income explanations without evidence.
Delay organizing back years.
Assume ARQ operates exactly like CRA.
Guess what the auditor wants.
Lie or mislead (invites fraud issues).
Neglect your rights to object or appeal.
Your Legal Rights During an Audit
Due Process: You must be treated fairly.
Representation: You may appoint Mackisen to act on your behalf.
Language: Choose English or French (ARQ defaults to French unless you request otherwise).
Objection: You have 90 days to object to a Notice of Assessment.
Privacy & Scope: CRA/ARQ must stay within the stated scope.
Our Expertise at Mackisen
35+ years of tax, legal, audit, bookkeeping, and accounting experience
In-house CPAs, auditors, bookkeepers, and tax lawyers
1,850+ resolved tax audit and litigation files
Bilingual team with deep ARQ knowledge
CRA/ARQ negotiations, settlements, objections, and Tax Court preparation
Proactive bookkeeping and audit-defense strategy design
We offer:
Tax audit representation • Personal and corporate tax defense • GST, QST, payroll, rental, capital gain, and trust audits • Audit preparation and document review • Objections and court-appeal filings
Top 19 Tips to Win Your Audit With Confidence
Keep your bookkeeping monthly.
Reconcile bank and credit cards.
Organize and scan invoices/receipts.
Maintain a clear audit trail in your software.
Log shareholder loans and repayments.
Retain payroll slips and ledgers.
Prepare year-end financials early.
Respond to audit requests before deadlines.
Keep a clean minute book.
Update corporate resolutions annually.
Separate business and personal expenses.
Flag and document large cash transactions.
Maintain leases and contractor agreements.
Reconcile GST/QST monthly.
Log capital asset purchases and sales.
Keep proof of residency for real estate claims.
Translate French documents for CRA when needed.
Track gifts, transfers, and inheritances.
Meet Mackisen experts before submitting anything.
Frequently Asked Questions
What triggers a CRA or ARQ audit?
Mismatches with slips, large or unusual deductions, industry anomalies, lifestyle indicators, GST/QST discrepancies, or patterns in bank deposits/real estate activity.
How far back can they reassess?
Generally up to 3 years after the notice of assessment; up to 6+ years in cases of neglect, carelessness, or fraud.
What if I can’t provide requested documents?
Expenses may be disallowed and income may be estimated, increasing tax, penalties, and interest.
What’s the penalty for unreported income?
Gross negligence penalties can reach 50% of the understated tax. Repeated offenses bring harsher consequences.
Do I have to meet the auditor in person?
Not necessarily. With representation, most audits are handled via documentation and calls.
What if I made honest mistakes?
You may still be reassessed, but good-faith cooperation can reduce penalties. Voluntary Disclosure may apply if you come forward first.
Can CRA/ARQ seize assets?
Yes—liens, garnishments, frozen accounts, and seizures are possible if you ignore or fail to address balances.
Review vs. Audit?
A review requests limited info; an audit is a deeper investigation with broader consequences.
Do I have the right to object?
Yes—90 days from the Notice of Assessment. Mackisen can prepare and file your objection.
Does ARQ follow CRA rules?
Principles overlap, but ARQ has its own procedures and operates independently for Quebec taxpayers.
Disclaimer
This article is for information only and is not legal or accounting advice. Tax laws change and individual circumstances vary. Consult Mackisen Consulting for personalized advice, strategic planning, and representation. Book a free consultation with our CPA and tax law team to review your options.
