Is a CRA Audit Different for a Corporation or Self-Employed Person in Canada?

If you run a business, you may wonder whether being incorporated changes how the CRA audits you. In many ways the process looks alike, because the same audit powers and the same records expectations apply. The differences tend to show up in time limits, how personal and business money are mixed, and who has to answer questions.

This article walks through the common process and then the points where a corporation and a self-employed person can differ. It is general federal tax information for Canada. GST/HST and other specifics depend on your facts, so confirm them with a lawyer or accountant.

This article covers Canadian federal tax law, which applies in every province.

The audit process is much the same

The auditor contacts you by mail or phone, examines records on site or at a CRA office, and the outcome is no change, a reassessment owing more tax, or a refund. In a business audit, the auditor usually phones first. You can hang up and call back to confirm identity, and a confirmation letter follows. The auditor will normally ask for electronic records before meeting.

Records requested include ledgers, journals, invoices, receipts, contracts and bank statements. The CRA gives no fixed audit length. Duration depends on the condition of the records, the scope of the audit, delays from missing records and consultation with other parts of the CRA.

Time limits and records

The normal reassessment period for individuals and Canadian-controlled private corporations ends three years after the earlier of the date of the original notice of assessment and the date of the original notification that no tax is payable. Corporations other than Canadian-controlled private corporations have a four-year normal period.

After the normal period, the CRA generally cannot assess unless an exception applies, such as misrepresentation or fraud, a valid waiver, an extended period for specified items, or a taxpayer relief request. That is true whether you are incorporated or not.

Books and records must generally be kept for a minimum of six years, and computer-based records must be kept in an electronically readable format. Good records and co-operation reduce the time an audit takes.

Where the two can differ in practice

The CRA uses indirect methods where records may be unreliable, accounts are mixed, lifestyle does not match reported income, or the business consistently reports income lower than similar businesses in its sector. One difference that applies only to corporations comes later: if a large corporation objects, its notice of objection must describe each issue, the relief sought and the facts and reasons, and it can appeal only the issues so specified.

The net worth method compares changes in assets, liabilities and personal spending against reported income, and can include the financial records of a spouse and household members. Under the Audit Manual, any positive variance is treated as unreported income, and non-taxable sources such as gifts or lottery winnings are part of the calculation.

The Minister is not bound by a return or information supplied by or on behalf of a taxpayer, and may assess tax payable even if no return was filed or the information was inaccurate. How a corporate audit and a personal audit of the owner relate to each other depends on your situation, so it is worth confirming with a lawyer or accountant. Whether personal expenses paid by a corporation raise further issues also depends on the facts and is worth reviewing with an accountant. GST/HST checks depend on your registration and filings, so confirm with a professional what the auditor is likely to review.

Powers, visits and your rights

An on-site audit takes place at your residence, place of business or representative's office, and the auditor presents valid identification on arrival. The auditor may ask employees who do the accounting entries about business operations.

An authorized person may inspect, audit or examine books, records and property, may enter premises where a business is carried on or records are kept, and may require the owner or person in charge to give all reasonable assistance and answer proper questions. An auditor may enter a dwelling-house without the occupant's consent only under a warrant.

A requirement for documents or information must set a reasonable time for compliance. If someone does not comply, a judge can order compliance on the Minister's application, but not for information protected by solicitor-client privilege. You may choose a person to represent you, though you remain legally responsible.

What to do next

• Separate personal and business banking if they are mixed
• Gather ledgers, invoices, receipts, contracts and bank statements for the years in question
• Confirm the caller is from the CRA before sharing information
• Note every deadline in any letter, since document requirements have one
• Diarize the 30 days the CRA gives you to agree or disagree with a written audit proposal, keeping in mind this is CRA administrative practice rather than a statutory deadline
• Talk to a lawyer or accountant before you agree to a waiver, because a waiver extends the CRA's time

If you disagree with the result, you can contact the auditor and then the team leader before objecting formally. The 30-day window to respond to a proposal is CRA administrative practice rather than a statutory deadline, while the objection deadline is set by statute.

Frequently asked questions