CRA Audits: What Triggers Them and How to Respond

Receiving a letter from the Canada Revenue Agency telling you your return has been selected for review can be unsettling — even if you've done nothing wrong. A CRA audit is simply the agency's process of verifying that the information on your tax return is accurate. It is not an accusation of fraud, and most audits are resolved without drama.

That said, how you respond matters. Providing the right documents promptly, understanding your rights, and knowing when to involve a professional can make a significant difference in how the audit unfolds and what, if anything, you owe at the end.

This article walks through what commonly triggers a CRA audit, how the process works, and what you can do if you disagree with the result.

What Is a CRA Audit?

An audit is an examination of your tax return and the underlying records to confirm that your reported income, deductions, and credits are accurate and supported by documentation. The CRA has broad authority under the Income Tax Act to audit any taxpayer at any time — there is no statute of limitations on fraud, and the normal reassessment period (the window in which the CRA can reassess you without alleging misrepresentation) is generally three years from the date of your original assessment, though this can be extended in certain circumstances.

Audits can be:

• Desk audits: handled by mail or phone; you send in specific documents
• Correspondence audits: similar to desk audits, narrowly scoped
• Field audits: a CRA auditor visits your home or business to review records in person; typically used for businesses or complex returns
• Business audits: a deeper examination of a corporation or self-employed person's books and records

Common Audit Triggers

The CRA uses a mix of algorithms, third-party data matching, and random selection to choose returns for review. While no one can predict with certainty what will flag a return, these factors are commonly associated with increased scrutiny:

Significant Deductions Relative to Income

If your deductions are unusually large compared to others in your income bracket or profession, the CRA may want to verify them. This is particularly common with employment expenses claimed on Form T2200, business expenses for the self-employed, and home office deductions.

Self-Employment and Business Income

Business owners, freelancers, and contractors are audited more frequently than salaried employees because they have more discretion in what they report and deduct. Cash-heavy businesses are given particular attention.

Rental Property Income

Reporting rental income (or losses) is a common area of review. The CRA looks at whether expenses are reasonable, whether the property is actually rented at arm's length, and whether losses are being used to offset other income.

Unreported Income

The CRA cross-references information from employers, financial institutions, and government agencies. If your T-slips don't match what you reported, a review is likely. Foreign income is an increasingly common area of focus given Canada's global information-sharing agreements.

Large or Unusual Charitable Donations

Donation claims that are disproportionately large relative to income, or donations to organizations the CRA has flagged, can attract review.

Prior Audit History

If you have been audited before and adjustments were made, you may face a higher chance of future audits.

Random Selection

Some returns are chosen at random as part of the CRA's statistical compliance programs. There is no avoiding this category.

The Audit Process

Step 1: The Initial Contact

The CRA will contact you — usually by letter — to explain that your return is under review and to request specific documents. Read this letter carefully. It will tell you what years are under review, what information is being requested, and the deadline for responding.

Step 2: Gathering Your Records

Respond to the request within the timeframe given. Typical documents include:

• Receipts and invoices supporting claimed deductions
• Bank statements
• Contracts or agreements
• Mileage logs for vehicle expenses
• Lease agreements for rental property
• Business financial statements

The Income Tax Act requires you to keep records for at least six years from the end of the tax year to which they relate. Keeping organized records year-round makes audit responses significantly easier.

Step 3: The Auditor's Review

The auditor will review what you provide and may ask follow-up questions. Stay professional and factual in your communications. Answer what is asked — you are not obligated to volunteer information beyond what is requested.

Step 4: Proposed Adjustments

If the auditor finds discrepancies, they will issue a proposal letter outlining proposed changes to your assessment. You have the right to respond to this proposal before a formal reassessment is issued. This is your first opportunity to provide additional documentation or arguments.

Step 5: The Reassessment

If the CRA proceeds despite your response, it will issue a Notice of Reassessment. This document sets out any additional tax, interest, and penalties owing.

Your Rights as a Taxpayer

The CRA's Taxpayer Bill of Rights sets out several important protections. You have the right to:

• Be treated with courtesy and professionalism
• Privacy and confidentiality of your tax information
• Receive complete and accurate information about the audit process
• Be accompanied by an authorized representative (such as a lawyer or accountant)
• Have the law applied consistently and fairly

You are not required to allow a field auditor into your home or business without proper authorization, though cooperation generally produces better outcomes than resistance.

If You Disagree with the Result: Objections and Appeals

If you receive a Notice of Reassessment you believe is wrong, you have the right to object. The process:

1. Notice of Objection: File this with the CRA within 90 days of the date on the Notice of Reassessment (or one year from the original filing deadline — whichever is later, as of writing; confirm current rules). This triggers a review by the CRA's Appeals Division, which is separate from the auditing team.

1. Tax Court of Canada: If the Appeals Division confirms the reassessment and you still disagree, you can appeal to the Tax Court of Canada. There is an informal procedure for smaller amounts and a general procedure for larger disputes. The deadlines and requirements are strict.

1. Federal Court of Appeal / Supreme Court: Further appeals exist, though they are rare and expensive.

Time limits for objections and appeals are strict. Missing a deadline can forfeit your right to challenge an assessment. If you receive a reassessment, get professional advice promptly.

When to Get Professional Help

Many straightforward correspondence audits can be handled without a lawyer — an accountant can gather the relevant documents and respond on your behalf. However, consider involving a lawyer when:

• The audit involves allegations of misrepresentation or fraud
• The amounts at issue are significant
• You are considering an objection or appeal
• The audit touches on complex legal questions (e.g., whether a transaction was a capital gain or business income)
• You want independent advice on your rights and obligations

A lawyer-client relationship also attracts legal privilege, which can protect certain communications in a way that accountant-client communications do not.

Frequently asked questions