CRA Review vs Audit: What Is the Difference for Taxpayers in Canada?

CRA letters do not all mean the same thing. Some ask for a receipt or two to support a claim. Others open a full examination of your books. Telling them apart helps you decide how much to prepare and who to involve.

This article explains what a full audit looks like using the CRA's own descriptions, and gives you practical ways to work out which kind of contact you have received. For the exact status of your file, the letter and the CRA contact number on it are your best guide.

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

Why the label matters

The label matters because it shapes what you are likely to be asked to produce. An audit is an examination of your books and records by an auditor, and it can end in no change, a reassessment owing more tax, or a refund. How a particular review is scoped depends on the letter you received, so it is worth confirming with the CRA.

The label also tells you how much material to expect to produce, how long it may take, and whether professional help is worth arranging early.

What a full audit looks like

The CRA describes an audit in stages. 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, and a confirmation letter follows.
• The auditor will normally ask for electronic records before meeting, such as ledgers, journals, invoices, receipts, contracts and bank statements.
• 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.

Audits can also use indirect methods where records may be unreliable, accounts are mixed, lifestyle does not match reported income, or a business consistently reports income lower than similar businesses in its sector. The net worth method, which the CRA calls the most common method of indirect verification of income, compares changes in assets, liabilities and personal spending against reported income.

How to tell what you have received

No single feature settles it, but several clues help. Use the checklist below and then confirm with the CRA directly.

• Scope: does the letter ask about one item or a few documents, or does it name whole years and ask for books and records?
• Contact: is a named auditor assigned and planning to phone or visit?
• Records: are you asked for broad records such as ledgers, bank statements and contracts?
• Wording: does the letter use the word audit, review or verification, and what does it say happens next?
• Authority: does it refer to a formal requirement under the Income Tax Act? If so, it must set a reasonable time for compliance.

If you are unsure, call the number on the letter and ask the CRA to confirm in writing what kind of contact this is and what period it covers. If the call came out of the blue, you can hang up and call back to confirm the caller's identity.

Why the type does not change your basic duties

Even where you think a request is minor, treat it seriously. A requirement for documents or information under s. 231.2(1) must stipulate a reasonable time for compliance, so it is mandatory and has a deadline.

The CRA is also not bound by your return. Under s. 152(7), the Minister may assess tax payable even if no return was filed or the information was inaccurate. Time limits also matter: for individuals the normal reassessment period 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, with exceptions such as misrepresentation attributable to neglect, carelessness or wilful default, or fraud, where there is no fixed time limit.

Some topics draw attention. Principal residence sales must be reported on the return for 2016 and later years, even if there is no gain or the whole gain is exempt. Property flips are generally fully taxable as business income. If your letter concerns property, rental income or a business, keep that in mind when you collect documents.

What to do next

• Note the date on the letter and the response date, if any.
• Confirm the type of contact and the years covered with the CRA, preferably in writing.
• Collect only what is asked, but keep complete copies of everything you send.
• Keep your books and records for at least six years.
• Speak with a lawyer or accountant before replying if the letter mentions penalties, unreported income or several tax years.

Frequently asked questions