Loan Records That Turned a CRA Bank-Deposit Audit Around

The situation

Kwame worked full-time as a grocery clerk in Niagara Falls and ran a small side business on evenings and weekends, doing small appliance and bicycle repairs out of his garage. He reported the income each year on the self-employment section of his personal tax return, alongside his T4 wages from the grocery store. The repair business brought in only a few thousand dollars a year, mostly in cash and e-transfers from neighbours, and Kwame kept it simple: a notebook of jobs done, and a personal bank account where everything landed.

That simplicity became a problem when the Canada Revenue Agency selected his return for a review. The letter that arrived did not allege anything specific. It asked for his bank statements for the two years under review, along with an explanation for his reported income. Kwame provided the statements without thinking much of it. Several weeks later, a proposal letter arrived showing a reassessment that added just under $15,000 to his income across the two years, with matching tax owing and arrears interest. Kwame read the letter twice and still could not connect the number to anything he recognized. He had reported every dollar he thought the repair business had earned, working from his notebook at tax time the same way he had for years. Nothing about the letter said where the CRA's figure had come from, only that it was based on his own bank records — the same records he had just handed over without a second thought.

What the review found

The CRA had used a method called a bank-deposit analysis. An auditor takes every deposit into a taxpayer's bank accounts over the period under review, subtracts anything that can be traced to a source already reported as income, and treats the unexplained remainder as income the taxpayer failed to report. It is a common technique when a self-employed person's records are informal, because it does not require the CRA to prove where money came from — it only requires the taxpayer to prove where it did not.

In Kwame's case, the unexplained deposits were almost entirely transfers from his brother Marco, a transit operator who had lent him money twice: once to buy a used cargo van for pickups and deliveries, and once to cover a slow month when the grocery store cut his hours. Kwame had never formalized the loans in writing. To Marco, it was simply helping his brother. To a bank-deposit analysis, a $4,000 e-transfer from a family member with no invoice, no repayment schedule and no note on the transaction looks identical to an unreported cash sale.

This is the core difficulty with informal family lending during an audit: the CRA is not required to accept a taxpayer's word that a deposit was a loan rather than income. The burden sits with the taxpayer to show, with evidence, that a deposit is not taxable. Without documentation, Kwame's explanation — true as it was — carried no more weight on paper than a bare denial.

What we did

1. Reviewed the deposit analysis line by line. We obtained the CRA's working papers and matched every flagged deposit against Kwame's bank records and his repair-job notebook, separating genuine unreported items, if any, from mischaracterized ones. This confirmed the entire disputed amount traced back to transfers from Marco, not to repair work.
2. Reconstructed the loans as a paper trail. Marco still had his own bank records showing the outgoing transfers on the same dates as Kwame's deposits, matched to the dollar. We had both brothers sign statutory declarations describing the purpose of each loan, the amounts, and the informal repayment arrangement already underway between them, since a promissory note written after the fact carries less weight than one would think — what matters most is that both sides' bank records independently corroborate the same transactions.
3. Tied the van purchase to an external record. The larger loan had gone toward the cargo van. We obtained the bill of sale and the used-vehicle registration showing the purchase date and price, which lined up with the transfer from Marco almost to the dollar — strong independent evidence that the money left Kwame's account for a purpose unrelated to any hidden income.
4. Submitted a formal response before the proposal became a final reassessment. The CRA's proposal letter gives a limited window to respond before the adjustment is processed. We prepared a written submission addressing each flagged deposit individually, attaching the declarations, the matching bank records from both brothers, and the vehicle documentation, rather than a general letter asserting the deposits were loans.
5. Followed up directly with the auditor. A short call clarified two smaller deposits the auditor had queried, which turned out to be refunds from a parts supplier for returned inventory. We supplied the supplier's return confirmation to close that piece as well.

The outcome

The auditor accepted the loan explanation for the deposits from Marco and the supplier refunds for the remainder, and issued a revised assessment removing the entire proposed addition to Kwame's income. The tax, penalties, and arrears interest that had been proposed on that amount fell to zero. No new reassessment followed for either year.

The file closed roughly four months after the initial request for bank statements, which is a typical timeline for a bank-deposit review once documentation is provided promptly and a written response is filed within the window given. Kwame kept the repair business running through the process; nothing about an audit under this method requires a business to pause.

The experience changed how Kwame runs the financial side of the business going forward. He and Marco now put loans of any size in writing at the time they happen, even informally, with the amount, the date and a rough repayment understanding. Kwame also opened a second account used only for repair-business deposits, so his personal transfers with family no longer sit in the same statement the CRA would review if his return is ever selected again. Marco, for his part, said the whole process made him more careful too — he now keeps a running note of anything he lends to family, not because he expects to be paid back on a schedule, but because he understands now that an audit does not ask what actually happened, only what can be shown to have happened. For a business as small as Kwame's, that lesson was cheap to learn compared to what it would have cost if the loan records had not lined up.

What you can learn from this