Surviving a CRA Business Audit Over Vehicle and Home-Office Costs

The situation

Agnieszka had spent years working as a security guard before starting her own company: a small corporation that placed contract security guards at construction sites, warehouses, and event venues around Burlington and the surrounding region. It was a modest operation. She was the sole director and shareholder, she still worked shifts herself when a site was short-staffed, and she ran the scheduling, invoicing, and client calls out of a converted spare bedroom in the home she shared with her spouse, Heather, a transit operator whose income and tax filings had nothing to do with the business.

The corporation's two most recent tax years had been reasonably profitable, and Agnieszka's accountant had claimed two categories of expense that are common for a business like hers: vehicle costs for driving between job sites to check on guards, deliver schedules, and meet clients, and a home office deduction for the room she used to run the administrative side of the business. Then a letter arrived. The Canada Revenue Agency (CRA) had selected the corporation for a business audit, and the auditor assigned to the file, Sarah, flagged exactly those two expense categories for review in her initial letter.

What the review found

A CRA business audit typically starts with a request for supporting documents, and the request here was specific: a mileage log for the vehicle expenses, and evidence that the home office space was used regularly and mainly for business. Agnieszka had receipts for gas, insurance, and vehicle maintenance, and she had genuinely used a home office. What she did not have was a contemporaneous mileage log — a day-by-day or trip-by-trip record of where she drove, why, and how far. She had claimed the vehicle expenses based on a rough percentage her accountant had estimated years earlier and never updated.

Without a logbook, the auditor's working position was to deny most of the claimed vehicle expenses outright, treating the vehicle as available for personal use by default and putting the burden on the corporation to prove otherwise. On the home office, the auditor questioned whether the room was used exclusively for business or also doubled as general household space, since the initial documentation Agnieszka sent in described it loosely as her "office/spare room."

The auditor's proposal letter, once it arrived, was blunt: deny substantially all of the claimed vehicle expenses and most of the home office claim across both years under review. Added back to the corporation's taxable income, that came to roughly $28,000. That reassessment would have increased the corporation's tax owing by several thousand dollars, and because part of the denied amount was treated as a benefit conferred on Agnieszka personally rather than a legitimate corporate expense, she also faced a personal reassessment on top of it. Combined, with interest running on both, the amount genuinely in dispute came to roughly $38,000 — squarely the kind of number that can unsettle a small operation with modest, steady income rather than deep reserves.

What we did

1. Reconstructed the mileage record from secondary sources. A missing logbook does not mean the trips did not happen — it means they need to be proven a different way. We worked with Agnieszka to rebuild a trip-by-trip record for both years using her dispatch calendar, text messages and call logs coordinating with guards on shift, client invoices tied to specific site visits, and fuel purchase timestamps and locations. Cross-referencing those sources against a mapping tool produced a defensible estimate of business kilometres driven that was consistent, internally corroborated, and far more credible than an unsupported percentage.
2. Established the home office as a business-use space. We gathered photographs of the room showing it set up with a desk, filing cabinet, and dedicated business phone line, along with the corporation's own scheduling software login history showing regular weekday use during business hours. We also prepared a short written explanation of how the space was used, addressing the auditor's exclusivity concern directly rather than leaving it to inference.
3. Distinguished the corporation's obligations from Heather's. Because the corporation was under review, not Agnieszka and Heather's joint household finances, we made sure the response stayed scoped to the business records the auditor was actually entitled to see, rather than opening the door to a broader review of personal banking that had no bearing on the corporation's expenses.
4. Responded formally within the audit's timeline. CRA audit proposal letters set out a window to respond before the reassessment is finalized. We prepared a written submission addressing the vehicle and home office issues point by point, attaching the reconstructed logbook, the supporting documentation for the home office, and a short cover explanation tying the numbers back to the original figures the accountant had filed.
5. Followed up directly with the auditor. Rather than submitting the package and waiting, we requested a call with the auditor to walk through the reconstructed logbook methodology and confirm what, if anything, remained outstanding. That direct contact is often what moves a file — auditors handle many files at once, and a clear, organized response that anticipates their questions tends to get resolved faster than one that leaves them to dig.

The outcome

The auditor accepted the reconstructed mileage log as a reasonable basis for the vehicle expense claim and accepted the home office documentation as sufficient to establish regular, principal business use of the room. The proposed reassessment was withdrawn. The corporation's original filed expenses stood, and no additional corporate tax, no shareholder benefit assessment against Agnieszka personally, and no interest was ultimately charged on the disputed roughly $38,000.

The audit still cost Agnieszka something that does not show up on a tax return: weeks of gathering records, a stretch of real uncertainty about what a reassessment might mean for the business, and the reminder that a rough estimate carried forward year after year eventually needs to be backed up. Her accountant now maintains a simple mileage-tracking app that logs trips automatically, and the home office arrangement is documented in writing as part of the corporation's annual records rather than left as an assumption.

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