On this page…

• What is an audit?
  • How we choose returns to audit
  • How we conduct audits
  • Delays in the audit, and how to avoid them
  • Finalizing an audit
  • What are your responsibilities?
• Underground economy
• Tax alert

What is an audit?

Auditing is a way for the CRA to monitor and inspect GST/HST, income tax and benefit returns, excise taxes and duties, and payroll records. There is a high standard of compliance with the law in Canada. Audits help us maintain public confidence in the fairness and integrity of Canada's tax system.

How we choose returns to audit

Your return is recorded in a computer system that lets us choose returns to be audited and sort them into different groups.

In some cases, we compare selected financial information for current and previous years of taxpayers involved in similar businesses or occupations.

The four common ways of choosing returns are:

1. Computer-generated lists

Most returns are selected for audit review from computer-generated lists. For example, the computer system can compare the selected financial information of taxpayers involved in similar businesses or occupations and generate lists of returns with audit potential. From these lists, we choose returns to be audited.

2. Audit projects

In some cases, we test the compliance of a particular group of taxpayers. If the test results show that there is significant non-compliance within the group, we may audit its members on a local, regional, or national basis.

3. Leads

Leads include information from other audits or investigations, as well as information from outside sources.

4. Secondary returns

Sometimes we select returns for audit because of their association with other previously selected returns. For example, if you are in partnership with another taxpayer, and that person's return has been selected for audit, it is usually more convenient to examine all the records at the same time.

How we conduct audits

If your return is selected, an auditor will review your records at a CRA office or at your place of business.

The auditor will examine books and records, documents, and information such as:

• information available to the CRA such as tax returns previously filed, credit bureau searches, or property database information;
• your business records such as ledgers, journals, invoices, receipts, contracts, and bank statements;
• your personal records such as bank statements, mortgage documents, and credit card statements;
• adjustments made by your bookkeeper or accountant to arrive at income for tax purposes; and
• the personal or business records of other individuals or entities not being audited; for example, a spouse, family members, corporations, partnerships, or a trust settlor, beneficiary, and trustee.

The auditor will contact you and ask that you send specific records to a CRA office, or arrange a convenient date and time to start the audit at your place of business.

If an auditor arrives at your place of business, the auditor will present an identification card. Before examining your records, the auditor may want to discuss the general nature of your business, or tour the premises to get a better understanding of the transactions recorded in your books.

Throughout the process, the auditor may request information and help from your employees, particularly those who do your accounting.

Your personal records and the personal or business records of other individuals or entities are legally considered to be part of the items that relate, or may relate, to the business being audited. An auditor can also examine the records of family members.

Delays in the audit, and how to avoid them

The time an audit takes depends on the state of your accounting records and related documents, and the size and complexity of your business. Your co-operation will help keep this time to a minimum.

Finalizing an audit

When an audit is completed, the auditor may propose adjustments to your return and provide you with a summary of the proposed adjustments.

If the auditor finds that your return has to be assessed or reassessed, you will receive a proposal letter explaining the reason for the adjustments. You will have 30 days to agree or disagree with the proposed assessment or reassessment. The auditor can explain the proposed adjustments if required.

If you provide more information within this period, the auditor will consider it and will issue a new proposal letter, if applicable.

If there are no proposed adjustments to your return, the auditor will advise you when the audit is completed.

If there are changes, we will issue a notice of assessment or a notice of reassessment.

What are your responsibilities?

By law, you have to keep books and records. Generally, books and records must be kept for a minimum of six years after the last year they relate to.

You must keep your books and records in good order. Using the service of a tax professional does not relieve you of your responsibilities.

If you are audited, make available to the auditor your records (both paper and electronic), supporting documents, and answers to the auditor's questions.

Underground economy

The underground economy typically involves economic activity that is not reported or that is under-reported for tax purposes.

The activities that classify as underground economy include failure:

• to file;
• to register;
• to report a business activity;
• to report business income; or
• to report employment income.

For more information, go to About the underground economy.

Tax alert

Protect yourself!

Most taxpayers, given the proper information and tools, will voluntarily meet their tax obligations.

Our website contains information that will help taxpayers understand how to protect themselves against tax schemes, and understand the consequences they might face.

For example, some taxpayers don't realize the financial and personal risks they are exposed to by paying cash for jobs for home renovations. Other taxpayers don't know that participating in certain tax shelter schemes to avoid paying taxes could mean a loss of their principal, the repayment of taxes owed, penalties and interest, and lead to fines and imprisonment.

For information about how to protect yourself against tax schemes, go to Tax Alert.

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