Getting a letter from the CRA saying your return is under review is enough to ruin anyone’s week. But an audit isn’t an accusation. Most of the time it’s the CRA checking that what you reported lines up with what they already know, and if your records are in order, it’s a process, not a disaster.
Here’s what actually pulls a file for review, what the auditor can look at, and how to be ready. A few things have changed since the last time we wrote about this, and one of them is worth your attention if you own a business.
How the CRA Picks Who to Audit
The CRA doesn’t audit at random, mostly. Files are chosen through a risk assessment, the CRA looks at the likelihood of errors on a return, compares your information against what it already has on file, and stacks you up against similar taxpayers. If something on your return sits well outside the norm for your situation, your risk score goes up.
That’s the key idea behind almost every trigger below. The CRA runs on data matching. It already has your T-slips, your filing history, and property records, and it compares businesses against others in the same industry. Most audits start when something doesn’t fit the pattern.
What Triggers a CRA Audit
Income that doesn’t match their records: This is the big one. The CRA gets copies of your T4s, T5s, and other slips directly from the source. Leave one off your return, even by accident, and the mismatch can get flagged automatically. Investment income and side income are common culprits.
Expenses or deductions that look high for your income: If you’re claiming business losses, meal and vehicle expenses, or a home office that seems large relative to what you earn, that stands out. It doesn’t mean the claim is wrong. It means you should be able to back it up.
Repeated business losses: A business that loses money year after year, especially where the loss offsets other income, draws attention. At some point the CRA wants to see a reasonable expectation of profit, otherwise it may treat the activity as a hobby and deny the expenses.
Cash-heavy businesses: Restaurants, construction, trades, salons, industries where cash changes hands are audited more often, and sometimes as part of targeted CRA projects. If your reported margins sit below others in your industry, expect questions.
Mixing personal and business expenses: Running personal costs through the business is one of the fastest ways to lose a deduction and invite a closer look. The line between the two needs to be clean.
Big or round-number claims: Unusually large charitable donations for your income level, or deductions that all land on suspiciously round numbers, are classic flags.
None of these are illegal, and none of them should stop you from claiming what you’re genuinely entitled to. The point isn’t to claim less. It’s to claim correctly and keep the paper that proves it.
What the Auditor Can Actually Look at
This surprises people. During an audit, the CRA isn’t limited to the one line it’s questioning. An auditor can examine your business ledgers, invoices, contracts, and bank statements, and your personal bank statements, mortgage documents, and credit card statements too. They can also look at the records of people connected to you, including a spouse, family members, or a related corporation, and they can ask your bookkeeper about how your business runs.
The takeaway is simple: the records that matter go well beyond your tax return. Keep them clean and keep them accessible.
New Audit Powers Worth Knowing About
Here’s what’s changed since we last covered this. Through Bill C-31, the federal government has proposed a set of expanded CRA audit powers. As of 2026 this is proposed legislation, not yet passed into law, but tax professionals broadly expect some version of it to go through, so it’s worth understanding now.
The centrepiece is a new “notice of non-compliance.” If the CRA decides you haven’t fully responded to a request for information, it could issue one of these, and it would carry a penalty of $50 for every day it stays outstanding, up to $25,000. It would also pause the clock on the CRA’s normal reassessment window, which means the years under review stay open longer. The proposals would also let the CRA require answers under oath.
We’re flagging this not to alarm you, but because the direction is clear: responding to the CRA promptly and completely is going to matter more, not less. If any version of this passes, dragging your feet on a document request could get expensive on its own.
How to Prepare
The best audit defence is built long before any letter arrives. Keep your books current and your personal and business finances separate. Hold onto your records, the CRA requires you to keep them for at least six years, and “my laptop died” is not a defence. When you claim something, keep the receipt or the logbook that supports it.
If an audit does land, a few things help. Respond on time. Give the auditor complete, organized records rather than a shoebox. Answer what’s asked without volunteering a tour of everything else. And if the numbers are significant or the situation is complicated, bring in your accountant early, not after a proposal letter shows up.
That proposal letter, by the way, is your cue to act: if the CRA proposes a reassessment, you have 30 days to respond, and it’s the best window to correct a misunderstanding before it hardens into a bill. If you still disagree after a reassessment, you have the right to formally object.
Talk to Us Before It’s a Problem
Most audits go smoothly when the records are solid and someone who knows the process is in your corner. At Cassar CPA, we help business owners and incorporated professionals across Ontario keep clean books year-round and stand with them if the CRA comes calling. From our offices in Toronto and Oakville, we handle corporate tax planning and CRA tax dispute resolution so an audit is a manageable process rather than a crisis.
If you’ve had a letter from the CRA, or you just want to know your records would hold up, book a discovery meeting and we’ll take a look before it becomes urgent.