Step-by-step Guide to Preparing for CRA Audit in BC

Receiving a notice from the Canada Revenue Agency that you are being audited can feel overwhelming. I have been through dozens of CRA audits with my clients over the past 30 years, and I can tell you this: an audit does not always mean you did something wrong. Often, audits are triggered by random selection, discrepancies between reported figures and third-party information, or deductions that fall outside industry norms.

The good news? With proper preparation, a CRA audit can be far less stressful than you might think. In this guide, I will walk you through the exact steps to prepare for a CRA audit in British Columbia, based on what I have learned supporting businesses throughout Chilliwack and the Fraser Valley.

 

Understanding Why CRA Audits Happen

Before we dive into preparation, it helps to understand why the CRA conducts audits. The CRA administers tax laws for the Government of Canada and uses audits to ensure everyone pays their fair share of taxes. This maintains the integrity of our tax system and funds the roads we drive on and the healthcare system we rely upon.

Common reasons your file might be selected for audit:

• Routine compliance checks: Some audits are simply part of regular monitoring and have nothing to do with suspected problems.
• Discrepancies in reporting: Differences between your tax return and third-party data from banks, employers, or vendors can trigger an audit.
• Significant changes year over year: Large fluctuations in income or expenses compared to previous years may raise questions.
• Industry-specific risks: Cash-based businesses or certain high-risk sectors receive closer scrutiny.
• Frequent filing errors: Regular mistakes or late filings can put your business on the CRA’s radar.
• Random selection: Yes, some audits are completely random. It happens.

The key thing to remember is that being selected for an audit is not an accusation. The CRA simply wants to verify that your financial records are accurate and complete.

 

Step 1: Stay Calm and Read the Audit Notice Carefully

When that envelope from the CRA arrives, take a deep breath. I know it is intimidating, but panicking will not help. Set aside time in a quiet place to carefully review the audit notice.

What to look for in the audit letter:

• Scope of the audit: Is the CRA reviewing your entire tax return or specific items like income, expenses, or tax credits? For businesses, they might examine corporate tax filings, payroll, or GST/HST.
• Years being audited: The notice will specify which tax years are under review. Typically, the CRA can go back three years from your last Notice of Assessment. However, if there is suspicion of fraud or misrepresentation, they can audit as far back as seven years or more.
• Documents requested: The letter will list specific documents they want to see. Sometimes these are generic templates, and not everything will apply to your situation.
• Deadlines: Note any response deadlines. Missing these can turn a simple review into a more comprehensive field audit.
• Type of audit: Is this a desk audit (reviewing specific deductions) or a comprehensive field audit (examining all records)?

If anything in the letter is unclear, contact the CRA directly for clarification. It is better to ask questions early than to provide incomplete information.

 

Step 2: Contact a Tax Professional Immediately

This is not the time to go it alone. Meeting with a CPA or experienced bookkeeper who is familiar with CRA audits is crucial. I cannot stress this enough.

Here is why professional help matters:

• We know what the CRA is looking for: After decades of working with audited clients, I can anticipate concerns and prepare accordingly.
• We communicate effectively with auditors: Anything said during audit interviews can be scrutinized later. Having a professional present ensures accurate representation of your financial dealings.
• We catch issues before the CRA does: A professional can review your records and identify potential problems, allowing you to address them proactively.
• We reduce your stress: You can focus on running your business while we handle the audit preparation and communication.

When I work with clients facing audits, my first step is always to review the audit notice together and create a game plan. We determine what documents are truly needed and start organizing everything systematically.

 

Step 3: Gather and Organize Your Documents

Now comes the detailed work. The CRA will want to see comprehensive documentation to support your tax return. Based on the audit scope, you will need to gather specific records.

Essential documents for most CRA audits:

• Financial statements: Profit and loss statements, balance sheets, and cash flow statements for the years being audited.
• Tax returns:  Copies of all filed returns for the relevant years, including T1, T2, T4, T5, and any other information slips.
• Invoices and receipts:  Documentation for all business expenses claimed as deductions. Yes, even the small ones.
• Payroll records:  T4 slips, payroll journals, source deduction remittances, and Records of Employment.
• GST/HST documentation:  GST returns, input tax credit calculations, and supporting invoices.
• Contracts and agreements:  Any contracts related to income or expenses, including lease agreements and service contracts.
• Vehicle logs:  If you claimed vehicle expenses, you need detailed mileage logs showing business versus personal use.
• Home office records:  If you claimed home office expenses, you need measurements of your workspace and household bills.
• Accounts receivable and payable:  Detailed records of money owed to you and money you owe to others.

Even if your receipts are in a disorganized shoebox, we can sort through them. The important thing is to provide everything. Incomplete documentation raises more questions and can extend the audit.

 

Step 4: Review Your Tax Returns and Understand the Numbers

Before the CRA auditor arrives or requests documents, review the tax returns in question yourself. You need to understand the numbers and be prepared to explain how each was calculated.

What to review:

• Income sources: Can you account for all income reported? Do your bank deposits match your reported income?
• Expense categories: Are all expenses properly categorized and reasonable for your industry?
• Deductions claimed: Can you support every deduction with documentation?
• Calculations: Were amounts calculated correctly, including depreciation, capital cost allowance, and GST input tax credits?

If you notice discrepancies or errors during this review, discuss them with your tax professional immediately. It is better to identify mistakes yourself than to have the auditor find them.

 

Step 5: Organize Your Records in a Logical System

How you present your documents matters. A well-organized set of records makes the audit go faster and demonstrates that you take your financial obligations seriously.

My recommended organization system:

• Create a master binder or digital folder organized by year and category.
• Use dividers or subfolders to separate income, expenses, payroll, GST, and other categories.
• Include a table of contents to make it easy for the auditor to find specific documents.
• Provide copies, keep originals.
• Label everything clearly.
• Create summaries for categories with many transactions.

 

Step 6: Prepare Explanations for Unusual Items

Take time to think about items in your return that might raise questions. Be prepared to explain anything unusual or out of the ordinary for your business.

Common items that need explanation:

• Large one-time expenses: Major equipment purchases, renovations, or professional fees.
• Fluctuations in income:  Why was your income significantly higher or lower than previous years?
• High deduction ratios:  If your expenses are unusually high relative to income, be ready to explain why.
• Cash transactions:  Cash-based businesses face extra scrutiny, so document everything meticulously.
• Home office claims:  Be prepared to show that your home office is used exclusively for business.
• Vehicle expenses:  Have detailed mileage logs showing business travel versus personal use.
• Related-party transactions:  Payments to family members or related businesses need careful documentation.

Write clear, concise explanations for these items. Practice explaining them in straightforward language. The auditor is looking for honesty and documentation, not complex justifications.

 

Step 7: Understand Your Rights During the Audit

You have rights during a CRA audit. Familiarizing yourself with these rights ensures you can advocate effectively for your position.

Your rights include:

• Right to representation: You can have a tax professional or lawyer present during all interactions with the CRA.
• Right to be treated professionally: CRA auditors should conduct themselves with respect and professionalism.
• Right to understand the process:  You can ask questions about the audit process and what the CRA is examining.
• Right to provide explanations:  You can explain your position and provide context for transactions.
• Right to appeal:  If you disagree with audit findings, you can file a Notice of Objection.
• Right to privacy:  The CRA must handle your information confidentially according to privacy laws.

By law, you must keep adequate books and records to determine your tax obligations. Generally, records must be kept for a minimum of six years. You are required to make all relevant records available to the auditor and provide complete and timely explanations.

 

Step 8: Respond Promptly and Professionally

Once you have gathered your documents and prepared your explanations, respond to the CRA as soon as possible. Ignoring or delaying your response can lead to penalties and may turn a simple desk audit into a comprehensive field audit.

Best practices for responding:

• Meet all deadlines: If you need more time, contact the CRA proactively to request a reasonable extension. They are often understanding.
• Provide complete information:  Give the auditor everything they requested. Incomplete responses lead to follow-up requests and extend the process.
• Be accurate:  Double-check all information before submitting. Misrepresentations can increase the scope of the audit or lead to penalties.
• Maintain a professional tone:  Whether communicating by email, phone, or in person, remain courteous and cooperative.
• Document everything:  Keep records of all interactions with the CRA, including dates, names, and details of conversations. These notes may be useful later.
• Answer directly:  Provide only the information requested. Offering extra details can be misinterpreted and raise additional questions.

Throughout my years of supporting clients through audits, I have found that cooperation and transparency make the process smoother. Auditors appreciate organized records and straightforward answers.

 

Step 9: The Audit Process – What to Expect

Understanding what happens during the audit itself helps reduce anxiety.

If it is an on-site audit: The CRA auditor will present their identification card before beginning. They may visit your business, your home, or your representative’s office. An on-site audit often allows questions to be addressed quickly and can minimize delays.

If it is an office audit: You may be required to bring or send supporting documents to a CRA office, which may be located outside your region. The CRA centralizes some audit files for efficiency.

During the audit: The auditor will review your documentation to verify reported income, deductions, and credits. They may ask questions about your business operations, how you calculate certain amounts, and how you track financial information.

Borrowing documents: The auditor may need to make copies of your electronic records or borrow some documents. They will give you a detailed receipt for anything borrowed and return items as soon as possible.

Security note: Auditors cannot receive records by email because information sent that way may not be secure. Your assigned auditor can provide information about how to send documents online using the CRA’s secure services.

At the end of the audit, the auditor will bring up any issues they found with your documents. You can also voice any concerns you have about the process.

 

Step 10: Review Audit Findings and Respond Appropriately

After reviewing your records, the CRA may propose adjustments to your tax returns. This is a critical stage.

Possible outcomes:

• No changes needed:  Your records are accurate and complete. The audit is closed with no adjustments. This is the best outcome.
• Minor adjustments:  Small errors are identified and corrected. You may owe additional tax or receive a refund.
• Significant reassessment:  Larger issues are found, resulting in substantial changes to your tax liability.

When adjustments are proposed:

• Review them carefully with your tax professional:  Make sure you understand what is being changed and why.
• Determine if they are justified:  If the adjustments are fair and based on legitimate errors, be prepared to accept them.
• Respond before reassessment:  The CRA will provide time to address proposed changes before issuing a Notice of Reassessment. It is more efficient to resolve issues at this stage than to file a Notice of Objection later.
• Consider your options:  If you disagree with the findings, you have the right to appeal.

 

Final Thoughts: You Can Handle This

I have supported businesses through countless CRA audits over my 30 years in this field. While receiving an audit notice is never fun, it does not have to be a disaster. With thorough preparation, professional support, and organized records, the process can be manageable.

Remember these key points:

• Stay calm and read the audit notice carefully
• Contact a tax professional immediately
• Gather and organize all relevant documents
• Understand your numbers and be ready to explain them
• Respond promptly and professionally
• Know your rights throughout the process
• Learn from the experience to improve your record-keeping

If you are facing a CRA audit in Chilliwack, the Fraser Valley, or anywhere in British Columbia, I am here to help. I have the experience and knowledge to guide you through every step of the process.

Something simple like sitting down and working through your documents together can make all the difference. We will organize everything, prepare explanations, and ensure you are fully ready when the auditor comes calling.

Need help preparing for a CRA audit? Contact SBSC Ventures today. I answer the phone personally and would be happy to discuss how we can support you through this process.

 

Frequently Asked Questions About CRA Audits

How far back can the CRA audit?

Typically, the CRA can go back three years from the date of your last Notice of Assessment. However, if there is suspicion of fraud, misrepresentation, or neglect, they can audit as far back as necessary, sometimes seven years or more.

How long does a CRA audit take?

The timeline varies depending on the complexity of your situation and how organized your records are. Simple desk audits might be resolved in a few weeks. Comprehensive field audits can take several months.

Can I be audited if I used a professional to prepare my tax return?

Yes. Using a tax professional does not exempt you from audits. However, it does reduce the likelihood of errors that trigger audits and provides professional support if an audit occurs.

What happens if I cannot find all my receipts?

Do your best to recreate records using bank statements, credit card statements, and any other documentation you have. Explain the situation honestly to the auditor. However, claiming expenses without any supporting documentation is risky.

Will I have to pay penalties?

If the audit finds errors, you may owe additional tax plus interest. Penalties are typically assessed only if the CRA believes errors were due to negligence or intentional misrepresentation.

Can the CRA seize my assets?

In extreme cases of tax debt, the CRA can take collection action including seizing assets. This typically happens only after extended non-payment and multiple warnings, not as a direct result of an audit.