What Triggers a CRA Audit or Review for Small Businesses in Canada?

Introduction

Most CRA audits are not random. They are triggered by patterns, inconsistencies, or filings that fall outside what the CRA expects for a business of your size and industry.

For small businesses in Canada, audits and reviews often arise from perfectly ordinary situations that were handled incorrectly or without enough context. Understanding what draws CRA attention can help you reduce risk, respond calmly if contacted, and avoid preventable issues altogether.

This article explains the most common CRA audit and review triggers, how the CRA identifies them, and what they mean in practice for small business owners.

Key Takeaways

• CRA audits are risk-based and data-driven.
• Certain expense patterns and reporting inconsistencies raise flags.
• GST/HST errors are one of the most common audit triggers.
• Being incorporated does not reduce audit risk.
• Clear records and consistent reporting significantly reduce problems.

Who This Applies To

This applies to:

• Incorporated and unincorporated small businesses
• Owner-managed corporations
• Professionals and service-based businesses
• Businesses with GST/HST registration

How the CRA Selects Files for Audit or Review

The CRA uses automated systems to compare your filings against industry norms and your own historical data. When something appears inconsistent or unusually high or low, your file may be selected for review.

According to the CRA, reviews and audits are intended to verify compliance and accuracy, not to penalise compliant taxpayers (Source: CRA, “Audits and reviews”).

Common Triggers the CRA Looks For

Unusual Expense Claims

Claiming a high level of expenses relative to reported income can raise questions, particularly for home office, vehicle, travel, and meals.

Repeated Business Losses

Consistent losses over several years may lead the CRA to question whether an activity is a business or a personal pursuit.

GST/HST Reporting Issues

Common issues include:

• Claiming input tax credits without proper documentation
• Filing nil returns while reporting business income elsewhere
• Mismatches between sales reported on income tax and GST/HST returns

Shareholder Benefits

Personal expenses paid through a corporation without proper treatment are a frequent audit issue. These amounts may be reclassified as taxable shareholder benefits.

Income That Does Not Match Lifestyle

Large discrepancies between reported income and apparent personal spending can attract attention.

What This Means in Practice

Being audited does not mean you have done something wrong. Many audits are resolved through clarification and documentation. Problems typically arise when records are incomplete, explanations are unclear, or mistakes are repeated over multiple years.

Businesses with consistent reporting, proper documentation, and professional oversight generally experience smoother reviews.

When Professional Support Matters

Professional support becomes important when:

• You receive a CRA review or audit notice
• Your business expenses are complex or mixed-use
• You operate through a corporation
• GST/HST filings are involved

A proactive approach reduces both risk and stress.

Frequently Asked Questions

Does incorporation protect me from CRA audits?
No. Corporations are frequently audited and often face more complex reviews.

Can the CRA audit previous years?
Yes. The CRA can review prior tax years, particularly if errors are identified.

What should I do if the CRA contacts me?
Respond promptly and gather documentation. Professional assistance is often helpful to ensure accurate and clear responses.