Introduction

Receiving notice of a CRA audit is one of the more anxiety-inducing things that can happen to an incorporated business owner. Most audits, handled correctly, result in modest adjustments or no changes at all. Handled poorly — without professional support, with incomplete records, or with an adversarial response — they can escalate significantly.

This article explains what a CRA corporate audit typically looks like, what is expected of the taxpayer, and what a well-managed response involves.

How a Corporate Audit Begins

A CRA audit of a corporation is typically initiated by an audit officer who contacts the corporation (or its representative) by phone or letter, identifying the taxation years under review and requesting an initial meeting or document submission.

The scope of the audit may be narrow — focused on a specific issue like a large expense deduction, HST reconciliation, or shareholder benefit — or broad, covering multiple years and multiple issues simultaneously. The initial contact letter should indicate the scope and the requested documentation.

Do not ignore an audit notice. The CRA will proceed regardless of whether the taxpayer engages constructively, and non-cooperation limits the ability to present the taxpayer's position effectively.

Contact Your CPA Immediately

Before responding to the CRA, and before providing any documents, contact your CPA. Your CPA should be authorised to represent the corporation (via CRA My Business Account) and should be the primary point of contact with the audit officer from the outset.

Having your CPA manage the audit communication has several benefits: it ensures that responses are professionally prepared, that documents are reviewed before submission, that the taxpayer's position is clearly articulated, and that any CRA requests that are overly broad or beyond the scope of the audit are appropriately challenged.

Gathering Documentation

The most critical factor in an audit outcome is the quality of documentation. Audit officers review the underlying support for income and expenses — invoices, contracts, bank statements, vehicle logbooks, payroll records, and corporate minutes. Records that are complete, organised, and consistent with the filed return support the claimed amounts. Gaps or inconsistencies invite further inquiry.

Before submitting anything, the CPA and the business owner should review the documentation to confirm it supports the return as filed. Where documentation is incomplete, the audit officer will note the gap — and the absence of support is typically resolved in the CRA's favour.

Common Areas of Focus in Corporate Audits

CRA audit officers typically focus on the following areas in a corporation audit:

Shareholder loan and shareholder benefit accounts — whether personal expenses have been paid through the corporation without proper treatment

Vehicle expenses — whether logbooks exist and whether claimed expenses are supported

Home office — whether the deduction is properly structured and documented

Large or unusual expense deductions — any significant claims that stand out on the income statement

HST reconciliation — whether HST collected and remitted matches the corporate income figures

Payroll and source deductions — whether amounts withheld are consistent with T4s issued

Responding to Proposed Adjustments

If the audit officer proposes adjustments — disallowing expenses, assessing shareholder benefits, or changing the timing of income — the taxpayer has an opportunity to respond to the proposal before a formal reassessment is issued. This is the proposal letter stage described in Article A19.

A well-supported written response at the proposal stage can result in the adjustments being reduced or withdrawn. The response should address each proposed adjustment specifically, provide documentary evidence, cite the relevant legal authority, and present the taxpayer's position clearly and professionally.

After the Audit: Keeping Records Going Forward

The most productive response to a completed audit — regardless of the outcome — is to review the practices that were examined and ensure they are well-documented going forward. Audits often reveal the same issues that could have been identified proactively: co-mingled expenses, undocumented vehicle use, shareholder loan balances that were not carefully managed.

Implementing the changes after an audit is better than not implementing them at all — but implementing them before an audit costs far less.

When to Speak With a CPA

If you have received an audit notice, the time to speak with your CPA is now — before you respond to the CRA. If you do not have a CPA, getting one engaged immediately is the most important first step.

Rotaru CPA helps corporations navigate CRA audits — from initial response through proposal letters and, if necessary, formal objections. Book a consultation if you have received an audit notice.