CRA Audit Lawyers in Toronto

Received a CRA Audit Notice?

A Canada Revenue Agency (CRA) audit can involve much more than a review of a tax return. Depending on the scope of the audit, the CRA may request accounting records, invoices, contracts, bank statements, receipts, corporate records, and other supporting documentation. In some cases, the CRA may also review personal financial records or information relating to connected individuals or entities.

If you have received a CRA audit letter or are already dealing with an auditor, getting advice early can help you understand the scope of the audit, organize your response, identify potential tax issues, and communicate with the CRA in a careful and strategic manner.

At KR Law Firm, our tax lawyers represent individuals, business owners, corporations, and other taxpayers in CRA audits and related tax disputes. We can review the issues under audit, assist with CRA information requests, communicate with the auditor as your authorized representative, and respond to proposed adjustments where appropriate.

Why Does the CRA Select Taxpayers for Audit?

The CRA uses risk-assessment systems and other information available to it to identify tax returns and accounts that may require further review. Being selected for an audit does not necessarily mean that the CRA has concluded that a taxpayer has done something wrong.

Depending on the circumstances, an audit may involve issues such as:

• Reporting Inconsistencies: Differences between information reported on a tax return and information available to the CRA may require further review.
• Transactions or Reporting Patterns: Certain transactions or reporting patterns may be identified for additional verification.
• Business or Industry-Specific Issues: The CRA may focus compliance activities on particular industries, transactions, or tax issues.
• Income, Expenses, Deductions, or Credits: Amounts claimed on a tax return may be reviewed to determine whether they are properly reported and supported.
• Third-Party Information: Information received from financial institutions, employers, other taxpayers, or other sources may lead to further review.
• Previous Compliance Activity: Issues identified through previous reviews, audits, or related taxpayer files may also be relevant.

The reason for an audit and the issues being examined can vary significantly from one taxpayer to another. Understanding exactly what the CRA is reviewing is an important first step in deciding how to respond.

What Happens During a CRA Audit?

The CRA audit process depends on the taxpayer, the type of tax involved, and the issues under review. A typical audit may involve several stages.

1. CRA Contact and Audit Scope

The CRA will generally identify the tax years, reporting periods, transactions, or issues being reviewed and may request specific records or information.

2. Review of Records and Supporting Documentation

The auditor may examine accounting records, tax filings, banking information, contracts, invoices, receipts, and other documentation relevant to the issues under review.

3. Follow-Up Questions and Information Requests

The CRA may request explanations, additional documents, reconciliations, or further information regarding particular transactions or amounts reported.

4. Proposed Adjustments

If the auditor believes that income has been underreported, deductions or credits have been incorrectly claimed, or another tax issue exists, the CRA may propose adjustments to one or more tax years or reporting periods.

5. Audit Findings and Taxpayer Response

Where changes are proposed, the taxpayer may have an opportunity to provide additional facts, documentation, or legal submissions before the audit is finalized and a reassessment is issued.

In a CRA business audit, where changes are proposed, the CRA generally provides the taxpayer with a written summary of its findings and an opportunity to respond. The appropriate response will depend on the proposed adjustments and the evidence available.

What Information and Records Can the CRA Request?

The documents requested during an audit depend on the issues under review. CRA auditors may examine records such as:

• General ledgers, journals, and accounting records;
• Invoices, receipts, purchase records, and expense documentation;
• Contracts, agreements, and transaction records;
• Business bank statements and credit card records;
• Personal bank statements and personal financial records where relevant;
• Payroll and employee records;
• GST/HST records and documentation supporting input tax credits;
• Property purchase and sale documents;
• Investment and shareholder records;
• Electronic accounting data and bookkeeping files; and
• Records relating to related or connected individuals or entities where relevant to the audit.

A CRA information request should be reviewed carefully. Providing incomplete or inconsistent information may lead to additional questions, while providing information without first understanding the scope of the request can create unnecessary complications.

A tax lawyer can help assess the CRA’s request, identify relevant documentation, and assist in preparing an accurate and appropriate response.

CRA Net Worth Audits and Indirect Verification of Income

In some audits, the CRA may use an indirect method to determine whether the income reported by a taxpayer appears consistent with the taxpayer’s overall financial circumstances. One commonly used method is the net worth method.

A net worth analysis may compare changes in a taxpayer’s assets and liabilities, personal expenditures, reported income, and other sources of funds. The CRA may then compare its calculation with the income reported on the taxpayer’s tax returns.

Depending on the circumstances, a CRA net worth audit may involve the review of:

• Personal and business bank accounts;
• Real estate and other significant assets;
• Loans and liabilities;
• Credit card and personal spending records;
• Gifts, inheritances, loans, or other non-taxable sources of funds;
• Household financial information;
• Transfers between accounts; and
• Differences between reported income and apparent expenditures or increases in net worth.

Net worth audits can be factually complex. Missing information about non-taxable sources of funds, transfers between accounts, loans, jointly held assets, or other transactions can materially affect the CRA’s calculations. These matters often require a detailed review of both the CRA’s methodology and the underlying financial evidence.

How Our Tax Lawyers Assist During a CRA Audit

1. Review the Audit Notice and Scope

We begin by reviewing the CRA correspondence and identifying the tax years, reporting periods, transactions, and issues under examination. Understanding the actual scope of the audit helps determine what information is relevant and where potential tax issues may arise.

2. Review Records Before They Are Provided to the CRA

We can review relevant tax filings, accounting records, correspondence, and supporting documents before they are submitted to the CRA. This can help identify inconsistencies, missing documentation, legal issues, or factual explanations that may need to be addressed.

3. Communicate With the CRA

Once properly authorized, our tax lawyers can communicate with the CRA regarding the audit. Depending on the matter, we can assist with correspondence, information requests, discussions with the auditor, and submissions concerning the issues under review.

4. Respond to Proposed CRA Adjustments

If the auditor proposes changes to income, deductions, credits, GST/HST, or other tax amounts, we can review the factual and legal basis for those adjustments. Where appropriate, we can prepare submissions, provide supporting evidence, and advance the taxpayer’s position before the audit is finalized.

5. Advise on the Next Stage if the CRA Reassesses

An audit may ultimately result in a Notice of Reassessment. If you disagree with the reassessment, a formal objection process may be available. We can assess the reassessment, applicable deadlines, and the appropriate next steps for challenging the CRA’s position.

Learn more about CRA objections and Notices of Objection.

Types of CRA Audits We Handle

Our tax lawyers assist individuals and businesses with a range of CRA audit matters, including:

CRA Business Audits

Audits involving corporations, owner-managed businesses, partnerships, professionals, self-employed taxpayers, income, expenses, deductions, shareholder transactions, and related tax matters.

Personal Income Tax Audits

Audits involving reported income, deductions, credits, investments, business income, foreign income, property transactions, and other personal tax issues.

GST/HST Audits

Audits involving taxable supplies, input tax credits, registration, remittances, documentation requirements, and the GST/HST treatment of transactions.

Payroll and Employer Audits

Audits involving payroll deductions, taxable benefits, source deductions, worker classification, and other employer compliance issues.

Real Estate Tax Audits

Audits involving property dispositions, rental income, principal residence exemption claims, assignment transactions, GST/HST, and whether gains should be treated as capital gains or business income. Learn more about our real estate tax matters.

International and Offshore Tax Audits

Audits involving foreign income, foreign property, cross-border transactions, residency issues, offshore assets, and Canadian information-reporting obligations.

CRA Net Worth Audits

Audits involving indirect verification of income, personal finances, assets and liabilities, household expenditures, bank deposits, and alleged unreported income.

What Happens After a CRA Audit?

A CRA audit does not always result in a reassessment. If the CRA concludes that the taxpayer’s filings are correct, the audit may be closed without changes.

If the CRA concludes that adjustments should be made, it may issue a Notice of Reassessment changing the taxpayer’s income, tax payable, credits, GST/HST, penalties, interest, or other amounts.

A reassessment does not necessarily end the dispute. Depending on the type of assessment and the applicable legislation, a taxpayer who disagrees with the CRA’s decision may be able to file a formal Notice of Objection.

– Learn more about challenging a CRA reassessment through the objection process.

If the dispute is not resolved through the CRA objection process, certain income tax and GST/HST matters may ultimately proceed to the Tax Court of Canada.

If a reassessment results in an outstanding tax balance, the CRA may also begin collection activity. Learn more about CRA collections and tax debt matters.

Because objection deadlines can apply, taxpayers who receive a reassessment they disagree with should obtain advice promptly.

Why Work With KR Law Firm During a CRA Audit?

CRA audits can involve substantial amounts of financial information, complex tax rules, and decisions that may affect later objections or litigation. Our role is to help clients understand the issues being examined and respond in a legally and factually supported manner.

• Tax-Focused Legal Representation: Our practice focuses on Canadian tax matters and disputes with the CRA.
• Strategic Review Before Responding: We assess the audit request and relevant records before substantive responses are provided where appropriate.
• Direct CRA Representation: Once authorized, we can communicate with the CRA regarding the audit and the issues under review.
• Dispute-Focused Approach: We consider not only the immediate audit but also how factual findings and proposed adjustments could affect a later objection or appeal.
• Representation Beyond the Audit Stage: Where appropriate, we can assist with CRA objections and tax litigation following a reassessment.

Frequently Asked Questions About CRA Audits

What triggers a CRA audit?

The CRA uses risk assessment and information from a variety of sources when selecting files for audit. An audit may involve reporting inconsistencies, transactions requiring further verification, industry or compliance risks, third-party information, or other factors identified by the CRA. Being selected for an audit does not by itself mean that the CRA has determined that tax was reported incorrectly.

What should I do after receiving a CRA audit letter?

Read the letter carefully, identify the tax years and issues being reviewed, note any response deadline, and determine what documents the CRA has requested. If the audit involves significant amounts, complex transactions, potential penalties, disputed tax positions, or substantial document requests, consider obtaining legal advice before providing a substantive response.

Can the CRA ask for my bank statements?

Yes. Depending on the circumstances and scope of the audit, CRA auditors may review business banking records and may also examine personal banking information where it is relevant to the audit, including in certain indirect verification or net worth audits.

Can the CRA review my personal finances during a business audit?

In some circumstances, yes. Personal financial information may be relevant where the CRA is attempting to verify business income, shareholder transactions, sources of funds, or other matters under review. Net worth and other indirect verification methods can involve a broader review of a business owner’s financial circumstances.

How long does a CRA audit take?

There is no single timeline for every CRA audit. The duration can depend on the number and complexity of the issues, the years or reporting periods involved, the availability of records, the responsiveness of the parties, and whether additional information or specialist review is required.

Can a lawyer communicate with the CRA on my behalf?

Yes. A taxpayer can authorize a lawyer to communicate and deal with the CRA on the taxpayer’s behalf. The scope of the lawyer’s access and authority depends on the authorization provided and the matter involved.

What happens if I disagree with the CRA auditor?

If the CRA proposes adjustments, there may be an opportunity to provide additional documents, factual explanations, and legal submissions before the audit is finalized. If the CRA later issues a reassessment and the taxpayer continues to disagree, a formal Notice of Objection may be available.

Can a CRA audit result in penalties and interest?

Yes. A CRA audit can result in additional tax, interest, and, depending on the circumstances, penalties. Whether a particular penalty is legally applicable depends on the facts, the legislation involved, and the basis relied upon by the CRA.

Can I object to a reassessment issued after an audit?

In many tax matters, a taxpayer who disagrees with a CRA assessment or reassessment can file a formal objection, subject to the applicable rules and deadlines. The objection process is separate from the audit itself and generally involves review by the CRA Appeals Division. Learn more about our CRA objection representation.

Speak With a CRA Audit Lawyer

If you have received a CRA audit notice, are responding to an information request, or have been advised that the CRA intends to make adjustments to your tax filings, KR Law Firm can review your situation and advise you on the next steps.

Early advice can be particularly important where the audit involves significant amounts, multiple tax years, business or personal banking records, real estate, GST/HST, alleged unreported income, or a CRA net worth analysis.

Contact KR Law Firm to Book a Free Consultation with one of our tax lawyers.