Receiving a letter from the Canada Revenue Agency requesting a review of your tax return can feel alarming, but a CRA audit does not automatically mean you have done something wrong. The CRA uses a risk-based selection process to examine T1 personal returns, T2 corporate returns, and GST/HST filings — and understanding how that process works puts you in a far stronger position if you are ever contacted.
This guide covers the most common audit triggers for 2025, what the CRA typically requests, your legal rights throughout the process, and how to respond effectively.
The CRA does not rely solely on random selection. Its risk-scoring models analyse filed returns against industry benchmarks, prior-year comparisons, third-party information slips, and statistical patterns. A return that deviates significantly from expected norms within your income bracket or business sector is more likely to be flagged.
There are three broad categories of CRA audit review:
Claiming a home office deduction or vehicle expenses remains one of the most scrutinised areas on a T1. The CRA expects these claims to be reasonable relative to your income and the nature of your work. A sole proprietor claiming 90% business use of a personal vehicle while reporting $40,000 in gross revenue, for example, is likely to attract attention. Maintain a mileage logbook throughout the year — not a reconstruction at tax time.
Filing multiple consecutive years of net losses from a self-employed activity signals to the CRA that the activity may not have a reasonable expectation of profit. The agency may reclassify the activity as a hobby, disallowing losses carried against employment income.
On T2 corporate returns, shareholder loan balances that remain outstanding at the end of two consecutive fiscal years are a significant red flag. Under the Income Tax Act, funds withdrawn from a corporation by a shareholder must either be repaid within the year following the fiscal year of withdrawal, included in income, or properly structured as salary or dividends. Improperly handled shareholder loans are a leading trigger for corporate audits.
Restaurants, contractors, salons, and other cash-intensive industries face heightened scrutiny. The CRA uses net worth audits in these sectors, comparing your reported income to lifestyle indicators such as real estate purchases, vehicle ownership, and travel.
Once your business exceeds $30,000 in annual taxable supplies, GST/HST registration is mandatory. The CRA cross-references GST/HST returns against T1 and T2 reported income. If the revenue declared on your GST/HST return does not reconcile with your income tax return, a review is likely. Input tax credit (ITC) claims that appear disproportionately large relative to revenue also attract attention.
The 2025 RRSP deduction limit is $32,490, and the TFSA contribution room for 2025 is $7,000. Contributions in excess of these limits trigger penalty assessments and, potentially, a formal review of your registered accounts. The CRA receives contribution information directly from financial institutions, so overcontributions are detected quickly.
The CRA receives T5007, T4A, and other information slips from third parties. If a slip is issued in your name but does not appear on your return, the discrepancy is flagged automatically. Rental income from platforms that report to the CRA is similarly cross-referenced.
The specific documents depend on the line items under review, but a typical audit request may include:
You are required by law to retain records for at least six years from the end of the tax year to which they relate. Digital copies are acceptable to the CRA provided they are legible and complete.
| Item | Claimed on Return | CRA Finding | Adjustment |
|---|---|---|---|
| Vehicle expenses | $9,800 (80% business use) | Log shows 52% business use | $3,430 disallowed |
| Home office (utilities, internet) | $4,200 (35% of home) | Floor area calculation accepted | No adjustment |
| Meals and entertainment | $2,600 | Missing receipts for $1,100 | $550 disallowed (50% rule applied) |
| GST/HST ITCs | $1,820 | $320 relates to personal expenses | $320 disallowed |
In this scenario, the consultant owes additional federal and provincial tax on the disallowed amounts, plus arrears interest. Penalties may apply if the CRA determines the errors were not made in good faith.
The Taxpayer Bill of Rights gives you specific protections throughout the audit process:
The single most important step is to respond within the timeframe specified in the letter — typically 30 days. Ignoring CRA correspondence does not make the audit disappear; it escalates it.
A structured response approach works best:
The team at Swift Accounting Ltd. in Calgary regularly assists clients through CRA correspondence audits and field audits, helping them compile documentation packages and communicate with CRA auditors professionally and efficiently.
The CRA also conducts payroll audits to verify that employers have correctly calculated and remitted CPP contributions, EI premiums, and income tax withholdings. For 2025, the CPP Year's Maximum Pensionable Earnings (YMPE) is $71,300. Misclassifying employees as independent contractors is one of the most common payroll audit triggers and can result in substantial retroactive assessments covering both the employer and employee portions of CPP.
For most individuals and corporations, the CRA's normal reassessment period is three years from the date of the original notice of assessment. However, if the CRA alleges misrepresentation due to neglect, carelessness, or fraud, there is no time limit — the CRA can reassess any year. This is why retaining records for at least six years is strongly recommended.
Not automatically. If the CRA determines that an error resulted from honest misunderstanding rather than intentional misrepresentation, it may issue a reassessment with interest but without civil penalties. The gross negligence penalty under subsection 163(2) of the Income Tax Act — equal to 50% of the understated tax — is reserved for cases where the CRA concludes you were wilfully blind or negligent. Proactively correcting errors through the Voluntary Disclosures Program before an audit begins can significantly reduce or eliminate penalties.
Yes. You have 90 days from the date on your notice of reassessment to file a Notice of Objection. Filing an objection suspends collection action on the disputed amount while the CRA's Appeals Division reviews your case. If the Appeals Division does not resolve the matter to your satisfaction, you can appeal to the Tax Court of Canada. Many disputes are settled at the objection stage without going to court.
Working with a qualified accountant reduces the likelihood of errors that trigger audits and ensures your claims are properly documented and defensible. Swift Accounting Ltd. prepares returns in accordance with CRA guidelines and keeps contemporaneous records that can be produced quickly if a review letter arrives. While no one can guarantee audit immunity, a well-prepared return with complete supporting documentation is far less likely to result in adverse findings.
If you have received a CRA audit letter, been reassessed, or simply want to ensure your records are audit-ready before filing, our team can help. Contact Swift Accounting Ltd. to speak with a Calgary tax professional about your situation — early action almost always leads to better outcomes.