You may be selected for audit by the CRA for various reasons, including errors in your tax return, the CRA disagreeing with your interpretation of a transaction, your business having been designated for review as part of a special CRA project, a computer algorithm detecting something it considers unusual about your income, your expenses or your lifestyle, or simply because of random selection.

The CRA will normally begin the audit process by contacting you by telephone while simultaneously sending you an official letter. The CRA will propose a date, time and place for the audit and generally set out the preliminary information and documents they wish to review. The CRA can generally review your records for the past 3 years from the date of your last notice of assessment, however in certain circumstances (such as an alleged misrepresentation, fraud or tax evasion), the audit may extend beyond 3 years.

During the information gathering stage, the CRA can review not only your business records (invoices, contracts, bank statements, etc.), but also records of third parties and family members. They can interview employees or any person who they believe may have information relevant to their audit. At this information gathering stage, it is very important to properly and fully understand all questions being asked by the CRA and to be clear in your answers. People often assume that by explaining or by providing more information than is required to answer a question, they are assisting in the audit process. Similarly, it's easy to answer the wrong question or misunderstand the question being asked and provide the wrong information. Such effort often leads to an expansion of the audit which is why it's important to engage a professional who is familiar with the CRA audit process to assist you in providing your answers.

The CRA will review and analyze all information it has gathered and which you have provided and ultimately, the audit will have two possible outcomes. There may be no changes to your filed returns and the audit will be closed, or the CRA may disagree with what you have filed and take the position that additional taxes, interest and penalties are owed. In the latter case, you will generally receive a post-audit proposal letter setting out the CRA's conclusions, the basis for their position and the effect of their conclusions with details of any taxes, interest or penalties they propose to assess. You will generally be provided 30 days to respond to the proposal letter and provide any additional information or documents you believe ought to be considered prior to CRA completing their audit. Once the audit is completed, the CRA will issue a new Assessment or Re-Assessment.

The Re-Assessment will set out the taxes, interest and any penalties the CRA considers are owed as a result of the audit. If you disagree with the Re-Assessment, you must complete and submit a proper written Objection within 90 days of the date of the Re-Assessment. Failure to file the Objection within the time allowed will generally result in the Re-Assessed tax, interest and penalty amounts being deemed owed, the likelihood of the start of CRA collection proceedings and any defense of your position having been lost.