CRA Audit Defence Canada:
Your Response to a CRA Notice Determines the Outcome.

CRA selects audit files using a combination of automated risk-scoring and manual referrals. As of 2024 and 2025, CRA uses artificial intelligence to flag returns before a human reviewer is involved. The system compares your return against thousands of comparable filings, checks your income and expense ratios against industry benchmarks, and cross-references what you reported against T4, T5, T5018, and other information slips submitted by third parties.

Industries with historically high non-compliance rates attract the most audit resources. Construction, real estate, restaurants, and cash-intensive businesses are among CRA's consistent priorities. CRA also runs targeted industry-specific audit programs, meaning businesses in high-risk sectors can be selected even without a specific issue in their return. The most common risk factors in CRA's selection model include claiming expenses that are disproportionately high relative to gross revenue, reporting business losses in consecutive years, receiving cash income that does not appear in your filed return, and discrepancies between information slips and reported income.

For most individual taxpayers, the normal reassessment period is three years from the date of the original Notice of Assessment. For corporations, the standard period is four years. After these periods expire, CRA is generally prohibited from reassessing a return, and any assessment issued outside the normal period can be challenged.

The critical exception: Under Section 152(4) of the Income Tax Act, CRA can reassess at any time with no time limit if it can establish that you made a misrepresentation attributable to neglect, carelessness, wilful default, or fraud. Courts have interpreted "misrepresentation" broadly to include negligent errors, not just intentional fraud. If CRA can point to a material error in your return and establish that it resulted from carelessness, the three or four-year limitation does not apply.

For GST/HST purposes, the Excise Tax Act provides a standard four-year reassessment period with the same fraud exception. If you have never filed a return for a given year, the reassessment clock does not start running until you file. CRA can assess an unfiled year at any time, indefinitely.

Yes. Under the Income Tax Act, CRA has the legal authority to require any person to provide books, records, and documents including personal and business bank statements, credit card records, loan documents, and financial records held by third parties. CRA can issue a formal Requirement to Provide directly to your bank or financial institution without notifying you first. Banks are legally required to comply.

The net worth assessment: When CRA suspects unreported income but lacks direct documentary evidence, it uses a net worth assessment. CRA calculates your opening and closing net worth over an audit period, adds your estimated personal living expenses, and compares the result against your reported income. Any unexplained increase in net worth is treated as unreported taxable income and included in a reassessment. This technique places the burden on you to explain every source of funds in your accounts and every increase in your assets. Professional representation is essential during a net worth assessment because every explanation you provide becomes part of the official record.

Budget 2024 introduced the most significant expansion of CRA audit powers in years. The following changes are now in effect or pending Royal Assent as of 2025:

Notice of Non-Compliance penalty: If you fail to comply with an audit information request, CRA can issue a Notice of Non-Compliance carrying a penalty of $50 per day, up to a maximum of $25,000. Critically, while a Notice of Non-Compliance is outstanding, the normal reassessment period for the affected tax years is extended, meaning the audit window stays open until you comply.

Compliance order penalty: If CRA obtains a Federal Court compliance order requiring you to provide information and you still do not comply, an additional penalty of up to 10% of your aggregate tax payable for each affected year can be imposed. This penalty applies only when tax owed exceeds $50,000 for at least one year.

Compulsory interviews: CRA has always had the power to require taxpayers to attend interviews. Budget 2024 strengthened enforcement of this power alongside the new penalty regime. Anything said in a CRA interview becomes part of the official audit record. Having professional representation present during any CRA interview is critical.

These changes make professional representation more important than ever. Responding to CRA audit requests correctly, completely, and on time is no longer just best practice. It is now legally and financially essential.

You have the legal right to file a formal Notice of Objection within 90 days of the mailing date on your Notice of Reassessment. This deadline is strict. If you miss it, you can apply for an extension within one year of the original 90-day deadline, but extensions are not automatically granted and CRA has discretion to refuse them. Missing the objection deadline can permanently eliminate your right to appeal a reassessment.

The Notice of Objection is reviewed by CRA's Appeals Division, which operates independently from the Audit Division that conducted the original audit. The Appeals officer reviews the factual record, the audit findings, and the applicable law. A well-prepared objection that clearly identifies every factual and legal error in CRA's position, supported by complete documentary evidence, significantly increases the likelihood of a full or partial reversal of the reassessment.

If the objection is unsuccessful or only partially resolved, you have the further right to appeal to the Tax Court of Canada. The Tax Court is a federal court with full authority to vacate, vary, or confirm CRA's reassessment. Important note: You are generally required to pay the reassessed tax amount while an objection is pending, or make acceptable payment arrangements with CRA. Interest continues to accrue during the objection period. This is another reason why resolving a CRA audit correctly at the audit stage is always preferable to relying on the appeals process.

The T5018 Statement of Contract Payments is a mandatory information slip that construction businesses must file with CRA when they make payments to subcontractors for construction services. If construction activities account for more than 50% of your business revenue, you are required to report all payments made to subcontractors who are not your employees.

T5018 slips and the T5018 Summary must be filed within six months of your fiscal year end. For individual or partnership subcontractors, you include their Social Insurance Number. For incorporated subcontractors, you include their Business Number. Failure to file on time carries penalties of $25 per day per slip, up to a maximum of $2,500 per slip per year.

Why this matters beyond the penalties: CRA uses T5018 filings to cross-reference subcontractor income. When you file a T5018 reporting $150,000 in payments to a subcontractor, CRA checks whether that $150,000 appears on the subcontractor's income tax return. When it does not, CRA audits the subcontractor. When the T5018 was never filed at all, CRA audits you. T5018 non-compliance is one of the primary triggers for CRA's targeted construction industry audit programs. Correcting historical T5018 non-compliance before CRA identifies it is one of the most effective ways to reduce audit risk in the construction sector.