A CRA letter is a process, not a verdict
The envelope from the Canada Revenue Agency lands on a Tuesday. It is calmly worded, it gives you 30 days, and it asks for documentation you may or may not have at hand. The reality of a CRA audit is far less dramatic than most owners imagine — but it is also far less forgiving of disorganised bookkeeping. The outcome is decided almost entirely by what your records look like before the letter arrived.
What triggers an audit
The CRA does not pick businesses at random. They use risk scoring, industry benchmarks, and tip-offs. Common triggers we see in BC small business:
- Industry outliers. Your gross margin or expense-to-revenue ratio is significantly different from your industry average
- Round-number expenses. $5,000 of meals every quarter looks fabricated, even if it is not
- Large or repeated losses. Losing money for three or more consecutive years invites a closer look
- Sudden changes. Revenue doubling year over year, or a major expense category appearing for the first time
- GST/HST refund claims. Especially if the claim is large relative to historical patterns
- Tip-offs. From ex-employees, ex-spouses, or competitors
- Shareholder loan balances that grow faster than retained earnings
Knowing the triggers is not about avoiding them — sometimes legitimate business produces these patterns. It is about being ready to explain them.
The two types of audits
- Desk audit. Conducted by mail or phone. The auditor asks for specific documents — usually focused on one issue (vehicle expenses, ITC claims, T4A reporting). These are common and usually resolve in weeks.
- Field audit. The auditor visits your premises (or asks for full access to records). Usually broader in scope. More common for incorporated businesses or where multiple issues are flagged.
Most small business audits in BC are desk audits. The principles below apply to both.
What the CRA actually asks for
Common document requests:
- General ledger and trial balance for the period
- Bank statements for all business accounts
- Credit card statements showing business charges
- Sales invoices and receipts
- Purchase invoices for major expense categories
- Vehicle logs if you claim vehicle expenses
- Home office calculations if you claim a portion of your home
- Payroll records and source deduction remittances
- Shareholder loan account history (for incorporated businesses)
- Minutes and resolutions for major decisions
The CRA can request records up to six years old (longer in cases of suspected fraud). Your record retention policy should reflect this.
The four habits of audit-ready businesses
In a decade of supporting BC clients through audits, we have noticed that businesses with clean outcomes share four habits.
1. Every transaction has a digital paper trail
Receipts photographed and attached to the bookkeeping entry. Invoices stored in cloud accounting software. Bank feeds reconciled monthly. When the auditor asks for evidence of a $1,200 expense, it takes 30 seconds to produce, not three hours of digging through shoeboxes.
2. Categorisation is consistent and defensible
Every expense category should be defined and applied the same way every time. Meals are meals. Office supplies are office supplies. A category called miscellaneous is an audit invitation.
3. Personal and business are completely separated
Different bank accounts. Different credit cards. No personal Amazon orders on the corporate card, even with the intention to repay. Co-mingled funds force the auditor to look at every transaction.
4. Year-end working papers exist
At year-end, your accountant produces working papers showing the bridge from the trial balance to the tax return. These papers are gold in an audit because they explain every adjustment.
When the letter arrives — the first 48 hours
- Read it carefully. What is the period? What are they asking for? Is this a desk audit or field audit?
- Note the deadline. Usually 30 days. Mark it.
- Loop in your accountant immediately. Do not respond on your own. The auditor's job is to assess; your accountant's job is to represent you.
- Do not destroy or alter records. Even reformatting a spreadsheet can look suspicious. Lock the records as they are.
- Ask for an extension if you need it. The CRA is generally reasonable if you explain. Better to ask than miss the deadline.
During the audit
- Answer only what is asked. Volunteering extra information opens new lines of inquiry.
- Provide documents through your accountant. They can preview the package and flag issues before submission.
- Be polite, calm, and professional. Auditors are people doing a job. Hostility never helps.
- Keep notes. Document every conversation, every document submitted, every commitment made.
If the auditor proposes adjustments
Most audits result in some proposed adjustment. The CRA issues a proposal letter and gives you 30 days to respond. This is the moment to engage seriously — once the assessment is finalised, your only options are formal objection or appeal.
Review every proposed adjustment with your accountant. Some will be fair. Some will be wrong. Some will be technically correct but addressable through additional documentation. Respond in writing to each one.
Your right to object
If you disagree with the final assessment, you can file a formal Notice of Objection within 90 days. The file moves to CRA Appeals — a separate division. About a third of objections result in some change to the assessment.
How we help
Fluent Books supports BC small businesses through CRA audits regularly. We act as the buffer between you and the auditor, organise the document package, and respond to questions in writing. The cost of getting it wrong — extra tax, interest, penalties — almost always exceeds the cost of professional support.
If you have received a CRA letter, or want a second set of eyes on whether your books would survive one, book a confidential review and we will assess your audit readiness honestly.