The Standard Audit Period

by Alina Nikolaeva

The CRA typically has three years from the date of your Notice of Assessment to audit your tax return. For example, if you filed your 2020 tax return and received your assessment in June 2021, the CRA can generally audit this return until June 2024. But this three-year limit is not set in stone. The CRA can go back further in specific situations.

When the CRA Can Look Back Further

The CRA can extend the audit period to six years or more in cases like these:

• You made a mistake or omission due to carelessness;
• You failed to file a tax return;
• You filed an incorrect tax return due to fraud or misrepresentation;
• You filed a waiver with the CRA to extend the normal reassessment period;
• Your return involves a tax shelter investment;
• Your return includes transactions with non-residents.

No Time Limit for Fraud

If the CRA suspects fraud, they can audit your returns from any year. There is no time limit. This applies to both personal and corporate tax returns.

Record Keeping Requirements

You must keep your tax records for specific periods:

• Personal tax returns and supporting documents: 6 years from the end of the tax year;
• Business records and related documents: 6 years from the end of the last tax year they relate to;
• Records for capital property: 6 years after you dispose of the property.

The CRA accepts digital copies of receipts and documents.

What Triggers an Audit?

The CRA selects returns for audit based on various factors, including possibly the following:

• Large changes in income or expenses from previous years;
• High vehicle expenses or home office claims;
• Continuous or large rental losses;
• Self-employment income;
• Large charitable donations;
• International transactions;
• Tax shelter planning.

Audits

An audit (or review) usually looks like this:

1. A taxpayer files a return.
2. The CRA usually issues an assessment without an audit or review. This initial assessment does not indicate that the CRA is satisfied with the return. The initial assessment does start the limitation period running. In general, absent a misrepresentation or fraud, the CRA cannot reassess an individual taxpayer more than three years after the date of the initial assessment.
3. It is uncertain how the CRA selects the taxpayer’s return for a review or audit. The CRA likely relies on statistics to determine whether a taxpayer has claimed, for example, an unusually high deduction for certain expenses.
4. The CRA auditor asks to see the taxpayer’s books and records, invoices and receipts, and the CRA asks questions about areas of concern. The auditor’s powers of discovery at this stage are quite broad. In general, almost any question or any demand for documentation, as long as it reasonably relates to the taxpayer’s liability under the Income Tax Act (Canada) (ITA), are to be satisfied. The taxpayer, throughout the review or audit, has the opportunity to rebut any suspicions or concerns the auditor might have.
5. The auditor issues a proposal letter, which sets out the auditor’s proposed reassessment. The letter generally gives the taxpayer 30 days to make submissions against the proposed reassessment.
6. After reviewing the taxpayer’s final submissions, if any, the auditor prepares an audit report that provides the factual and legal basis for the proposed reassessment.
7. The auditor’s team leader reviews the auditor’s report.
8. Once the auditor’s report is approved, a notice of reassessment is issued to the taxpayer that summarizes the adjustments made by the reassessment. The reassessment replaces the assessment originally issued to the taxpayer, and it fixes the taxpayer’s liability for tax under the ITA unless the taxpayer successfully disputes it by filing an objection or, if that step is unsuccessful, by filing an appeal to the Tax Court.

Objections

To dispute a reassessment, a taxpayer must file an objection with the CRA first:

• The taxpayer begins the process by completing a notice of objection in writing and sending it by mail or delivering it to the Chief of Appeals “in a District Office or Taxation Centre” (Income Tax Act, s.165(2)).
• The CRA has created a form for objections, T400A, but the ITA does not prescribe this form, so it is not necessary to use it. In Lester v. The Queen, 2004 TCC 179, a letter was held to constitute a valid notice of objection.
• The objection must be filed:
  • on the day that is 90 days after the day of mailing of the notice of reassessment; or
  • in the case of an individual or a testamentary trust, on or before the later of:
    • the day that is 90 days after the day of mailing of the notice of assessment; and
    • the day that is one year after the taxpayer’s filing-due date for the year for which the reassessment was issued.
• Section 166.1 of the ITA allows a taxpayer to apply to extend the time for filing a notice of objection. The taxpayer must make the application within one year after the normal objection deadline expires, among other requirements.
• The CRA sends a letter acknowledging receipt of the notice of objection (with a copy to the taxpayer’s representative, if any).
• The Chief of Appeals assigns the objection to an appeals officer for review. The officer reviews the objection, submissions, the return in question, and the auditor’s report and working papers. The officer also reviews the ITA, case law, and CRA publications.
• The appeals officer usually asks for further submissions or additional documentation or information.
• The appeals officer usually sends a proposal letter outlining the CRA’s position.
• The taxpayer can make final submissions.
• The appeals officer prepares an appeals report setting out conclusions on the facts and law and the disposition of the objection. The officer can reverse, vary, or confirm the reassessment under objection.
• The appeals officer’s team leader reviews the report.
• Once approved, the CRA issues either a new notice of reassessment to vary or reverse the reassessment under objection, or a notice of confirmation confirming that the reassessment under objection was correct as far as the CRA is concerned.

If the taxpayer wishes to dispute the new reassessment or a reassessment that was confirmed, the taxpayer can file an appeal with the Tax Court of Canada.

Related: Objections (Granville Law Group) and CRA Disputes.

Collections

An amount of income tax or HST, including penalties and interest, that has been assessed or reassessed is due and payable as soon as it is assessed. It is often recommended to pay some or all of the assessed amount even if you intend to dispute it. Making a payment can stop non-deductible arrears interest from accumulating on any amount that remains outstanding after the dispute is resolved. Where the payment is in excess of what is finally determined to be owed, the CRA will pay interest on the excess. Making the payment is not an admission of liability, and neither CRA appeals nor the Tax Court takes note of any such payment when deciding the merits of a dispute.

That said, in general the CRA is not supposed to take collection action on income tax debts within 90 days of the debts being assessed or while they are under objection or an appeal to the Tax Court. The CRA can and does collect HST and payroll source deduction amounts even if the taxpayer has filed an objection or an appeal. The CRA might also withhold refunds and apply them against an income tax debt. The taxpayer can request the release of the refunds, and the CRA will ordinarily comply with the request.

If a CRA collections officer calls about a tax debt, get the officer’s name and contact details, ask the officer to call your authorized representative, and then pass that information to your representative to follow up. It is not wise to ignore a collections officer, but you do not need to engage personally. You can respond through your authorized representative.

Need help responding to the CRA?

If you have received an audit request, proposal letter, reassessment, or collections call, the earlier you get clear advice, the more options you usually have. We can help you understand the timeline, prepare your documentation, and choose the most practical next step.

Call: 604-669-6580
Email: avn@granvillelaw.com
Contact: Schedule a consultation

Service page: CRA Disputes

Quick answers

How long does the CRA have to audit my return?

Often three years from the Notice of Assessment, but it can be longer in certain situations.

Do I have to use the CRA objection form?

Not necessarily. The law requires a written objection that meets the requirements. A form is optional.

Should I pay if I plan to dispute?

In many cases, paying some or all can reduce arrears interest. The right approach depends on your facts and timing.