If you’re self-employed in Canada, you’ve probably heard stories about CRA audits—someone’s cousin who got dinged for unreported income, or a friend who spent months digging through receipts. It’s easy to assume it won’t happen to you, but audits are more common than most people think, especially if you’re running your own business. That doesn’t mean you need to panic. It just means you need to understand what the CRA is looking for and how to stay on solid ground.
Taxpage, a Canadian law firm of tax law specialists that helps people deal with audits and other tax disputes, points out that many audits stem from simple red flags—not necessarily wrongdoing. Things like big swings in income, unusually high expenses compared to industry averages, or repeated losses can trigger a closer look. So can inconsistent information between your tax return and what’s reported to the CRA by third parties like clients or banks.
Why the CRA Audits Self-Employed Canadians
When you’re self-employed, your tax situation is naturally more complex. You’re responsible for tracking income and expenses, collecting and remitting HST/GST (for most), and making installment payments throughout the year. There’s no employer doing that for you. If your records aren’t thorough or up to date, the CRA might assume the worst—or at least take a deeper dive into your books.
What to Expect If You’re Audited
So what does an audit actually look like? First, you’ll get a notice—usually a letter—telling you the CRA is reviewing your return. Sometimes it’s a desk audit, which means they’ll ask for documents by mail or online. Other times it’s a field audit, where an agent visits your home or office. Either way, they’ll ask for backup: invoices, receipts, bank statements, mileage logs, and anything else that supports the numbers you’ve claimed.
Records the CRA Usually Wants to See
One of the biggest mistakes self-employed people make is thinking “close enough” is good enough. It’s not. The CRA expects receipts for expenses, not just credit card statements. They want mileage logs that show dates, destinations, and purpose of travel—not just a rough estimate. If they find personal expenses mixed in with business deductions, or if something seems inflated or vague, that can lead to reassessments, penalties, or interest charges.
And yes, the CRA can go back a few years. For most people, they can audit returns up to three years after the date of assessment. But if they suspect fraud or misrepresentation, there’s no time limit. Offshore audits may also cover up to ten years of tax returns.
Handling an Audit
If you’re already being audited, the best move is to stay calm and organized. Respond to requests on time, and seek legal advice as quickly as possible. An audit doesn’t necessarily mean the CRA thinks you’ve done something wrong—it just means they have questions, and how you handle them matters.
Start by carefully reading the CRA’s audit letter. It will outline which tax year is being reviewed and what specific information they’re looking for. This isn’t the time to scramble or stall. Set aside time to gather the documents they’ve requested, and keep a running list of what you’ve sent. If something’s missing, be honest about it. Trying to fudge the details or hide gaps in your records will only make things worse.
If the audit is a desk audit, you’ll be asked to upload documents online or mail them in. These are usually less invasive, but you should still treat them seriously. If it’s a field audit—where an auditor shows up at your home or business—it’s a bit more involved. They may want to look at physical files, talk through your bookkeeping process, or even inspect your workspace to verify claims.
In either case, don’t go it alone. Reach out to a tax lawyer early. Even if you think you can explain everything yourself, having someone experienced in CRA procedures can keep the audit focused and prevent you from volunteering information that could complicate things. They act as a buffer between you and the CRA—making sure everything you provide is accurate, complete, and properly framed.
Audits can take weeks or even months. During that time, keep communication professional and timely. If you’re asked for clarification or additional documents, respond promptly and document everything. And if the audit leads to a reassessment, don’t assume it’s final. You have the right to appeal.
How to Stay Off the CRA’s Radar in the First Place
For those not under audit yet, the best defence is a clean set of books. That means keeping digital and physical records of everything, separating personal and business accounts, and reviewing your financials regularly. Use accounting software if you can. Track your HST/GST obligations monthly, not just at tax time. And if you’re not 100% sure what counts as a deductible expense, don’t guess—get clarity before you file.
Running your own business means wearing a lot of hats. Bookkeeping and tax compliance might not be the most exciting part of the job, but it’s a critical one. Stay organized, stay informed, and you’ll be in a much stronger position if the CRA ever comes knocking.
