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How Far Back Can CRA Audit Businesses? What You Need To Know

Updated: Jun 13






The Canada Revenue Agency (CRA) plays a crucial role in ensuring that taxpayers and businesses fulfill their tax obligations and comply with tax laws. One of the ways the CRA carries out this responsibility is through audits. In the case of an audit, they will closely examine books and records to determine if the individual or business has correctly reported their income and claimed deductions, including any applicable HST or GST.


An audit is certainly not something that anyone looks forward to, but it is a possibility that you must be prepared for. The CRA can only audit a given tax year for a certain amount of time afterwards. Let's dive into the audit time periods and requirements you need to know about as a business owner.


Key Highlights


  • Normally, the CRA audits the 2-3 most recent tax years. However, they can audit up to 10 years in cases of fraud or serious issues with tax returns.

  • Offshore audits, which look for unreported income or assets held outside of Canada, usually encompass 10 years' worth of tax returns.

  • Taxpayers are required to keep their financial records and supporting documentation for 6 years in case the CRA requests them.


Understanding the CRA Audit Process


When the CRA selects a business for an audit, they will typically contact you by phone and confirm the audit via a letter. You will then be required to cooperate with the auditor to provide supporting documents and records, including receipts, to verify the information on your tax return. 

The CRA will review these documents and may request additional information or clarification. The audit process can vary in length depending on the complexity of the situation and the availability of requested information. There are simple steps you can take to handle your audit with the best results, but the most important things to remember are communication and cooperation.


The Scope of CRA Audits & Reassessments


CRA audits are conducted to ensure compliance with the tax laws outlined in the Income Tax Act. The scope of the audits can vary depending on the specific circumstances of the person or business being audited. Generally, the CRA focuses on verifying the accuracy of reported income amounts and claimed deductions. The audits may also include a review of supporting documents and records to ensure their validity.


How Far Back Can the CRA Audit?


The CRA is limited in how far back they can audit taxpayers. In most cases, audits will only take place 2-3 years after the tax year in question. However, if the CRA finds significant discrepancies in their tax audits or suspects fraud, they have the authority to go further back and audit previous years.


Special Circumstances Extending the Audit Period


While the general rule is that the CRA can audit the two or three most recent tax years, there are special circumstances that can extend the audit period. For example, if a taxpayer has made voluntary payments towards a debt, the CRA can extend the period for auditing that debt. Similarly, if the debt is of a particular type, such as a debt arising from a tax shelter, the CRA can also extend the audit period. Additionally, if the CRA suspects fraud or wilful evasion of taxes, there is no time limit on how far back they can audit. The specific length of the audit period can vary depending on the nature of the audit and the uncovered during the process.


Impact of Previous Audits on Current Assessments


Previous audits can have an impact on current assessments by the CRA. If the CRA has conducted an audit on the taxpayer in the past and identified significant discrepancies or fraud, it may result in a reassessment of the taxpayer's current returns. The CRA will take into account the findings of previous audits and may scrutinize the taxpayer's returns more closely. It is essential to address any issues identified in previous audits and ensure your current returns are accurate to avoid getting audited again!


How Many Years Do You Need To Keep Business Documents?


Although the typical audit takes place within 2-3 years, businesses are required to keep important documents for a minimum of 6 years after the last tax year they relate to. This means that for a 2015 return, the documents must be kept until the end of the tax year in 2021. You can store them in paper or electronic format, but it's important to keep them safe until the end of the 6-year period. If important documents are lost or destroyed before the end of this period, the CRA could prosecute you.


Conclusion


By staying proactive and compliant, you can do your best to avoid a CRA audit. However, if you end up going through an audit, you should still be prepared. Staying safe by storing your records safely, keeping your finances organized, and using high-quality bookkeeping and accounting technology is crucial. 


Set yourself up for success in the event of an audit by using ReInvestWealth's AI accountant. Start today with a free trial for 30 days.



Frequently Asked Questions


Can the CRA audit me after I've filed my taxes?


Yes, the CRA can audit taxpayers and businesses after they've filed their taxes. The CRA has the authority to select taxpayers for audits based on various factors, including the presence of significant discrepancies in tax returns. The audit can encompass the two or three most recent tax years, and in certain cases, the CRA can go further back and audit previous years if they suspect fraud or serious issues.


What triggers a Canada Revenue Agency audit?


A CRA audit can be triggered by a number of factors, including discrepancies in tax returns, suspected tax evasion, negligence in reporting income or claiming deductions, neglect in fulfilling tax obligations, or carelessness in record-keeping. The CRA uses risk assessment to select taxpayers and businesses for audits based on these factors.


How can I reduce the risk of a CRA audit?


Maintaining good records and accurate supporting documents is essential to reduce the risk of a CRA audit. Businesses should implement best practices in bookkeeping and accounting, ensure accurate reporting of income and expenses, and file taxes on time.

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