A letter arrives from the Canada Revenue Agency. For most self-employed Canadians, the first instinct is to assume the worst. In most cases, that instinct leads to more stress than the situation warrants.
CRA contact covers a wide range of situations, from routine document requests to formal audits. Each type of contact has its own process, its own timeline, and its own appropriate response. The gap between what people assume is happening and what is actually happening is often significant, and understanding the difference is the first step toward handling it properly.
A Review Is Not an Audit
When CRA reviews a return, it is checking whether the amounts reported are correctly supported, not concluding that something is wrong. CRA reviews approximately 3 million income tax returns each year as part of normal processing. CRA may ask for documents to support specific claims, including receipts, invoices, bank statements, or other records.
An audit is a more detailed examination of a taxpayer’s books and records. It is triggered through CRA’s risk-assessment process and involves a CRA auditor being assigned to examine income, expenses, and supporting documentation in depth.
The practical distinction matters because the response process, the stakes, and the documentation requirements are different for each. A review letter asking for vehicle expense receipts is not the same situation as an auditor requesting access to your bank records and business journals. CRA’s own guidance is clear: a review does not represent a tax audit.
There are also several types of CRA review programs, including pre-assessment reviews, processing reviews, matching programs, and supplementary examinations. The type of review and what it covers is generally identified in the CRA contact you receive.
How CRA Will Contact You
For a review, CRA may contact you by letter or phone to explain what is being reviewed, what documents are required, and when you need to respond.
For an audit, a CRA auditor will generally contact you by phone first, then follow up with a letter confirming the details of the audit, including the tax years under review. If you receive a call claiming to be from CRA and are not comfortable, you have the right to end the call and contact the auditor or team leader back directly, or to wait for the confirmation letter before providing any information.
CRA may send email notifications telling you that you have new mail in your CRA account, but it does not use email to ask you to reply with personal or financial information. Suspicious payment demands by text, email, or aggressive phone call should be verified independently through the official CRA contact number before responding.
What CRA Is Looking for in Self-Employed Returns
CRA’s risk-assessment systems identify returns considered to be at higher risk of non-compliance. For self-employed individuals, several patterns can draw attention:
- Business expenses that are high relative to reported income
- Expenses that do not match typical patterns for the reported industry
- Income that appears significantly lower than comparable businesses in the same sector
- Reported lifestyle expenses that appear inconsistent with reported income
- Large or inconsistent year-over-year changes in income or claimed deductions
A return can also be selected through CRA’s Matching Program, where information on the return is compared to third-party sources such as T4As issued by clients or financial institution records. If there is a discrepancy, a review or reassessment may follow.
Selection does not mean CRA believes a specific error was made. The risk-assessment process uses indicators and comparisons, and selection does not confirm non-compliance.
Your Records Obligation
As a self-employed individual, you are required to keep books and records adequate to determine your tax obligations. Generally, self-employed taxpayers must keep records for six years from the end of the last tax year they relate to. In some situations, including late-filed returns, different retention timing can apply. CRA can ask to examine those records within that period, and in certain limited circumstances, can request records outside of it.
During an audit, the auditor may request:
- Business records: ledgers, journals, invoices, receipts, contracts, and bank statements
- Personal records: personal bank statements, mortgage documents, and credit card statements
- Records of related individuals or entities where relevant to the audit
If your records are available electronically, CRA will typically ask for those first. Records can also be submitted online through CRA’s secure services. If physical records are borrowed, the auditor will provide a detailed receipt for anything taken.
The Indirect Verification Method
In certain circumstances, CRA may use an indirect method to verify reported income rather than relying solely on your books and records. The most common method is a net worth analysis.
A net worth audit considers changes in assets and liabilities, personal spending patterns, and other information including non-taxable sources of income such as gifts, inheritances, and lottery winnings. The resulting income estimate is compared against what was reported on the tax return.
CRA may use indirect verification when there are indicators such as books and records that appear prone to error, mixing of personal and business accounts, reported income that does not appear consistent with lifestyle, or operating in a sector associated with higher rates of unreported income.
This method goes beyond business records and includes personal financial records, motor vehicle registrations, and land title information. Where the net worth method is applied, CRA may also request the personal financial records of a spouse or contributing household members.
The Audit Process: What to Expect
After initial contact and document collection, the audit proceeds through a review of your records by the assigned auditor. If adjustments are proposed, CRA will issue a proposal letter explaining the proposed changes with calculations, and you generally have 30 days to respond before the audit is finalized.
You can respond in writing explaining why you disagree, provide additional documentation, or accept the proposed adjustments. The auditor will consider your response before issuing a final letter.
If the audit results in a change to your taxes, you will receive a notice of reassessment. If you disagree with the reassessment, you have the right to file a formal objection. For individuals, the objection deadline is generally the later of 90 days from the notice of assessment or reassessment and one year after the filing deadline for the return, subject to specific exceptions.
Filing an Objection
A notice of objection is a formal request for CRA’s Appeals division to review the assessment or reassessment independently. You can file online through My Account, or by mail using Form T400A.
The deadline to file is generally the later of 90 days from the date shown on the notice of assessment or reassessment and one year after the filing deadline for the return, subject to specific exceptions. If you miss that deadline, you may apply for an extension, but that extension must generally be requested within one year of the original objection deadline and will only be granted in limited circumstances.
During the objection period, CRA will generally not take collection action on the disputed amounts while the objection is pending, though exceptions apply in certain circumstances such as jeopardy cases. Interest continues to accrue on any unpaid amounts, including disputed ones, regardless of whether an objection has been filed. Amounts that are not in dispute remain owing and should be paid to limit interest charges.
The objection process does not require a lawyer or CPA to initiate, but the complexity of the issues involved and the amounts at stake often determine whether professional representation is appropriate.
What Good Records Actually Look Like
The best position to be in during any CRA contact is to have records that are organized, complete, and consistent with what was filed.
For a self-employed Canadian, that means:
- Separate business and personal bank accounts, so that business income and expenses do not require reconstruction from personal records
- Receipts or invoices for every expense claimed, stored in a way that can be retrieved by year and category
- A vehicle log if claiming business use of a vehicle, showing dates, destinations, and business purpose for each trip
- Documentation of the home office calculation method used and the measurements or costs it was based on
- GST/HST records if registered, including input tax credit claims and remittance history
Records stored electronically are acceptable. CRA accepts electronic submissions of documents and may ask for them in that format. The requirement is that records be accessible, readable, and retained for the required period.
Your Rights During the Process
Under the Taxpayer Bill of Rights, you have the right to be treated professionally and courteously, to have your information kept confidential, to know why CRA is asking for information, and to file a complaint if you are not satisfied with the service received. You can raise concerns with the auditor or the auditor’s supervisor at any point during the audit.
The Decisions This Guide Does Not Resolve
Whether to respond to a CRA review on your own or engage a representative depends on the nature of the contact, the complexity of your tax situation, and what is at stake. A straightforward document request for a home office deduction is different from an audit of multiple tax years with a net worth component.
Whether to file an objection, and whether to represent yourself or engage someone with CRA experience, involves assessing the strength of your position, the amounts involved, and whether the proposed adjustments are based on an error of fact or an error in how the law was applied.
These are decisions where a CPA who knows your situation is in a better position to assess the options than you are on your own.
Teplov CPA provides bookkeeping and tax services for self-employed Canadians. If you have received a letter from CRA and are not sure what it means or what to do next, reach out at contact@teplov.ca.