Net Worth Audits

Start with who will actually handle your file. Ask whether a lawyer will represent you, whether your communications will be protected by solicitor-client privilege (accountants and bookkeepers generally cannot offer this), and who your day-to-day contact will be. Privilege matters because anything you tell a non-lawyer representative can later be demanded by the CRA.

Ask about scope and fees up front. Find out whether the engagement is quoted as a fixed fee or billed hourly, what is and is not included, and what happens if the audit expands or proceeds to a Notice of Objection or the Tax Court. At Barrett Tax Law most matters are quoted on a fixed-fee basis once scope is understood, so the cost is known before work begins.

Ask about experience with your specific issue — unreported income, shareholder benefits, a net-worth assessment, GST/HST, or gross negligence penalties — and how the representative plans to preserve your objection and appeal rights while the audit is still open. A representative who is already thinking about the objection stage is protecting your downstream options.

Finally, confirm how deadlines will be tracked. Audit query and proposal-letter deadlines are short, and a missed deadline can narrow your options. A clear answer on how the firm diaries CRA deadlines tells you a lot.

It varies widely with the complexity of the file. A simple, single-issue audit can resolve in roughly three to six months. Complex business audits, GST/HST audits, or audits spanning multiple years and entities can run eighteen months to three years or longer.

The timeline is driven by the number of issues, how quickly documents can be assembled, the auditor's workload, and whether the file proceeds past the proposal-letter stage to reassessment, objection, or appeal. Responding promptly and completely to audit queries tends to keep a file moving; silence or weak responses tend to escalate and lengthen it.

We diary every CRA and statutory deadline at the outset and keep you informed at each stage so you always know where the file stands.

The difference is who starts it and why. A CRA audit is initiated by the CRA: it selects your file, identifies the years and issues, and reviews your affairs, often with penalties and interest in play. A voluntary disclosure is initiated by you, before the CRA contacts you, to correct unreported income, unfiled returns, or missed information returns.

The consequences differ accordingly. In an audit, you are defending against the CRA's proposed adjustments and penalties. In an accepted voluntary disclosure, the CRA agrees not to refer the matter for criminal prosecution and provides relief from certain penalties, although the underlying tax and interest remain payable.

Timing is what separates the two paths. The Voluntary Disclosures Program is only available while the matter is still voluntary — that is, before the CRA has begun an enforcement action about it. Once an audit letter arrives, the disclosure route generally closes for the matters under review.

A CRA audit usually follows a predictable sequence. It begins with a letter identifying the years and issues under review and requesting documents by a deadline. The auditor then gathers information — reviewing returns, financial statements, bank records, and third-party data — and may visit a business or interview the taxpayer.

Next come written audit queries about specific transactions or deductions, each carrying an implicit deadline. Before reassessing, the auditor issues a proposal letter (sometimes called a "30-day letter") setting out the proposed adjustments, the legal basis, and any proposed penalties. This is usually the most important stage — the last clean opportunity to shape the record before a reassessment is issued.

If the matter is not resolved at the proposal stage, the CRA issues a Notice of Reassessment, which starts the clock on your right to file a Notice of Objection. Throughout the process, what you say and produce can affect your later objection and appeal position, so responses should be considered carefully.

You can claim a share of your home's carrying costs equal to the share of your home used for business. If your home is 1,000 square feet and your office is a 110-square-foot room, you can claim 11%. A renter can claim that percentage of rent, heat, and power; an owner can claim that percentage of mortgage interest, property tax, heat, and power.

Home office claims are heavily audited because they are often estimated or inflated. Measure the actual space rather than eyeballing it, and do not include questionable items like gardening or pool maintenance. Because people move and later cannot show a former office, it is wise to document the office now — take photos, draw a floor plan, calculate the square footage, and keep the records in case the CRA ever asks.

The normal reassessment period is three years from the date of the original Notice of Assessment for individuals and Canadian-controlled private corporations, and four years for other corporations and mutual fund trusts. Within that window the CRA can generally reassess without showing anything special.

The CRA can reassess outside the normal period if the requirements of subparagraph 152(4)(a)(i) are met — broadly, a misrepresentation attributable to neglect, carelessness, or wilful default, or fraud. Certain matters, such as some GST/HST and offshore items, have their own rules.

Because the open-period question can be its own line of defence, it is worth confirming which years are genuinely within the CRA's reach before responding to an audit that reaches back several years.

First, identify what the letter is and what it requires. A CRA letter may open an audit, ask for documents, propose adjustments (a proposal letter), confirm a reassessment, or start collection action — and each carries its own deadline and its own implications. Note any date by which a response is required.

Do not ignore it, and be careful about responding off the cuff. What you say and produce can shape your later objection and appeal position, and casual admissions can be difficult to undo. If the letter proposes adjustments or penalties, or if significant amounts are involved, get advice before responding.

A free consultation can help you understand the letter, the deadline, and the right next step. Acting early — while options are still open — is usually far better than waiting until a deadline is near.

When a CRA auditor proposes a gross negligence penalty under subsection 163(2), the recommendation is supposed to be documented in an internal "penalty recommendation report." That report sets out the facts and reasoning the auditor relied on to conclude the penalty was warranted, and it is one of the most useful documents in a penalty defence.

Much like a defective speeding ticket, if there is a flaw in the penalty recommendation report — or if no report exists at all — the penalty can be dismissed. Whenever a gross negligence penalty is challenged, ask to see the penalty recommendation report. It frequently reveals that the penalty was recommended on thin or boilerplate grounds that cannot survive the reverse onus that applies to these penalties in court.

In practice, yes. It is fine to use one vehicle for both business and personal driving, but on audit you need to be able to separate the two, and a vehicle log is what auditors look for. Many businesses simply pick a percentage, and auditors know it is a guess — which makes the deduction easy to deny.

A log is simple: record each business trip with the date, destination, reason, and the starting and ending odometer readings, and take odometer readings at the start and end of the year. Divide business kilometres by total kilometres to get your business-use percentage, then claim that share of fuel, insurance, licensing, interest, leasing costs, and maintenance. With a log that adds up, an auditor will generally allow the expense.

A proposal letter (often called a "30-day letter") is the CRA's notice, before it reassesses, of the adjustments it intends to make, the legal basis for them, and any penalties it proposes to apply. It is usually the last opportunity to influence the file before a reassessment is issued.

The right response is a written submission, filed within the deadline, that marshals the relevant evidence and makes the legal argument against the proposed adjustments and penalties. Where helpful, we ask for a meeting with the auditor and team leader. A strong, timely response sometimes resolves issues before reassessment; even where it does not, it builds the record for a later objection.

Ignoring a proposal letter, or responding thinly, tends to lock in the CRA's position. Treat it as the important stage it is.

The net worth (or "lifestyle") method estimates income indirectly — by measuring the increase in a taxpayer's net worth over a period and adding the family's cost of living — rather than from the taxpayer's actual records. Because it rests on assumptions rather than evidence, it routinely produces errors that inflate income.

The most common error is failing to net out transfers between a taxpayer's own accounts, so that money moved back and forth between a chequing account and a line of credit is counted as income each time. Another is using Statistics Canada averages for the cost of living, which seldom match a particular household's real spending. The method is meant to be a last resort, used only where there is no other reasonable way to determine income — yet auditors often reach for it even when good books and records were available.

Both have a role, and they are not interchangeable. Accountants are well suited to preparing returns, reconstructing records, and handling routine CRA correspondence. A tax lawyer becomes important when the dispute turns on the law — when penalties are proposed, when the file may proceed to a Notice of Objection or the Tax Court of Canada, or when the matter could expose you to significant liability.

One difference is decisive: communications with a lawyer are generally protected by solicitor-client privilege, while communications with an accountant generally are not and can be demanded by the CRA. Where the facts are sensitive, that protection matters.

In many files the lawyer and accountant work together — the accountant on the numbers, the lawyer on strategy, privilege, and the legal record. Barrett Tax Law regularly coordinates with a client's existing accountant.

Generally not for the issues the CRA has already raised. The Voluntary Disclosures Program requires that the disclosure be voluntary — meaning the CRA has not yet begun an enforcement action against you about the matter. Once you receive an audit letter, voluntary status is generally lost as to the matters under audit.

There may still be eligibility for years, entities, or issues that fall outside the audit's scope and that the CRA has not contacted you about. For example, if a current audit covers one year, unrelated issues in an earlier year or a separate corporation may still qualify. The analysis is delicate and time-sensitive.

The key point is that the door can close quickly. If you think there are unaudited exposures, the time to assess voluntary disclosure is before the audit reaches them.

A waiver lets the CRA reassess a tax year after the normal reassessment period — generally three years for personal and corporate income tax, four years for GST/HST — has otherwise closed. Signing one gives up the protection of a statute-barred year, which can be a significant right to surrender.

A waiver should never be signed without first consulting legal counsel. An auditor who cannot meet the normal reassessment deadline may be unable to reassess at all unless the taxpayer voluntarily extends the window. If you or your client is presented with any waiver in the course of an audit, objection, or other dealing with the CRA, get advice before signing.

As a general rule, keep records for at least six years from the end of the tax year to which they relate. Even though the CRA usually reassesses only three or four years back, it can reach further back where it suspects fraud or gross negligence, so keeping records a year or two beyond the minimum is sensible.

Some records should essentially never be discarded — purchase and sale agreements, share transactions, and registries needed to calculate a capital gain on a future sale. Keep originals where you can, since an auditor who asks for an original receipt may disallow an expense supported only by a scan or a credit-card statement, and back everything up off-site.

It depends on the audit. Many audits are narrow, low-stakes, and document-driven — a query about a specific deduction or receipt — and these are often reasonable to handle yourself by simply providing the records requested. For a small matter, professional fees could exceed the tax at issue, which makes self-representation the sensible choice.

The calculus changes when the stakes and legal complexity rise. A tax lawyer becomes valuable where the CRA is reconstructing your income indirectly (such as a net-worth assessment), where gross-negligence penalties are proposed or foreseeable, where the audit reaches beyond the normal reassessment period, or where the facts are sensitive or carry any criminal potential. In those situations, solicitor-client privilege, control over the scope of disclosure, and framing the law before adjustments harden into an assessment can change the outcome.

A practical middle path is to get a single read early — even on an audit you intend to handle yourself — to confirm it really is routine and to flag the warning signs that would change the answer. Many matters begin self-represented and bring in counsel only if they escalate.

A net worth assessment is an indirect method the CRA uses to estimate unreported income. Instead of auditing transactions directly, the CRA measures the change in your assets, liabilities, and personal spending over a period and treats unexplained increases as unreported income. It is commonly used where records are incomplete or where the CRA suspects cash income.

Net worth assessments are estimates, and estimates can be wrong. They are challenged by reconstructing the true picture — identifying non-taxable sources of funds (gifts, loans, inheritances, transfers between accounts, sale proceeds), correcting valuation and opening-balance errors, and documenting personal expenditures accurately. Each correction reduces the alleged unreported income.

Because the burden often shifts to the taxpayer to displace the CRA's assumptions, careful evidence-gathering is central. These files frequently also involve gross negligence penalties, which can be contested on their own grounds.

Sometimes a site visit is routine and appropriate; for many business audits it is expected. The point is that the visit should be planned rather than improvised. Decide in advance who will be present, what records will be available, and which topics are within and outside the scope of the audit.

A surprise or unstructured visit is rarely required and rarely helps. Casual conversation during a visit can introduce facts into the file that complicate the matter. With representation, the visit is managed so that the auditor gets the information they are entitled to without the file drifting into unrelated territory.

If you are unsure whether to agree to a visit or how to prepare for one, that is exactly the kind of question to raise at a consultation before responding to the auditor.

As a general rule, keep your records for six to seven years. Under the Income Tax Act the six-year period runs from the end of the tax year the records relate to. Although the Canada Revenue Agency can ordinarily reassess income tax for three years and GST/HST for four, keeping records a little longer is wise because the agency can reach back further where it suspects fraud or gross negligence. Records tied to buying or selling property should be kept indefinitely, because you need them to compute the correct capital gain on disposition.

On receipts: strictly speaking, the Income Tax Act does not require an original receipt to claim most business expenses — but if an auditor asks for the original and you can only produce a photocopy, scan, or credit card statement, the expense may be denied. The practical answer is to keep everything an auditor might want, including originals (plus a scan, since some receipts fade), and to back up your records offsite.

A net-worth assessment estimates your income from the growth in your wealth plus your living expenses, treating the unexplained increase as unreported income. The appeal attacks the methodology: showing the auditor understated your opening net worth, identifying non-taxable sources (gifts, loans, inheritances, sales of personal property, accumulated savings) that explain apparent increases, correcting misvalued or double-counted assets, and challenging inflated personal-expenditure estimates. Every dollar traced to a non-taxable source comes out of the assessment.

Self-employed individuals, cash-business owners, real-estate flippers, large charitable donors, taxpayers with offshore assets, and high-income earners with year-over-year income changes are statistically more likely to be audited.

A regular CRA audit aims to assess additional tax and penalties; a criminal investigation aims to build a case for charges such as tax evasion or fraud. The Supreme Court of Canada has drawn the line using a "predominant purpose" test: once the predominant purpose of the CRA's inquiry becomes determining criminal liability, the taxpayer is no longer required to comply with the agency's audit requests, and Charter protections against self-incrimination and unreasonable search engage.

Warning signs include an auditor abruptly going silent (which can signal a referral to criminal investigations) or correspondence threatening prosecution. If you suspect a criminal purpose, stop providing documents and contact a lawyer immediately — an accountant has no privilege and can be compelled to hand over materials, whereas communications with a tax lawyer are protected.

Yes. We routinely host audits at our office. This keeps the auditor away from staff and family, and lets us control the flow of information and documents.

A Proposal Letter is the auditor's draft assessment. You usually have 30 days to respond. This is the most important window in the audit — once it becomes a Notice of Reassessment, your only remedy is a Notice of Objection.

Not filing sets off a predictable chain. If you owe money, a late-filing penalty of 5% of the balance plus 1% per month (to twelve months) applies under subsection 162(1), and arrears interest compounds daily on top. If you still don't file, the CRA can assess you without a return under subsection 152(7) — an arbitrary assessment that usually overstates what you owe. Once a balance is assessed, the CRA's collections powers (wage garnishment, bank requirements to pay, liens) can be used without a court order. In a narrow band of serious cases, persistent non-filing can lead to prosecution under subsection 238(1).

The severity tracks how much is owed and whether you came forward first. Most non-filers resolve their files well short of prosecution.

An arbitrary assessment — also called a notional assessment — is the CRA assessing your tax for a year in which you never filed a return. Subsection 152(7) of the Income Tax Act lets the CRA estimate your income, usually from the T4, T5, T3, and T5008 slips it already holds, and assess tax on that estimate. Because the slips report gross amounts, the assessment leaves out the deductions, credits, and expenses you would have claimed, so the figure is typically higher than the tax you actually owed.

Under subsection 152(8) the assessment is presumed valid and is collectible until you displace it. The usual remedy is to file the real return for the year, after which the CRA reassesses on the correct numbers.

In almost every case the fix is to file the actual return for the year the CRA assessed without one. A correctly prepared return showing your real income, deductions, and credits gives the CRA the information it was filling in by estimate, and it will ordinarily reassess on that basis — frequently reducing the tax substantially, sometimes to nil or a refund.

You can also object formally with a Notice of Objection, generally within 90 days of the assessment date, but for a non-filer the return itself is the more complete remedy because it supplies the correct figures directly. Note that collections do not pause automatically while you prepare the return, so where a large balance is involved it is worth communicating with the CRA so enforcement doesn't run ahead of the reassessment.