CRA ready, all year: what a review actually asks for

Most businesses consider CRA readiness for about a week, and that week begins the day a letter arrives. At that point readiness is not something held but something being reconstructed out of bank records and vendor correspondence, against an externally set deadline.

The alternative is not complicated. It is a set of routines that make the answer to every likely question available before it is asked.

What a review actually looks like

Most CRA contact is not a full audit. Far more common is a limited review directed at a single item: an expense category, a payroll remittance that does not agree, an HST period that appeared inconsistent, or a credit claim outside expected ranges.

It arrives as a letter requesting information, generally with about thirty days to respond. The response is made in writing with supporting documentation. Handled properly, most close without escalation. What widens a narrow review is a response that cannot substantiate what was filed, since that raises a reasonable question about everything else.

What gets asked for

The specific list varies with what is under review, but requests come from a fairly stable set.

• Bank and credit card statements for the periods in question
• Invoices and receipts supporting claimed expenses, not the ledger entry
• Sales invoices substantiating reported revenue
• Payroll records including T4 summaries and remittance history
• HST and GST working papers showing how the filed figure was arrived at
• General ledger detail for named accounts and periods
• Contracts and leases behind significant recurring amounts
• Mileage and vehicle logs where vehicle expenses are claimed
• Documentation for shareholder transactions and loan movements

A ledger entry does not appear on that list by itself. The entry is the claim. The document is the evidence. A business holding only the first is unsupported in documentation terms, regardless of how orderly the accounting appears.

The documentation standard

Canadian record keeping requirements are less mysterious than most owners assume. Books and records adequate to determine your tax obligations must be kept, generally six years from the end of the tax year they relate to. Electronic records are fine. Readable scans are fine.

In practice an adequate document establishes four things: who was paid, how much, when, and for what. A credit card line proves money left the account but not what it purchased. That single distinction accounts for a large proportion of disallowed expenses.

Where the standard bites hardest

Some categories attract more scrutiny because they are commonly misapplied. Vehicle expenses generally require a log. Meals and entertainment require the business purpose recorded, not only a receipt. Home office claims require a defensible allocation basis. Payments to shareholders or related parties must be characterised at the time, since salary, dividend and loan repayment carry different consequences and cannot be reclassified retroactively once a review is underway.

Where businesses get caught

Across the files we review, exposure clusters in the same handful of places.

1. Payroll remitted but never reconciled. The payments were made, yet the CRA account and the internal ledger disagree. It goes unnoticed because remittances were being sent.
2. HST filed on figures that cannot be traced. The return was produced from a report that has since changed, with no working paper recording the calculation.
3. The shareholder loan used as a personal float. Amounts moving in and out without characterisation, which can produce a taxable benefit assessment on money the owner reasonably considered their own.
4. Expenses supported only by a statement line. Common with subscriptions and vendors who issue receipts by email that were never retained.
5. Intercompany charges with no agreement behind them. Management fees between related companies with nothing documenting the arrangement or the basis for the amount.
6. Cash transactions recorded from memory. Increasingly rare, and still fatal to a position when it appears.

Making readiness permanent

The objective is a business where a review letter represents a scheduling inconvenience rather than a difficult month. That position comes from five practices, none of which require significant effort once established.

• Capture at source. Documents attached to transactions as they occur, through a capture tool rather than an inbox search months later. Support that already exists costs almost nothing. Support reconstructed afterwards costs a great deal.
• Monthly reconciliation without exception. Every account, including payroll and HST control accounts, agreed to independent evidence. An unreconciled account is an unanswerable question awaiting the person who asks it.
• A working paper for every filing. A saved calculation showing how each return and remittance was derived, stored alongside the filing. This single practice resolves a large proportion of limited reviews on the first response.
• Characterise related party transactions at the time. Determine whether an amount is salary, dividend, loan or reimbursement when it occurs, record the decision, and apply it consistently. Deciding at year end is how benefit assessments arise.
• An annual internal check. One pass over the categories that attract attention, testing whether support could actually be produced. A gap you identify is a bookkeeping task. A gap identified for you is a negotiation.

If a letter has already arrived

Do not miss the deadline, and do not send everything available in the hope that volume reads as cooperation. It does not, and it frequently widens the scope of the review.

Read precisely what is being requested and answer it completely, in writing, within the timeframe. Where documentation is missing, an extension request is routine and generally granted. Where the review is likely to surface an error you are already aware of, take advice before responding, since a voluntary correction is treated differently from one the reviewer identifies first.