A GST/HST audit: what the CRA actually checks

A GST/HST audit is narrower than a full income tax audit and, for most owners, less frightening than it sounds. The auditor is testing a mechanical question: did tax that should have been collected get reported, and were the credits claimed against it real? Almost every adjustment traces back to one of those two lines.

How files get picked

The CRA selects audit files on the basis of a risk assessment. It looks at factors such as the likelihood or frequency of errors in returns and indications of non-compliance, and it may compare what it already holds about a business to similar files or to information gathered in other audits or investigations. Persistent refund positions, sharp swings in reported sales, ratios out of line with the sector, and repeated late filings all feed that picture. Our guide to common audit triggers covers the pattern side.

The two halves of the examination

Half one: did you charge and report the tax?

The auditor starts from your revenue and works toward the returns. Typical questions:

• Does total revenue in the books reconcile to the sales reported on the GST/HST returns for the same periods, and to the revenue on the corporate return?
• Were any sales treated as exempt or zero-rated? On what basis, and is there evidence for it?
• Was the correct provincial rate charged? Interprovincial sales are a standing source of adjustments — see the place-of-supply rules.
• Were exports zero-rated with proper documentation? The conditions in our guide to exports and non-resident customers are exactly what gets tested.
• Were sales of assets, equipment or vehicles taxed? These sit outside the normal sales cycle and get missed.
• Were shareholder or employee benefits, and any taxable barter or trade arrangements, accounted for?

Half two: were the credits supported?

The CRA is explicit that during an audit it will confirm you were entitled to all the input tax credits you claimed. That means the auditor tests documentation, not just arithmetic:

• Does an invoice exist for each material credit, showing the supplier’s name, the date, a description, the amount and the tax?
• Was the supplier actually registered? The CRA operates a service for confirming a GST/HST account number, and credits claimed on tax charged by an unregistered supplier are vulnerable.
• Was the purchase for use in commercial activity? Personal expenses run through the business are the classic disallowance.
• Were credits claimed twice — once from the invoice and once from the statement or the credit card feed?
• Were restricted or partially restricted items handled correctly?

The mechanics of all this sit in our guide to claiming input tax credits.

The records you are expected to have

The rule is six years. You generally have to keep all sales and purchase invoices and other records related to your business operations and the GST/HST for six years from the end of the year to which they relate. The CRA may ask you to keep them longer, and destroying them early requires a written request and written approval. Invoices for capital property should be kept longer still, to support future credit claims or tax owing if the use of the property changes.

An auditor will examine business records such as ledgers, journals, invoices, receipts, contracts and bank statements — and may also examine personal records, and the records of other individuals or entities that relate to the return being audited. Adjustments made by your bookkeeper or accountant for tax purposes are in scope too.

How the process runs

1. First contact. An auditor contacts you by mail or phone, or both, with the date, time and location.
2. The examination. On-site audits happen at your residence, your place of business, or your representative’s office; otherwise it is done from a CRA office and you send the documents in. Auditors cannot receive records by email, so use the CRA’s secure submission channels. If the auditor borrows documents, you get a detailed receipt.
3. Proposed adjustments. You receive a preliminary statement of audit adjustments and have 30 days to analyse it, discuss it with the auditor and make representations. This is the stage where evidence changes outcomes.
4. Assessment. The CRA issues a notice of assessment or reassessment. If an amount is owing, interest runs.
5. Dispute. If you disagree, you have 90 days from the date on the notice to file an objection using Form GST159.

Preparing sensibly

Before the auditor arrives, do the reconciliation yourself. Tie reported sales for each period back to the general ledger. Pull the supporting invoice for every large credit. Identify anything treated as zero-rated or exempt and put the reasoning in writing with the evidence attached. Check whether any receivables were written off and whether the bad debt adjustments were calculated correctly — those are recalculated often.

Then be organised and be brief. Answer what is asked, provide what is requested, and route questions through one person. An audit that starts with clean, reconciled records and a clear explanation of the unusual items usually ends with a short letter and no adjustment. The ones that go badly are almost always the ones where nobody could produce the paperwork.

This article is general information, not tax advice for your specific situation. Tax rules and CRA administrative positions change — confirm anything that affects a decision with the CRA or with us first.