A GST/HST audit: what the CRA actually checks

What to expect is set out below: which periods are opened, which documents are asked for, and which input tax credits get questioned first.

An audit answered completely, once, with the working papers, is a shorter audit. How a review is handled here, or start with an enquiry.

A GST/HST audit is narrower than an income tax audit and less frightening than it sounds. It asks whether tax that should have been collected was reported, and whether the credits claimed were real. The short answer to the HST audit what to expect question is that mechanical test: tax charged when required, and credits claimed that were real.

How files get picked

The CRA picks audit files by risk: likely errors, signs of non-compliance, and comparisons with similar files or other audits. Persistent refunds, sharp swings in reported sales, ratios out of line with the sector and repeated late filings all count. Our guide to common audit triggers covers the patterns. How a CRA HST audit then runs, from your revenue through to the input tax credits, is set out in the sections below.

The two halves of the examination

An audit tests two separate things, and a business can pass one and fail the other. It is worth knowing which half a question belongs to before answering it.

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

Keep all sales and purchase invoices and other business and GST/HST records for six years from the end of the year to which they relate. The CRA may ask for longer, and early destruction needs written approval. Keep capital property invoices longer still, to support future credits or tax owing if the use of the property changes.

Auditors examine ledgers, journals, invoices, receipts, contracts and bank statements, and may examine personal records and those of related people or entities. Tax adjustments by your bookkeeper or accountant 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 analyze 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.

The CRA audit document checklist lists what to pull together before the first meeting, and a refund held for review is decoded in the GST/HST review letter.

Preparing sensibly

Before the auditor arrives, reconcile: tie each period's reported sales to the general ledger, pull the invoice for every large credit, document why anything is zero-rated or exempt, and check that the bad debt adjustments on write-offs were calculated correctly — they are often recalculated.

Then be organized and brief. Answer what is asked, provide what is requested, and route questions through one person. An audit that starts with reconciled records and a clear explanation of unusual items usually ends with a short letter and no adjustment.

If returns are late rather than merely under review, the late GST filing penalties are formula-driven and worth knowing exactly.

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.