Audit Readiness
Audit readiness is the practice of keeping books, reconciliations, and source documents organized so a CRA review can be answered within days, not weeks.
Definition
Audit readiness is a posture, not a project. It means the corporation's books are reconciled monthly, every ledger balance can be traced to source documents, and the working papers behind the T2 and GST/HST returns are filed and retrievable. ITA s.231.1 and ETA s.288 give CRA broad powers to inspect records; ITA s.230 and s.230.1 (reinforced by IC78-10R5) set the standard those records must meet. IC71-14R3 describes how a tax audit is conducted and what CRA typically asks for.
Key rules
- Maintain a monthly reconciliation for every bank, credit card, loan, and sales tax account. The reconciliation should tie the ledger balance to the external statement with zero unreconciled items older than 60 days.
- Keep working papers for each tax return. For the T2 this typically includes the trial balance, adjusting journal entries, Schedule 1 reconciliation, CCA continuity, shareholder loan continuity, and dividend declarations.
- Store source documents in a way that supports retrieval by date and by vendor. Digital folders by year and month, with a search-friendly file name convention, meet CRA's accessibility expectations under s.230.1.
- Respond to an audit letter promptly, in writing, and only within the scope requested. If the request is unclear, ask CRA for clarification in writing rather than sending more than is asked.
- Keep a register of correspondence with CRA, including notices of assessment, reassessments, objections, appeals, and compliance letters.
Most small-corporation reviews focus on a narrow set of items: GST/HST input tax credits, vehicle and home office expenses, meals and entertainment, shareholder loan balances, and payroll source deductions. Reconciling these five areas monthly removes most audit risk before it ever arrives.
Example
A BC CCPC receives a CRA letter asking for supporting documents for its 2024 ITC claims. A ready corporation can respond within two weeks with:
If any of these pieces is missing, the corporation spends the first week rebuilding them instead of answering questions.
Common mistakes
- Waiting for the audit to clean up the books. CRA auditors read adjusting entries dated after the audit letter as evidence that the records were not kept current.
- Sending every document CRA could possibly want. Over-delivering expands the audit scope. Answer only what was asked, in writing, on time.
- Letting the owner talk to the auditor informally on the phone. Oral answers become part of the file and can be used to support reassessment. Keep communication in writing and involve the adviser.
- Ignoring the objection deadline. A notice of assessment can only be formally challenged by filing a notice of objection within 90 days.
- Destroying records while an audit or objection is outstanding, which breaches the extended retention requirement under s.230(6).
Related concepts
Audit readiness rests on the , the standards, and the they preserve. The most common audit subject is the and its supporting schedules.
Authority
- Income Tax Act s.230 and s.231.1
- Excise Tax Act s.286 and s.288
- Canada Revenue Agency Information Circular IC71-14R3, The Tax Audit
- Canada Revenue Agency Information Circular IC78-10R5, Books and Records Retention / Destruction
See also
Related entries
Six-Year Retention Rule
CRA requires corporations to keep books, records, and supporting documents for at least six years from the end of the tax year they relate to, with longer holds in several defined situations.
Electronic Records
CRA allows books and records to be kept in electronic form if they are readable, auditable, and accessible in Canada. ITA s.230.1 and GST/HST Memoranda 15.1 and 15.2 set the standards.
Source Documents
Source documents are the original evidence behind each ledger entry: invoices, receipts, contracts, bank statements, and anything else that proves what actually happened.
T2 Corporate Return Overview
Every Canadian resident corporation must file a T2 return within six months of year-end and pay any balance owing within two or three months.
This entry is for general reference. It does not constitute professional tax advice. Consult a qualified Canadian accountant for your specific situation.