Common Tax Issues the CRA Audits — and Most Common Solutions

A letter from the Canada Revenue Agency (CRA) can make even the most confident business owner uneasy. While audits are a normal part of Canada’s tax system, many are triggered by common, avoidable issues. Understanding what the CRA typically audits—and how a professional accounting firm responds—can turn a stressful situation into a manageable, even routine, process.

Below is a clear, practical breakdown of the most common CRA audit areas, why they raise red flags and appropriate solutions.

1. “Are these truly business expenses or personal?”

Why the CRA asks

The CRA frequently reviews expenses that could have a personal element—such as meals, travel, vehicles, home costs, or lifestyle-related spending.

The right solution

• Apply reasonable business-use percentages (not 100% unless clearly justified)

• Maintain receipts with business purpose noted

• Ensure expenses align with the nature of the business

• Exclude clearly personal items altogether

Key principle: Expenses must be incurred to earn income and be reasonable in amount.

2. “Is your home office claim calculated correctly?”

Why the CRA asks

Home office deductions are allowed, but errors are common—especially around square footage and exclusive use.

The right solution

• Use a floor-area–based calculation

• Distinguish between exclusive-use and shared-use space

• Apply time-use adjustments where required

• Carry forward unused home office expenses correctly

Key principle: The method must be consistent, measurable, and conservative.

3. “What is this shareholder loan or ‘due from shareholder’ balance?”

Why the CRA asks

Owner-managed corporations are closely reviewed for personal use of corporate funds and unpaid shareholder loans.

The right solution

• Repay shareholder loans within the prescribed timeframe or

• Clear balances through dividends or bonuses (tax-efficiently planned)

• Ensure balances are properly disclosed on the balance sheet

• Avoid rolling balances year after year without resolution

Key principle: Corporate funds are not personal funds unless properly reported and taxed.

4. “Are your GST/HST input tax credits valid?”

Why the CRA asks

GST/HST audits are common because technical errors are frequent—even among compliant businesses.

The right solution

• Claim ITCs only with CRA-compliant invoices

• Match GST/HST filings to bookkeeping and bank records

• Apply correct place-of-supply and rate rules

• File consistently and on time

Key principle: Every dollar of GST/HST claimed must be traceable and supportable.

5. “Does your reported income match third-party information?”

Why the CRA asks

The CRA compares reported income to:

• Bank deposits

• T-slips (T4, T5, T5018)

• Payment platforms and third-party reporting

The right solution

• Perform full bank-to-income reconciliations

• Clearly explain timing differences (deposits vs earned revenue)

• Correct omissions promptly if identified

• Separate loans, transfers, and non-income deposits from revenue

Key principle: Income reporting must reconcile cleanly across all data sources.

6. “Why does this business report losses every year?”

Why the CRA asks

Repeated losses may trigger questions about whether the activity is a commercial business or a hobby.

The right solution

• Demonstrate commercial intent

• Show evidence of active efforts to earn profit

• Maintain business plans, forecasts, and strategy documentation

• Explain losses due to startup phase, expansion, or market conditions

Key principle: Losses are acceptable when there is a genuine expectation of profit.

7. “Why are there large year-to-year fluctuations?”

Why the CRA asks

Unusual spikes or drops in income, expenses, or deductions raise questions about consistency and accuracy.

The right solution

• Provide written explanations for anomalies

• Support changes with contracts, invoices, or one-time events

• Ensure accounting methods remain consistent year over year

Key principle: CRA accepts change—when it’s well explained and documented.

How CRA Reviews Are Best Handled

CRA audits are process-driven, not emotional. The strongest outcomes come from:

• Clear documentation

• Targeted responses (no over-disclosure)

• Timely, professional communication

• Positions that are defensible, not aggressive

The goal is not to argue—it’s to demonstrate compliance clearly and confidently.

Final Thought: Don’t Navigate CRA Reviews Alone

Each CRA question has a correct solution—but identifying it, applying it properly, and communicating it effectively requires experience.

That’s why many business owners choose to hire an accounting firm to:

• Assess audit exposure before CRA does

• Implement the right solutions proactively

• Respond to CRA professionally and strategically

• Protect time, reduce stress, and minimize tax risk

Audits don’t have to be disruptive. With the right structure and responses in place, they become manageable—and often routine.