A GST/HST audit by CRA is one of the most common — and most stressful — tax reviews a Canadian business can face. CRA audits GST/HST returns separately from income tax and can go back up to 4 years (or longer if fraud is suspected). For Ontario businesses that have filed incorrect GST/HST returns, claimed ineligible Input Tax Credits (ITCs), or failed to collect HST on taxable supplies, a GST/HST audit can result in significant reassessments, penalties, and interest. Pathak Professional Corporation in Mississauga provides GST/HST audit defence and CRA representation for Ontario businesses. Call 437-872-7399.
Why CRA Audits GST/HST Returns
CRA selects GST/HST registrants for audit through a combination of risk-scoring algorithms and random selection. Common triggers for a GST/HST audit include:
- Large ITC claims relative to sales: If your Input Tax Credits consistently exceed or closely approach your GST/HST collected, CRA’s system flags the account
- New registrants claiming large ITCs: New businesses claiming large start-up ITCs are frequently audited
- Significant refund claims: GST/HST refund requests (net tax = negative) almost always trigger at least a desk review
- Inconsistency between HST and income tax returns: Revenue reported on your HST returns should be consistent with income on your corporate T2 or personal T2125
- Industry targeting: CRA regularly targets specific industries with high non-compliance history — construction, real estate, restaurants, and automotive are perennial targets
- Tip or third-party information: CRA acts on tips about unreported revenues or fraudulent ITC claims
- Prior audit history: Businesses that were reassessed in a previous audit are more likely to be audited again
What CRA Examines in a GST/HST Audit
A CRA GST/HST auditor reviews your business records to verify:
1. HST Collected on Sales (Output Tax)
- All taxable supplies of goods and services must have HST collected at 13% (Ontario)
- Zero-rated supplies (exports, basic groceries, most prescription drugs) — 0% HST collected but ITCs still claimable
- Exempt supplies (residential rent, most financial services, health care) — no HST collected AND no ITCs on related expenses
- Whether sales to related parties were priced at fair market value (non-arm’s length transactions)
2. Input Tax Credits (ITCs) Claimed
CRA verifies that every ITC claimed is properly supported:
- Valid supporting invoice or receipt showing HST registration number of the supplier
- Invoice contains all required information (date, amount, description, HST number)
- Expense was for business use (not personal use)
- If business use is mixed personal/business: only the business-use percentage is eligible for ITCs
- Claimed within the 4-year limitation period (2 years for certain large businesses)
3. Required Invoice Information
CRA’s GST/HST audit will reject ITCs for invoices that don’t include all required fields:
| Invoice Amount | Required Information |
|---|---|
| Under $30 | Supplier name, invoice date, HST amount, description of supply |
| $30 – $149.99 | + Supplier’s GST/HST registration number |
| $150 or more | + Purchaser’s name or trade name, terms of payment, description and quantity |
4. Taxable vs Exempt Classification
CRA verifies that you correctly classified your supplies as taxable, zero-rated, or exempt. Common misclassification errors:
- Treating short-term Airbnb rentals as exempt (they are taxable if over $30,000/year)
- Treating construction services for new residential housing as fully taxable (new housing rebate rules apply)
- Incorrectly claiming ITCs on expenses related to exempt supplies
- Missing the requirement to self-assess HST on imported services and intangibles
GST/HST Audit Process — What to Expect
Step 1: Contact Letter from CRA
CRA sends a letter identifying the audit period (typically 4 years), the GST/HST account number, and the auditor’s name and contact information. The letter requests a list of books and records to produce. Contact a CPA immediately upon receiving this letter — before contacting the CRA auditor.
Step 2: Initial Meeting or Document Request
CRA’s auditor will meet with you (in-person or virtually) and request a comprehensive set of records:
- All GST/HST returns filed for the audit period
- All sales invoices, sales records, and point-of-sale records
- All purchase invoices supporting ITC claims
- Bank statements for all business accounts
- General ledger and chart of accounts
- Corporate or personal financial statements for the period
- Contracts with major customers and suppliers
Step 3: CRA Reviews Records and Issues a Proposal Letter
After reviewing your records, CRA issues a Proposal Letter (also called a Notice of Proposed Assessment) setting out the proposed adjustments — increases to HST owing and disallowed ITCs. You have 30 days to respond to the proposal letter with additional documentation or arguments.
Step 4: Notice of Assessment
If you accept the proposal or CRA rejects your response, a formal Notice of Assessment is issued. You then have 90 days from the date of the assessment to file a Notice of Objection with CRA’s Appeals Division if you disagree.
Step 5: Appeal Options
If CRA’s Appeals Division upholds the assessment, you can appeal to the Tax Court of Canada. For amounts under $25,000, the Informal Procedure is available (simpler and no court costs). For larger amounts, the General Procedure applies. Pathak Professional Corporation provides CRA audit representation from the initial audit through the objection and, if necessary, Tax Court proceedings.
GST/HST Audit Penalties
When CRA reassesses your GST/HST return, the following penalties and interest can apply:
| Penalty Type | Amount | When Applied |
|---|---|---|
| Late filing penalty | 1% + 0.25%/month (max 12 months) | HST return filed late |
| Failure to remit penalty | 3%–10% depending on frequency | HST collected but not remitted on time |
| Gross negligence penalty | 25% of unreported HST (minimum $250) | False statements or omissions made knowingly or negligently |
| Third-party civil penalty | $1,000 or 50% of tax involved | Participating in tax evasion schemes |
| Interest | Prescribed rate + 4% daily compound | On all unpaid HST and penalties from due date |
Common GST/HST Audit Adjustments — What Gets Disallowed
The most common ITC disallowances and HST adjustments in a CRA GST/HST audit:
- Missing or incomplete supplier invoices: ITC disallowed because the invoice doesn’t include the supplier’s HST registration number or required fields
- Personal expenses claimed as business ITCs: CRA frequently disallows ITCs for vehicle, meals, entertainment, and home expenses that were 100% claimed but should be partially personal
- ITCs for exempt or personal property: Claiming ITCs for residential rent payments, personal vehicle purchases, or other ineligible expenses
- HST on related-party transactions at below-market prices: If you sold property or services to a related party below fair market value, CRA may assess HST based on the fair market value
- Unreported HST on cash sales: CRA reconstructs revenue for cash-intensive businesses using bank deposits, comparative industry statistics, or markup analysis
How to Prepare for a GST/HST Audit — 7 Steps
- Contact a CPA immediately — ideally before meeting with or responding to the CRA auditor
- Gather all purchase invoices — organized by period, with supplier HST numbers verified
- Reconcile HST returns to financial statements — revenue on HST returns must match sales in your books
- Identify and address weaknesses — missing invoices, partially personal expenses, or revenue that was not HST collected
- Prepare a business-use log for mixed-use assets — vehicle, home office, phone
- Document any exempt or zero-rated supplies with written justification for the classification
- Do not meet with CRA alone — your CPA should attend or conduct all meetings as your authorized representative
Frequently Asked Questions
How far back can CRA audit my GST/HST returns?
CRA can reassess your GST/HST returns within 4 years of the date the return was due or filed (whichever is later). If CRA believes there was fraud or willful misrepresentation (gross negligence), there is no limitation period — CRA can go back indefinitely. For most honest business errors, the 4-year look-back applies. This means a CRA audit initiated today can reach back to returns filed in 2021 and later. Pathak Professional Corporation helps Mississauga businesses understand their exposure before a GST/HST audit begins.
What documents must I keep for GST/HST purposes?
CRA requires you to keep all records supporting your GST/HST returns for a minimum of 6 years after the end of the last tax year they relate to. Records include: all sales invoices and receipts, all purchase invoices and receipts (with HST registration numbers), bank statements for all business accounts, cash register tapes or point-of-sale records, and any contracts or agreements with customers and suppliers. Electronic records (accounting software data files) must be kept in a format accessible to CRA. Call Pathak Professional Corporation at 437-872-7399 to set up a CRA-compliant document retention system for your Ontario business.
Can I claim ITCs for expenses paid in cash where I don’t have a receipt?
No. CRA requires documentary evidence for all ITC claims. If you cannot produce a valid invoice with the supplier’s HST registration number, CRA will disallow the ITC. For cash purchases under $30, a simple receipt with the supplier name and HST amount is acceptable. For purchases over $30, you need the supplier’s HST number on the receipt. If a supplier cannot provide a proper invoice, you can verify their HST registration number on CRA’s online GST/HST registry. Reconstruct any missing documentation as soon as possible — and before a CRA audit notice arrives.
What happens if my GST/HST audit reveals I owe a large amount?
If a GST/HST audit results in a large reassessment, you have two options: pay the amount assessed (plus penalties and interest), or file a Notice of Objection within 90 days to dispute the assessment. CRA may consider a payment arrangement if you cannot pay immediately — contact CRA’s Collections Division or have your CPA negotiate a payment plan. For amounts that are legitimately disputed, the Notice of Objection process and ultimately Tax Court can reduce or eliminate the assessment. Pathak Professional Corporation represents Ontario businesses through the objection and appeal process. Call 437-872-7399.
GST/HST Audit Defence in Mississauga
Pathak Professional Corporation provides comprehensive GST/HST audit defence for Ontario businesses: pre-audit preparation and gap analysis, authorized CRA representative services, proposal letter response, Notice of Objection filing, and Tax Court of Canada representation.
If you have received a CRA GST/HST audit notice or have concerns about your GST/HST compliance, contact us immediately. Call 437-872-7399 or email info@pathakcpa.ca. 48 Village Centre Place, Mississauga, Ontario L4Z 1V9.
