If you run an incorporated small business in Canada, CRA audits can feel like an unwelcome surprise. But here’s the truth: Audit triggers exits. They audit when your numbers or documentation raise red flags. Understanding what the CRA looks for — and how to stay compliant — is one of the best ways to protect your corporation and your peace of mind.
Why CRA Audits Happen (and Why They’re on the Rise)
Over the past few years, the CRA has increased its audit activity for small corporations. The agency uses data-driven analytics and AI-powered review systems to compare your filings against industry averages and past returns. If your expense patterns fall outside the “expected” range — that’s when the system flags your file.
Key facts for 2025:
CRA is focusing on incorporated service businesses, real estate investors, and digital entrepreneurs.
Home-office deductions, vehicle use, and meals & entertainment remain the top three review categories.
According to CRA’s 2025 Audit Bulletin, over 40% of corporate reassessments came from missing documentation rather than fraud.
The takeaway? Most audits are preventable with solid recordkeeping and proactive reviews.
Top 7 CRA Audit Triggers for Small Corporations
1. Inconsistent Vehicle or Mileage Claims
Claiming 100% business use on a vehicle is the fastest way to invite a CRA review. CRA expects mileage logs showing the date, purpose, destination, and distance of each business trip. If your fuel, insurance, and maintenance deductions seem high compared to revenue, CRA will ask for receipts or a logbook.
Avoid it:
Use a digital mileage tracker (e.g., MileIQ or QuickBooks Mileage) and record odometer readings monthly. Deduct only the business portion of expenses.
2. Personal Expenses Coded as Business
When personal items — groceries, clothing, family travel — appear under “office supplies” or “meals,” CRA flags them. Even “mixed-use” costs (like mobile phones) need proper allocation.
Avoid it:Keep personal and business transactions separate. Use one dedicated business bank account and card. If you reimburse yourself, record it through shareholder loans, not as deductions.
3. Large Home-Office Deductions
CRA pays close attention to home-office claims, especially after remote-work changes. To qualify, your workspace must be used regularly and exclusively for business. Inflated square footage or missing proof of layout can trigger an audit.
Avoid it:Keep floor plans, property tax or rent statements, and utility breakdowns showing business use. Use a realistic percentage — not more than 20–30% for most home offices.
4. Meals & Entertainment Expenses
This is one of CRA’s most common audit targets. They’ll ask who you met, where, when, and what the purpose was. Credit card statements alone aren’t enough — CRA wants itemized receipts with notes.
Avoid it:Write the client or project name directly on each receipt and keep digital copies. Remember: Only 50% of eligible meal costs are deductible unless it’s a catered staff event.
5. High Shareholder Withdrawals or Loan Balances
When shareholder loans remain unpaid or fluctuate irregularly, CRA sees this as a sign of possible personal benefit. If you’ve taken money out of your corporation that isn’t recorded as salary or dividends, expect scrutiny.
Avoid it:Repay shareholder loans within one year of the company’s year-end, or convert them properly to salary/dividends.
Maintain clear minutes for all transactions.
6. Missing or Late GST/HST Filings
CRA’s systems automatically flag late GST/HST returns or mismatched remittances.
Even small timing errors can trigger an automated review.
File on time, reconcile sales and input tax credits, and ensure QuickBooks or your POS system matches CRA reports.
7. Unusual Deductions or Income Fluctuations
A big drop in reported income — or a sudden spike in expenses — without explanation is another red flag. CRA’s algorithms compare your data year-over-year and against other businesses in your NAICS code.
Avoid it:
Include explanatory notes in your tax file (e.g., “one-time equipment purchase”) and keep invoices to support changes.
How to Stay CRA-Compliant (Without Losing Sleep)
Keep digital records for at least 6 years. CRA accepts PDFs and cloud backups if they’re accessible on request.
Separate business and personal banking. It’s the #1 rule for clean books.
Use accounting software that syncs with CRA. QuickBooks Online or Zoho Books helps flag mismatches early.
Schedule quarterly reviews. A 15-minute check with your accountant can prevent a full-scale audit later.
File on time, every time. Late filings increase CRA scrutiny.
What to Do If You Get an Audit Letter
Don’t panic — but don’t delay. A CRA audit letter usually asks for specific items (bank statements, receipts, payroll records). Respond professionally and meet the deadline. If you’re unsure, don’t go it alone — a CPA can communicate with CRA on your behalf and protect your interests.
How Bhundhoo Tax Helps Small Corporations Stay Audit-Ready
At Bhundhoo Tax Professional Corporation, we don’t just file returns — we help you audit-proof your books. Our CPA-led team ensures:
All expense categories follow CRA guidelines
Shareholder transactions are documented correctly
Bookkeeping systems are CRA-compliant
Year-end files are ready for quick verification
Final Word: Prevention Is the Best Audit Strategy
Most audits aren’t about catching fraud — they’re about catching mistakes.
When your bookkeeping and documentation are solid, CRA reviews become simple box-checks instead of stress tests.
Book a file review with Bhundhoo Tax Professional Corporation today — and enter 2026 knowing your books are clean, compliant, and CRA-proof.