by Matthew Pollock

by Elias Zafiridis

AuditsApril 23, 20250 comments

GST/HST Audit Triggers: Key Facts

The Canada Revenue Agency (CRA) conducts audits to ensure that businesses are complying with federal tax laws, including those related to the Goods and Services Tax (GST) and Harmonized Sales Tax (HST). A GST/HST audit can be a stressful and disruptive experience—especially if you’re unprepared.

In this guide, we break down the common audit triggers, explain how the CRA conducts GST/HST audits, and share practical strategies to help your business stay compliant and audit-ready.

What is a GST/HST Audit?

A GST/HST audit is an examination of a business’s financial records by the CRA to ensure the correct amount of GST/HST has been collected, reported, and remitted. The purpose is to identify:

• Underreporting of GST/HST

• Incorrect input tax credit (ITC) claims

• Failure to charge or remit GST/HST

• Misclassification of taxable and non-taxable sales

While the CRA may occasionally select businesses at random, most audits are risk-based and result from red flags in filings or information obtained from third parties.

Top GST/HST Audit Triggers in Canada

1. Frequent Refund Claims

If your business frequently claims GST/HST refunds, it may raise a red flag. While legitimate refunds are common in industries with high input costs (like manufacturing or export businesses), the CRA may investigate to ensure the claims are accurate and justified. This is particularly common in zero-rated industries like exporters, where GST/HST is paid on inputs but not collected on sales.

Why It’s a Trigger:

• The CRA wants to ensure that refunds are not based on inflated input tax credits (ITCs).

• A pattern of large refunds may indicate improper record-keeping or fraudulent claims.

How to Mitigate:

• Keep detailed documentation of purchases and ITCs claimed.

• Clearly differentiate between personal and business expenses.

• Maintain accurate and organized records to justify refund claims.

2. Discrepancies Between GST/HST Filings and Income Tax Returns

The CRA cross-references your GST/HST returns with income tax filings. If the reported sales figures do not align, it may trigger an audit.

Why It’s a Trigger:

• Discrepancies indicate potential underreporting of income or overstated input tax credits.

• Misreporting may suggest poor bookkeeping or intentional tax evasion.

How to Mitigate:

• Reconcile sales and revenue figures between your GST/HST returns and income tax returns.

• Regularly audit your internal accounting practices.

• Use accounting software to maintain consistent and accurate records.

3. Significant Changes in Business Activity

A sudden increase or decrease in reported sales or ITC claims can raise suspicions. The CRA may question whether changes in revenue correspond with legitimate business growth or decline.

Why It’s a Trigger:

• Sudden spikes may suggest underreporting in previous years.

• A sharp decline may indicate incorrect reporting or concealment of sales.

How to Mitigate:

• Document the reasons for significant changes, such as new contracts, business expansion, or economic downturns.

• Keep records of major business changes like acquisitions or significant new clients.

4. Industry-Specific Red Flags

Certain industries are more prone to CRA audits, including:

• Construction and contracting

• Restaurants and hospitality

• Retail and cash-based businesses

• Transportation and logistics

Why It’s a Trigger:

• These industries often deal with cash transactions or complex tax structures, making them more susceptible to errors and underreporting.

• The CRA uses industry benchmarks to compare your reported figures with averages.

How to Mitigate:

• Understand the CRA’s industry standards and ensure your reports align.

• Keep meticulous records, especially for cash sales and tips.

• Conduct internal audits to verify compliance.

5. Unusually High Input Tax Credits (ITCs)

Claiming a disproportionately high amount of ITCs compared to your revenue can lead to closer scrutiny.

Why It’s a Trigger:

• High ITCs may indicate personal expenses claimed as business expenses.

• The CRA may suspect fictitious or duplicated invoices.

How to Mitigate:

• Only claim ITCs for business-related purchases.

• Keep all receipts, invoices, and purchase agreements.

• Conduct periodic reviews to ensure proper classification of expenses.

6. Late or Incorrect GST/HST Filings

Filing your GST/HST returns late or making mistakes in your filings can trigger an audit.

Why It’s a Trigger:

• Frequent errors may indicate poor financial management.

• The CRA may investigate whether errors were intentional to reduce tax liability.

How to Mitigate:

• Set reminders for filing deadlines.

• Double-check returns before submission to catch errors.

• Work with a tax professional to ensure accuracy.

7. Unreported Cash Sales

Businesses that operate heavily in cash, such as restaurants and retail, are often scrutinized for unreported cash income.

Why It’s a Trigger:

• The CRA is aware that cash-based businesses may underreport income.

• Reporting significantly lower cash sales compared to industry averages can be suspicious.

How to Mitigate:

• Implement point-of-sale systems that automatically record transactions.

• Regularly reconcile cash registers and bank deposits.

• Train employees on the importance of accurate cash handling.

What Happens During a GST/HST Audit?

If the CRA selects your business for an audit, they will:

1. Send a Notice of Audit: Informing you of the upcoming review.

2. Request Documents: Including sales records, purchase receipts, bank statements, and GST/HST returns.

3. Conduct On-Site Inspections: Inspecting financial documents at your business location.

4. Issue an Audit Report: Outlining any discrepancies, penalties, or additional taxes owed.

How to Prepare for a GST/HST Audit

• Keep Organized Records: Maintain accurate and accessible documentation for six years from the end of the last tax year to which they relate, or longer if under audit or appeal.

• Conduct Self-Audits: Regularly review your GST/HST reporting for accuracy.

• Seek Professional Advice: Work with a tax lawyer to prepare and represent your business during an audit.

Why a Tax Lawyer Can Help

A GST/HST audit can be stressful and financially damaging if not handled correctly. A tax lawyer can:

• Communicate with the CRA on your behalf.

• Prepare responses and gather necessary documentation.

• Negotiate settlements or payment arrangements.

• Represent you during disputes or appeals.

Schedule a free consultation with Rosen & Associates Tax Law today to get expert assistance before or during a GST/HST audit.

***Disclaimer: This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions, you should consult a lawyer.