Let me start with something most accountants would never admit in public.
I got audited.
Me. A CPA who does this for a living. I file my own taxes carefully, I know the rules, and the Canada Revenue Agency still pulled my file. It was over a tax credit, it came down to tracking down some paperwork, and it worked out fine in the end.
I tell you that up front for one reason. If they can audit me, they can audit anyone. And that should actually make you feel calmer, not more scared. An audit is not a sign you did something wrong. It is a sign that something on your return fit a pattern the CRA decided to look at.
So let me answer the question that gives so many of us that little knot in the stomach every spring. How does the CRA actually decide whose file to pull?
Just how closely are you watched? More than you would guess.
Let me give you some numbers straight from the CRA’s own 2026-27 Departmental Plan.
For the coming year, the CRA plans to operate with about 49,500 full-time staff and a budget of roughly 6.3 billion dollars. It processed more than 33 million individual tax returns last year. This is a large, well-funded organization.
Now hold it up against the United States. The American tax agency, the IRS, runs with somewhere around 75,000 to 100,000 staff depending on the year. Sounds bigger, right?
But the United States has about 335 million people. Canada has about 40 million.
Do the math. Canada has roughly one tax employee for every 800 people. The United States has roughly one for every 4,500. So measured per person, the Canadian government watches its taxpayers something like five to six times more closely than the American government watches theirs.
That is not a stretched-thin agency. That is an intensely staffed one. And it is getting sharper, not softer. The same plan says the CRA is now running more than 200 artificial intelligence projects, which are computer programs that learn patterns from huge amounts of data, all aimed at finding the files most worth a closer look.
So how do they aim all of that? They target.
Even with all those people, the CRA cannot personally check 33 million returns. So the real question is how they choose.
And they actually tested it. Years back, they ran random audits against targeted audits and compared the hit rate. The random audits found a real problem only about 12 times out of 100. The targeted audits found one almost 47 times out of 100. Nearly four times better.
Those are the CRA’s own figures from 2010 and 2011. The study is old, I will be upfront about that. But it never stopped mattering, and it almost certainly still shapes how the agency works today. The lesson was obvious. Stop wasting effort on random files. Aim.
And it all runs on one thing. Return on investment.
Here is why targeting matters so much to them.
The CRA runs like a business. Every auditor is a cost. Every hour spent on your file is an hour not spent on someone else’s. So they ask the same question any business owner asks. Where do we get the best return on our money?
And they hold themselves to it with hard targets. In its 2026-27 plan, the CRA set a goal of bringing in 20 billion dollars from compliance work. To see what that looks like in practice, in 2022-23 the CRA completed about 62,660 audits that found 14.3 billion dollars in additional tax owing.
That is the return they are chasing. And because they are this large, this well funded, and under constant public scrutiny over how they spend, the pressure runs in one direction. They have to justify the budget by bringing in more than they cost. Targeting is how they do it.
What this means for you
Now let me walk you through the triggers the CRA actually looks for. I am going to sort them into three sets. The first is for every Canadian. The second is for real estate investors. The third is for business owners, where the biggest reassessments tend to happen.
A trigger is simply something on your return that makes the CRA stop and take a closer look. It is a reason your file gets opened, nothing more. Here is what tends to do it.
Triggers on a personal return
1. Your spending looks bigger than your income.
The CRA calls this indirect verification of income. They look at what you own and how you live, and they compare it to the income on your return.
Say you report 45,000 dollars of income, but you own a 1.4 million dollar home and a new car. The CRA can see that the lifestyle costs more than the income would seem to cover, and they may ask how it is being funded.
The CRA’s own audit manual describes a tool called the net worth method. They estimate your income from your assets and spending, and if there is a gap, they ask you to explain it. The trigger is the distance between visible spending and reported income.
2. You asked for an HST refund.
GST and HST is the sales tax you charge customers. When you buy things for your business, you pay that tax too. An input tax credit is just the sales tax you paid on business purchases that you are allowed to claim back. If the tax you paid out is more than the tax you collected, you are owed a refund, so you ask the CRA for money.
Here is the trigger. The CRA reviews every single HST refund claim before it sends the money. That is their stated policy. They look before they pay.
If you are a first-time filer asking for a sizable refund, expect them to ask to see the invoices behind your credits. So the practical move is to have that paperwork ready when you file.
3. You claimed employment expenses.
This one is common for commissioned salespeople and people who work from home.
To claim most employment expenses, you need a signed form from your employer called a T2200. It confirms your employer required you to pay those costs yourself. Because this is an area the CRA reviews often, claiming these expenses tends to prompt a request to see that signed form and your receipts.
4. You claimed moving expenses.
Moving expenses come with a hard eligibility test, and any deduction with a clear rule attached tends to get checked against that rule.
The test is the 40 kilometre rule. To deduct your moving costs, your new home must be at least 40 kilometres closer to your new work or school than your old home was, measured by the shortest normal public route. Two other things the CRA may verify. You can only deduct moving costs against income you earned at the new location, and if your employer paid for part of the move, you subtract that first.
5. You claimed a tax credit.
This is the simplest trigger of all. A tax credit lowers your tax dollar for dollar, so claiming one is, in plain terms, asking the government for money back. And any time you ask for money back, the request tends to get looked at before it is approved.
Donation credits, medical expense credits, the disability tax credit, tuition credits, the home renovation credits, and education or co-op credits are all common ones. Because a credit puts money back in your pocket, the CRA often asks to see the receipt or the signed form behind it. So keep that paperwork handy. This, by the way, is exactly what I got audited for, and I will tell you that story shortly.
6. Repeated business losses with almost no income.
If you run a small business or a side venture that loses money year after year while bringing in very little, the CRA may ask a simple question. Is this a real business, or a hobby?
The difference matters. A real business is run to make a profit, so its losses are deductible against your other income. A hobby is something you do for enjoyment, and its losses are not deductible at all.
So when a business reports losses every year with almost no revenue and no clear path to ever turning a profit, that is the trigger. The CRA may look at whether it was ever a genuine attempt to make money, or a personal interest being written off against your paycheque.
7. Someone reported you.
This is the one you cannot control by filing carefully, and a lot of people do not know it exists.
The CRA runs a program called the Leads Program. Anyone can use it to report a person or business they believe is not paying their fair share. It is confidential, and the CRA takes consistent tips seriously.
So who reports people? Often it is someone close. An ex-spouse after a hard split. A former business partner. An employee who left on bad terms. A neighbour. You cannot stop that. What you can control is whether your records hold up if it happens.
Triggers the CRA watches in real estate
The CRA has repeatedly named real estate as a high-risk area in its recent plans. And its own numbers show the effort. In a single recent year, April 2024 to March 2025, the CRA completed 14,854 real estate audits and assessed 849 million dollars in extra tax. On top of that, it applied 853 penalties worth about 103 million dollars.
If you divide the total assessed across every file, that averages roughly 57,000 dollars per audit. But that blended number actually understates it for many investors, because the income tax audits alone, the ones most rental owners and flippers fall under, averaged closer to 85,000 dollars per file. That kind of return is exactly what keeps a sector on the CRA’s radar.
8. Several properties sold over a few years, each held only a short time.
This is the trigger behind what people loosely call flipping. Notice it is a pattern, not one sale.
Here is what the CRA sees. You sold a property in 2022. Another in 2023. Another in 2024. Each owned for only a few months. And each time you reported the profit as a capital gain. A capital gain is the profit when you sell an investment, and only half of it is taxed. Business income is the profit when you are really in the business of buying and selling, and all of it is taxed. Same sale, very different tax.
A string of quick sales, one after another, makes the CRA ask which one you really are, an investor or someone running a buy-and-sell business. There is also a federal rule now that treats a property sold within 365 days as business income by default, unless a life event like a death or a job move applies.
9. Moving into homes, selling each for a gain, and claiming each one tax-free.
Your principal residence, the home you actually live in, can be sold completely tax-free. This is one of the most generous breaks in the tax system, and it has been abused for years. That is exactly why, since 2017, the CRA has required you to report the sale of any home on your return, even one that is fully tax-free.
The trigger is when the tax-free sales repeat. Buy a house, move in, sell a year later for a gain, claim it tax-free. Then do it again the next year, and again. Each sale on its own looks fine. The repetition is what makes the CRA ask whether you genuinely lived in each home or were building and selling them.
10. A rental loss that wipes out your employment income.
Here is the real trigger. Your rental loses money on paper, and you use that loss to lower your employment income, which creates a refund. A refund gets attention. A rental loss large enough to erase your salary gets more.
What the CRA really watches for is how the loss was created. The most common issue is a capital expense written off all at once.
A capital expense is a major improvement to the property, like a new roof or a full renovation, that adds lasting value. The rule is you cannot deduct the whole cost in one year. You claim it gradually over time. When someone writes off a big improvement as a single-year expense, it can turn a small profit into a large loss. That is what draws the look.
To be fair, plenty of rentals genuinely lose money right now, mostly because interest rates climbed so high that the mortgage eats up the rent. The CRA knows this. So in recent years there has actually been less audit attention on ordinary rental losses, simply because almost everyone has one. The trigger is not the loss by itself. It is a loss big enough to wipe out your other income, especially one built on a misclaimed improvement.
11. Income that looks small next to the real estate you own.
This is the lifestyle trigger applied to property. The CRA can see the homes you own and the income you report. When someone reports modest income but holds several properties with large mortgages, the CRA may ask how it is all being funded. The gap between visible real estate and reported income is one of the things the CRA notices.
12. Earning your living as a realtor.
This one is not about a single transaction. On its own real estate compliance page, the CRA says realtors are included in its risk-assessed populations, because their main income comes from a high volume of real estate transactions. The profession as a category gets a closer statistical look. If you are a realtor, keep your own filings especially tidy, because you are in a watched group by definition.
Triggers the CRA watches in business
This is where the largest reassessments tend to happen. Much of what follows comes straight from the CRA’s own income tax audit manual and a roundtable the CRA held with accountants.
13. Deductions that look out of line with businesses like yours.
The CRA does not look at your expenses in a vacuum. It compares you to other businesses in your industry, a process called benchmarking. They know roughly what a normal restaurant, trucking company, or consulting firm spends in each category. So if you write off a home office that is a large share of your house, or claim a vehicle that looks like it is also personal, or show meals well above your peers, you stand out from the pack, and a reviewer may want to see the receipts.
14. You run a cash business.
If you operate in a cash-heavy field, like a restaurant, a salon, or a contractor, you are in one of the more closely watched groups, because cash is harder to trace than electronic payments.
Here is what is worth understanding. When the CRA suspects a cash business has missed income, it does not need your books to test it. It uses indirect methods spelled out in its own audit manual. The two main ones are bank deposit analysis, where they add up the deposits into your accounts, and the net worth method, where they estimate income from your assets and lifestyle. Because business and personal money often mix in an owner-run company, the CRA can even ask for the personal bank statements of the owner and the spouse. If they conclude income was missed, they can reassess going back six years instead of the usual three, and add a penalty. For a cash business, clean and complete records are your single best protection.
15. You claimed a business tax credit like SR&ED.
Government credits for business are valuable, and any claim for money back tends to get reviewed. The biggest is SR&ED, which stands for Scientific Research and Experimental Development. It rewards genuine research and development.
When the CRA reviews one of these claims, the thing it most often asks for is documentation, specifically records you created at the time you did the work rather than notes reconstructed later. They want dated logs, results, time records, and emails from the actual period. The work being real is one half. Having the contemporaneous paperwork to show it is the other half. The same logic applies to other government credits, like provincial co-op credits.
The shocking truth most Canadians do not know
Here is the part that catches people completely off guard when they are audited.
When the CRA questions something on your return, the burden of proof is on you. Not on them.
Most people assume taxes work like a courtroom, where you are innocent until the government proves you did something wrong. It is the opposite. When the CRA reassesses you, it makes its assumptions, and then it is your job to prove those assumptions wrong. If you cannot back up your claim with documents, the claim is denied. Full stop.
That is why everything in this article comes back to one thing. Paperwork. The receipt, the signed form, the invoice, the log. You are not keeping records to satisfy some filing rule. You are keeping the evidence you will need if you ever have to prove your own case. Because you are the one who has to prove it.
One more shift. The net is getting tighter.
Here is something most people have not heard about, and it tells you where this is heading.
Since 2023, Canada has rules that require tax advisors to report certain aggressive tax-planning deals to the CRA. They are called the mandatory disclosure rules. If an advisor sets up one of these flagged transactions and does not report it, the penalty can be as high as the entire fee they charged, plus up to 100,000 dollars. The advisor, not just the client, is on the hook. The United States has its own version of this for what it calls reportable transactions.
For a normal business filing a normal return, this changes nothing day to day. But it tells you something. The CRA is no longer waiting for an audit to find aggressive planning. They are asking to be told about it up front.
The honest part
I am not going to tell you there is a trick to become audit-proof. There is not. Even if you do everything right, a small number of files are still picked at random every year. You could be one. That is the cost of a self-reporting tax system.
But here is the good news, and I know it firsthand. If your records are clean and your story is honest, an audit is an inconvenience, not a disaster. You hand over your paperwork. They check it. Life goes on. That is how my own audit went. The people who struggle are the ones who cannot back up what they filed.
Let me show you what that looks like.
When the records do not hold up
Not everyone has that experience.
Let me tell you about someone I know who owns a restaurant. A cash business. And remember what I said about cash businesses being one of the more closely watched groups. That is likely why her file got picked.
The CRA did something that catches a lot of cash-business owners off guard. They asked for her personal line of credit statements. Not her business books. Her personal borrowing.
Why? Because of what they found. She had been depositing cash into her line of credit, and that cash had never shown up as income on her return.
Here is the trap. When you put cash into a bank account or a line of credit, you create a record. The money leaves a footprint. When the CRA adds up the deposits and compares them to the income you reported, the gap is right there in black and white. That is the bank deposit analysis I described earlier. It works because the cash she thought was invisible became visible the moment it touched a bank.
In her case, there genuinely was income that was never reported. So no paperwork could make it go away. The result was tax owing, plus a penalty, plus interest that keeps building from the year it should have been paid. For an amount that piled up over several years, a bill like that does not land in the hundreds or the thousands. It can reach the hundreds of thousands of dollars.
That is the difference. My own audit was an inconvenience because I had nothing to hide and just needed to find paperwork. Hers was far harder, because the income was real and unreported, and no amount of cooperation changes that math.
So hear me on this. The CRA being willing to work with you only helps when the underlying return is honest. Cooperation buys you time and goodwill on the paperwork. It does not erase income that was never reported.
Let me leave you with what I actually believe, because it is not cynical. Making good money and paying your fair share of tax is a good thing. It means you are building something. The goal was never to hide from the CRA or to pay as little as humanly possible. The goal is to report honestly, keep what proves it, and never lose a night of sleep over a brown envelope in the mail. Do that, and an audit is just paperwork.
Next Steps
If you want to make sure your file can stand up to a second look, Book a consultation with my team today. We help everyday Canadians navigate the confusing world of taxes so you can keep more of what you earn.
Until next time, happy Canadian Real Estate Investing.
Cherry Chan, CPA, CA
Your Real Estate Accountant
