Taxes London Ontario: How to Prepare for a CRA Audit 46579

If you live or do business in London, Ontario, a Canada Revenue Agency audit is not a remote possibility. It is a routine part of the tax system, and it is more manageable than most people think once you understand how the CRA approaches risk and what kind of records stand up to scrutiny. Over the years, I have sat with London ON entrepreneurs, tradespeople, retirees, and salaried professionals at every stage of the audit cycle. The common threads are consistent record keeping, timely responses, and calm, informed advocacy. The missteps are just as predictable, and most are avoidable.

This guide brings together that lived experience with the CRA’s published procedures to help you prepare before an audit, respond effectively if you receive a letter, and protect your position after the file is closed. I will use examples from the kinds of files that come up frequently in London - independent contractors on T4A slips, small corporations in construction and hospitality, medical professionals with professional corporations, and families with rental properties near Western and Fanshawe.

What triggers CRA attention in London, and what does not

The CRA uses a combination of risk models, random selection, and referrals. In practical terms, three patterns lead to more calls than others in this region. First, cash-intensive businesses such as restaurants, salons, and home renovation outfits tend to attract verification of sales and payroll remittances. Second, rental losses claimed for multiple years invite a closer look at whether the activity is a business or a hobby, and whether capital and current expenses were properly separated. Third, automobile expenses and home office deductions that are out of line with income in similar industries are low hanging fruit for adjustments.

Not every large expense is a red flag. If you are a corporate tax accountant London clients rely on for year end support, you already know that documentation, not the size of the deduction, decides whether it survives. A physiotherapy clinic can legitimately claim significant equipment and leasehold improvements in year one. A contractor can claim fuel and repairs well above the average if the logs, invoices, and job sites match. The CRA is less concerned with your totals than with whether you can prove them.

The letters that matter, and how to read them

Most interactions begin with a notice, and the type of letter tells you a lot about the scope. A pre-assessment review hits in the spring and targets a specific claim such as tuition, medical, or donations on your income tax London Ontario return. A post-assessment review arrives later and can touch multiple lines on the return. An audit letter is more formal, assigns an auditor, names the tax years, and lists categories like sales, purchases, payroll, shareholder loans, or GST/HST input tax credits.

Timelines are often short, ten to thirty days. If you cannot gather everything on time, call or write right away to request a reasonable extension. It helps to be specific. Say you need two weeks to obtain backup from your bank and landlord, and propose a new date. Polite written communication becomes part of the file and sets a cooperative tone.

Building an audit-proof file before anyone asks

Life is easier when your records are audit ready by default. In my practice, the strongest files share the same habits. Bank accounts are separated between business and personal activity. Sales are recorded daily or weekly, not when the accountant asks for year end. Receipts are captured at the source, then categorized consistently. Payroll is reconciled monthly, not only at year end. And the bookkeeping is performed by someone who understands what counts as supporting documentation.

A digital system works as long as it is disciplined. A shoebox works too if it is organized. The CRA does not dictate software. It asks whether your records are complete, reliable, and available. If you use cloud software, ensure exportable backups. If you scan, keep readable images with dates and vendor names. If you pay with e-transfer, match the payee to an invoice or job. For anyone searching for bookkeeping London Ontario help, that discipline is what separates a clean review from a drawn out audit.

The core documents the CRA expects to see

Auditors begin with the bank, then tie the numbers to source documents. For unincorporated businesses and smaller corporations, you should be able to produce at least the following. Keep everything for six years from the end of the last tax year to which they relate.

Bank and credit card statements for all accounts used, with annotated deposits and transfers where necessary Sales records: invoices, point of sale summaries, contracts, and cash register Z-tapes, matched to deposits Purchase records: vendor invoices, receipts, statements, and proof of payment Payroll records: time sheets, T4 summaries, ROEs, PD7A remittance forms, and WSIB filings if applicable GST/HST records: filed returns, ITC support, and a reconciliation from sales and purchases to line totals

That list looks simple on paper. In practice, the reconciliation ties everything together. Your revenue per the general ledger should match sales reported on the HST return, which should tie to the bank deposits after adjusting for fees and timing. If you run seasonal crews in construction, your payroll per the books should tie to the PD7A forms in each remittance period. If you track shareholder advances, the loan balance on the T2 return should match the notes in the financial statements and the ledger account, with a reasonable plan for repayment to avoid a deemed dividend under section 15(2).

Special attention items in common London files

Automobile expenses: The CRA wants a log. Perfect is rare, but reasonable is required. I have seen auditors accept reconstructed logs built from calendars and job sites when the client made a good faith effort. The arithmetic matters. If your business mileage for the year is 24,000 km and your total is 32,000 km, your business-use percentage is 75 percent before personal-use benefits. Keep insurance, fuel, maintenance, financing charges, and lease payments. For corporations, track taxable benefits on the T4 and ensure they agree with the log.

Home office: A deduction is available when you meet clients at home or the home office is your principal place of business. Calculate the percentage by square footage used exclusively for business. Shared spaces complicate the math. Keep utility bills, property tax statements, and rent. Claim repairs only for the office area unless it is a repair that clearly affects only that space.

Meals and entertainment: Only 50 percent is deductible in most cases, and not at all if the primary purpose was personal. Write the client name, date, and business purpose on the receipt right away. Auditors look for a pattern of meals on weekends and vacations without context.

Contractors versus employees: Construction and gig-economy files accounting service options London draw attention here. If your subcontractors work under your direction, use your tools, and have no risk of loss, the CRA may argue they are employees. Keep written contracts, WSIB clearances, proof accounting firms near London of commercial insurance, and evidence of independent business activity to support your position. A reclassification can trigger CPP and EI assessments and penalties.

Rental properties: Separate capital expenditures from current repairs. A new roof is capital, not an expense. Repainting is usually current. Keep leases, rent ledgers, and a reconciliation of rent deposits to bank statements. For student rentals near Western University, vacancy periods around May and August are common, but you should still show advertising and attempts to lease to support any losses.

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