The questionnaire looks administrative, so most owners treat it that way. It is actually a risk-scoping instrument, and the answers you give in the first fortnight usually decide which years get opened and how far the review reaches.
Key Takeaways
- The questionnaire arrives before any document request because it is cheaper than fieldwork.
- Personal spending questions exist to test declared income against your actual cash needs.
- Unlisted non-taxable money, such as gifts or loans, gets treated as income you failed to declare.
- You must answer proper questions, but you are never required to speculate or build documents that do not exist.
- Answers that conflict with your filed returns widen the file faster than missing receipts do.
Why an Audit Starts With a Questionnaire
Fieldwork is expensive. Questions are not. So a CRA auditor opens most files by sending a contact letter with a questionnaire attached, then reads the answers before deciding how much of their own time your file deserves.
The document does three jobs at once. It confirms what CRA already holds from slips, third-party filings and prior returns. It surfaces inconsistencies between your description of the business and what the numbers say. And it fixes the scope, because a business the owner describes as cash-heavy with informal record keeping attracts a very different plan from one that runs on cloud bookkeeping with a bookkeeper on staff. The Canada Revenue Agency’s own overview on canada.ca, What you should know about audits, describes this selection and planning stage in general terms.
One thing the questionnaire is not: a legal demand. It is an administrative request. The compelling power sits elsewhere in the Income Tax Act (ITA), which matters when you need more time or need to push back on a question.
Four Questionnaires That Arrive With an Audit Letter
They are not interchangeable. Identify which one you are holding before you write a word.
| Questionnaire | Who receives it | What it is really testing |
|---|---|---|
| General business or corporate | Corporations and sole proprietors under field review | Structure, related parties, who keeps the books, what software, where records live |
| Personal living expenses | Owner-managers, cash-intensive trades, income-verification files | Whether declared income can fund the household it apparently supports |
| GST/HST refund or pre-assessment review | Registrants claiming sizeable input tax credits | Whether the claimed inputs relate to real commercial activity |
| Expense or credit verification | Employees and individuals in a processing review | Whether a signed T2200, invoice or receipt actually supports the deduction claimed |
A fifth type shows up on cross-border files, asking about days in Canada, property, dependants and ties, to settle residency before anything else is examined.
What Lifestyle Questions Tell the CRA About Unreported Income
The personal expenditure form reads as an intrusion. Mortgage or rent, groceries, utilities, vehicles, insurance, travel, tuition, credit card payments, cash on hand at the start and end of each year. Owners often refuse on principle, then answer badly under pressure.
Understand what it builds. Every dollar leaving your household is an application of funds. Every dollar arriving is a source. If the applications exceed the sources you declared, the difference is presumed to be income you did not report, and the burden of explaining it lands on you rather than on CRA.
That makes the non-taxable inflows the most valuable lines on the page: gifts from family, an inheritance, an advance on a shareholder loan, proceeds from selling a personal vehicle, a TFSA withdrawal, a mortgage refinancing. None of them are income. All of them close the gap. Leave them off and the arithmetic runs against you.
What the gap costs. A Vaughan contractor reported $78,000 of net business income for 2023. His completed form showed $61,000 of household spending, $42,000 of mortgage payments, and two financed vehicles at $1,150 a month, roughly $117,000 of applications. Against $78,000 declared plus a $9,000 refund, the worksheet showed a shortfall near $30,000. He had received a $35,000 advance from his father that year, but no line invited it and he did not add one. Documenting that transfer afterwards took four months and a copy of an overseas bank draft. Had he written one sentence and attached the draft at the outset, the file would have closed on the first pass.
Here is a pattern worth knowing. In our experience the personal expenditure form is requested before the general ledger, not after. The sequence is deliberate: your own description of your spending is easier to test than your bookkeeping, and it hands CRA a benchmark against which to read the ledger when it finally arrives.
Indirect Verification of Income: When Books and Records Are Not Enough
When answers do not reconcile, or when books and records are incomplete, CRA switches to indirect verification of income. Rather than adding up your sales, it reconstructs what your income must have been. Four methods dominate:
- Net worth. Assets minus liabilities at the start and end of a period, plus living costs, less non-taxable receipts, equals income.
- Bank deposit analysis. Every deposit across every account is treated as revenue until you identify it as something else.
- Source and application of funds. The cash-flow version of the net worth calculation, run year by year.
- Projection. Sales rebuilt from input costs and industry margins, or household spending compared against Statistics Canada averages.
All four produce an assessment that is presumed correct until you displace it. That is the part owners underestimate. Once a deposit lands on the auditor’s schedule, proving it was a loan repayment, a gift from family or a transfer between your own accounts is your job, and bank records older than six years are frequently gone. Our guide to the types of CRA audits covers how a net worth review differs from a routine desk check.
What You Must Answer, and What Is Simply Additional Information
The obligation is real. ITA 231.1(1) lets an authorized person require you to give all reasonable assistance and to answer all proper questions relating to the administration of the Act, either orally at a designated place or by video-conference, or in writing in the form specified. Refusing outright is not a strategy.
The limits are equally real:
- A question must be a proper question, meaning it relates to administering or enforcing the Act. Curiosity about a relative’s business is not.
- You supply documents that exist. You are not obliged to create analysis, schedules or summaries that were never part of your records.
- You give facts. You do not give legal opinions about your own position, and you should never guess when the honest answer is that the records do not show it.
- Solicitor-client privilege is protected. Communications with your accountant are not privileged in Canada, so working papers and emails are reachable.
Two decisions mark the edges. In BP Canada Energy Company v. Canada (National Revenue), 2017 FCA 61, the Federal Court of Appeal refused CRA routine access to tax accrual working papers, holding that the Minister cannot enlist taxpayers to reveal the soft spots in their own returns. And in R. v. Jarvis, 2002 SCC 73, the Supreme Court held that once the predominant purpose of an inquiry becomes the determination of penal liability, audit powers can no longer be used to gather evidence. Questions that shift from what happened to what you knew and intended are a signal worth taking seriously, particularly where gross negligence penalties are already on the table.
How to Answer a CRA Audit Questionnaire Without Widening the Scope
Order matters more than eloquence. Work through it like this:
- Confirm in writing which years, entities and taxes are under review before answering anything.
- Answer in writing, even where the request arrives by phone, so a record exists on both sides.
- Respond to the question asked rather than the question you suspect sits behind it.
- Write “the records do not show this” where that is true, and never estimate to appear cooperative.
- List every non-taxable inflow with supporting proof attached, adding lines the form does not provide.
- Reconcile your answers against the filed returns before sending, because contradictions cost more than gaps.
- Request extra time in writing rather than sending a rushed, partial package.
- Keep a dated copy of exactly what you submitted, including attachments.
Creators and online sellers face a variation on this, since platform reporting means CRA often arrives already holding gross revenue figures. Our guide to creator and platform audits covers how those files open.
When a Taxpayer Should Stop Answering and Call a CPA
Some questions are ordinary. Others are the file changing shape. Escalate when you see any of these:
- Questions reaching into a spouse’s, partner’s or adult child’s finances.
- Questions about what you knew, believed or intended, rather than what occurred.
- A request for personal bank statements when the review was opened as a corporate one.
- An invitation to attend an in-person or video interview to answer questions orally.
- A second questionnaire repeating ground you already covered, which usually means your first answers did not reconcile.
Across the owner-managed files we represent, the single most common avoidable error is not a missing invoice. It is a questionnaire answered quickly, from memory, without checking it against the returns already filed. That mismatch is what converts a narrow review into a multi-year reassessment. If you want context on which sectors are drawing attention right now, see where CRA is focusing audit activity this year.
Frequently Asked Questions
How do I know if CRA is auditing me or just reviewing my return?
A processing review asks you to support one or two specific claims on your tax return and usually names a single line number. An audit, by contrast, names an assigned officer, identifies the years and entities under examination, and arrives with a questionnaire. The presence of a named officer is the clearest signal.
Do I have to answer a CRA questionnaire?
You must answer proper questions and provide reasonable assistance under ITA 231.1. You are not required to speculate, create documents that do not exist, or offer legal conclusions about your own filings. Answering carefully is a far better position than declining to answer.
Does CRA look at my personal bank account during a business review?
It can, and it routinely does where income appears understated. Personal accounts are how owner-managers actually receive money, so deposits there are treated as potential revenue until you identify each one. Third-party requirements can also be sent directly to your bank.
How long do I have to respond to an audit questionnaire?
Letters commonly allow 30 days, though the period is administrative rather than statutory. Extensions are usually granted when requested in writing before the deadline and paired with a specific new date. Silence, by contrast, escalates the file quickly.
Should my accountant answer the questionnaire for me?
A representative can respond on your behalf once authorization is on file, and that is generally the better route. Your accountant knows what the filed returns actually say and can catch a contradiction before it reaches CRA. Communications with them carry no privilege, so accuracy still governs.
Can answering a questionnaire make the audit bigger?
Yes, and this is the main risk. Inconsistent answers, unexplained personal spending and omitted non-taxable receipts all justify expanding the years or entities under review. Consistency with what you already filed is the single most protective quality your answers can have.
The Bottom Line
Treat the questionnaire as the most consequential document in the file, because it usually is.
- Identify which questionnaire you received before drafting anything.
- Account for every non-taxable dollar that funded your household.
- Answer facts, decline to guess, and never create analysis you do not have.
- Reconcile your answers to your filed returns, then keep a dated copy of the package.
How much detail a given question actually requires depends on what CRA already holds, which years are open and how your records were kept, so a first response is worth reviewing before it goes out. Our CRA representation team handles these responses from the initial letter onward. If a questionnaire is already sitting on your desk, get in touch before the deadline rather than after it.
