There are four principle ways the CRA select income tax returns for audit and review:
When you file your income tax return, it is recorded and filed in the CRA’s computer system. The CRA’s computer system then generates a list of taxpayers to be audited. Sometimes the audit list is random. Sometimes it is based upon a matching the information you reported in your tax return with information reported by others. Sometimes the audit list is based upon whether you claimed a particular type of deduction or tax credit. Sometimes the audit list is based upon comparison of financial information between taxpayers in similar businesses or occupations.
Accordingly, regardless of the fact that your return might be simple and straight-forward and regardless of how cautious and diligent you and your accountant were in preparing your tax return, you may still be selected for an audit.
The CRA undertakes audits where it decides to focus on a particular group or industry, either on a local, regional, or national basis. It does not matter what you reported in your income tax return or how diligent you and your accountant were in preparing your tax return, if you are part of the particular group or industry selected for an audit project by the CRA, you will be subject to audit.
The CRA also selects taxpayers for audit because of their association with others. For example, if you carry on business through a corporation and your corporation is selected for audit, the CRA will often choose to audit your personal income tax return at the same time. If you are a member of a partnership and the CRA has chosen to audit the partnership or one of your partners, the CRA will generally audit you as well.
The CRA relies on audit tips and leads from other taxpayers or from other audits or investigations. Some of the best audit leads the CRA receives are from former spouses or partners, former employees, or even jealous neighbours. Audits that arise from calls to the CRA’s TIPS telephone line are often some of the most time consuming and expensive for a taxpayer given that the CRA believes it has a credible source of inside knowledge about you.
For more information on how the CRA selects tax returns for audit, please see:
Individuals: http://www.cra-arc.gc.ca/tax/individuals/topics/income-tax/reviews/selec...
Businesses: http://www.cra-arc.gc.ca/tax/business/topics/life-events/audit/select-e....
or go to the CRA’s website at www.cra-arc.gc.ca and search “Audit Selection”.