CRA Small Business Audit: Foreign Income and Objection Rights

A CRA audit of your small business can move quickly from routine document requests to a proposed reassessment. That is especially true when the auditor finds foreign bank deposits, overseas investment income, or payments that never appeared on a return. Your best protection comes from three habits: managing the audit carefully, correcting the foreign income picture accurately, and tracking the objection deadline from the date on your notice.

If the CRA reassesses you after an audit, you preserve your rights by filing a notice of objection within the deadline: 90 days from the notice date for a corporation, and the later of 90 days or one year after the filing deadline for most individuals. Missing that window can leave you depending on a discretionary extension.

At Beganyi Law, we see tax disputes from both the corporate and the tax side. Principal lawyer Ladislav Beganyi holds a Master of Taxation from the University of Waterloo and works with business owners and their accountants on reassessments, reorganizations, and ownership changes.

If a reassessment or audit letter is already on your desk, you can arrange a confidential consultation through our contact page or by calling +1 647-977-7749. Remote consultations are available across Ontario.

Key Takeaways

• Treat an audit proposal letter as your last chance to fix the record before a reassessment issues.
• Foreign income must be reported in Canadian dollars, and asset reporting on Form T1135 is a separate obligation.
• Calculate your objection deadline from the notice date, and file through a CRA secure portal when you can.

What Should You Do When a Small Business Audit Begins?

Start by confirming who is auditing you and what years and issues they are reviewing, then control how records leave your business. Most of the leverage a taxpayer has in a dispute is built during the audit, through the documents provided and the explanations given before the CRA issues a notice of reassessment.

Verify the Auditor and Understand the Scope of the Review

A CRA auditor will contact you by mail, phone, or both to set the date, time, and location of the audit. For an on-site review at your business, home, or your representative's office, the auditor will show a valid identification card on arrival. Some files are managed centrally, so your auditor may sit in an office outside Ontario and ask you to send documents.

Before any meeting, ask for the following in writing:

• The tax years and returns under review (T2, T1, GST/HST, payroll)
• The specific issues flagged, such as business expenses, shareholder benefits, or unreported income
• The auditor's team leader name and contact details

The CRA selects audit files through a risk assessment that compares your returns with similar files and with information from other audits. Knowing which risk triggered the review helps your accountant and lawyer focus the response.

Respond to Information Requests and Preserve Business Records

A CRA information request can reach well past your corporate ledger. Auditors may review your personal bank statements and credit card records, records of family members, and records of related corporations or trusts. They may also speak with the employees who make your accounting entries.

Practical steps we recommend:

1. Keep a log of every document provided, the date, and the method of delivery.
2. Use CRA secure upload services, since auditors will not accept records by email.
3. Get a receipt for any original documents the auditor borrows.
4. Answer the question asked. Volunteering speculative explanations creates new issues.
5. Preserve records for at least six years, in electronically readable format if you keep them on a computer.

If records are missing, request copies from banks or suppliers. Failure to provide required books and records is an offence, and gaps slow the audit.

Distinguish an Audit Proposal from an Assessment You Can Dispute

A proposal letter is a draft. It explains the adjustments the auditor intends to make, and you have 30 days to agree or disagree. This is the stage to submit missing documents and written arguments, and to escalate to the team leader if needed.

A notice of assessment or notice of reassessment is the formal CRA assessment. Only that notice starts the objection clock, and an objection filed before it issues may be invalid. If the auditor gives you an estimate of the balance before the notice arrives, paying all or part early reduces interest.

How Does Unreported Foreign Income Affect Your Business and Personal Taxes?

Unreported foreign income exposes you to tax on the omitted amounts, interest, penalties, and a reassessment period that can stay open three years longer than usual. The analysis turns on who earned the income, how it was converted to Canadian dollars, and whether separate foreign asset reporting was missed.

Identify Who Earned the Income and Which Residency Rules Apply

Canadian residents are taxed on world income under the Income Tax Act. The first question is whether the income belongs to you personally, your operating company, a holding company, or a family trust. Owners with layered structures often find that a foreign account was opened personally while the business activity ran through the corporation, which creates attribution and shareholder benefit questions.

Residency matters too. An individual who leaves Canada but keeps residential ties is a factual resident and still reports world income. A treaty can make someone a deemed non-resident. If your structure needs review after an audit, our work on corporate structure in Ontario addresses how ownership choices affect who reports what.

Reconcile Foreign Receipts, Currency Conversions, and Supporting Documents

All amounts for tax purposes must be determined in Canadian dollars. The default is the Bank of Canada rate in effect on the day the amount arose, or the annual average rate for recurring payments. The CRA also accepts rates from providers such as Bloomberg, Thomson Reuters, and OANDA, provided the rate is verifiable and used consistently.

For an audit, build a reconciliation that ties each foreign deposit to its source:

Transfers between your own accounts and loan proceeds are not income, and proving that with paper often removes a large portion of a proposed adjustment.

Separate Foreign Tax Credits from Foreign Asset Reporting

These are two different regimes, and auditors review both.

Foreign tax credits under section 126 reduce Canadian tax where you paid foreign income tax on the same income. The credit is the lesser of the foreign tax paid and the Canadian tax otherwise payable on that income, calculated separately for business and non-business income and by country. Report the gross foreign income; do not net out foreign tax.

Form T1135 applies to Canadian resident individuals, corporations, and certain trusts holding specified foreign property costing more than $100,000 at any time in the year. Property used exclusively in an active business and shares of a foreign affiliate are excluded. Holdings under $250,000 can use the simplified Part A.

Assess Reassessment Exposure, Penalties, and Available Correction Routes

The normal reassessment period extends by three years when income from specified foreign property went unreported and the T1135 was late, missing, or inaccurate. Penalties for a late T1135 start at $25 per day to a maximum of $2,500. Where the failure was knowing or grossly negligent, the penalty becomes $500 per month up to $12,000, and a failure lasting over 24 months can add 5% of the property's cost.

Once an audit has begun on the disclosed issue, the Voluntary Disclosures Program is no longer available for it. Your correction routes then become accurate amended filings, a well-supported response to the proposal, and an objection if the reassessment overreaches.

How Do You File an Objection Before the Deadline?

A valid CRA notice of objection must be filed within the statutory window, state the facts and reasons, and be signed by you or an authorized officer. Getting the deadline and the content right at this stage protects your path to the Tax Court of Canada.

Calculate the Deadline for Individuals, Corporations, and Trusts

The notice of objection deadline runs from the date printed on the notice of assessment, reassessment, or notice of determination:

A self-employed individual whose return was due June 15 counts the one-year period from that date. For corporations, there is no one-year alternative, so the 90 days is firm.

Prepare the Facts, Legal Reasons, Evidence, and Requested Changes

A strong income tax objection reads like a short legal brief. Include:

• Your name, address, daytime phone, and SIN, business number, or trust account number
• The notice date and tax year
• Each disputed issue, the facts, and the provisions or case law supporting your position
• The specific change you want, expressed as an amount
• Copies of supporting documents and your representative's details

Large corporations (taxable capital employed in Canada over $10 million with related corporations) must describe each issue and quantify the relief sought, or they lose the right to appeal that issue later. Documents withheld during the audit and produced only at objection may be sent back to the auditor for a second review.

Submit Form T400A, an Online Objection, or a Signed Letter

You have three filing methods:

1. Online: use "Register my formal dispute" in My Account or My Business Account, or have your representative file through Represent a Client. You receive a case number immediately, and the file reaches an appeals officer sooner.
2. Form T400A, mailed or faxed to the Chief of Appeals at the Appeals Intake Centre in Sudbury.
3. A signed letter setting out the facts and reasons, sent to the same centre.

File a separate objection for each assessment. If the CRA reassesses you after you object, that cancels the original objection, and you must object to the new reassessment.

Request Extra Time Under ITA 166.1 and ITA 166.2

If you missed the deadline, ITA 166.1 lets you apply to the CRA for an extension, filed with the objection itself, no later than one year after the original deadline. You must show you could not act or intended to object within the period, that granting relief is fair, and that you applied as soon as you could.

If the CRA refuses, or does not decide within 90 days, ITA 166.2 allows an application to the Tax Court of Canada within 90 days of the refusal notice. Trying to resolve the issue through an adjustment request is an accepted reason for delay, though relying on it is risky.

Check the Separate Rules for GST/HST Disputes

GST/HST assessments are objected to under the Excise Tax Act, with a 90-day deadline and their own form and portal option. The differences that catch business owners:

• The CRA does not postpone collection on disputed GST/HST.
• You can appeal to the Tax Court if no decision issues within 180 days, compared with 90 days for income tax.
• The Tax Court informal procedure limit for GST/HST is $50,000 in dispute.

What Happens During the Review and After the CRA Decides?

Once filed, your objection goes to an appeals officer who is independent of the audit, and the result is a notice of confirmation, a reassessment, or a vacated assessment. From there you decide whether to accept, appeal to the Tax Court of Canada, or pursue separate relief.

Work with the Appeals Officer and Respond to Further Questions

The CRA appeals officer reviews the file, contacts you or your representative, and discusses the differences. Under the Taxpayer Bill of Rights, you are entitled to an impartial review, and you can request the auditor's report and working papers to see how the reassessment was built.

Respond to every follow-up request by its deadline and through the case number. Many disputes settle at this stage on partial terms, especially where documents prove the character of foreign deposits.

Understand Collection Restrictions and Continuing Interest

For income tax objections, the CRA normally postpones collection on disputed amounts until 90 days after it sends its decision. Exceptions include source deductions, GST/HST, and amounts in jeopardy. Large corporations must pay 50% of the disputed amount up front.

Interest keeps accruing throughout. Paying all or part of the balance stops that growth, and if you have paid and receive no decision within 120 days, you can request a refund of the disputed amount.

Consider a Tax Court Appeal and the Applicable Procedure

A notice of appeal must reach the Tax Court within 90 days of the notice of confirmation or reassessment. You can also appeal if the CRA has not decided your income tax objection within 90 days of filing.

Tax Court decisions can be appealed to the Federal Court of Appeal within 30 days, with July and August excluded.

Distinguish an Objection from a Taxpayer Relief Request

An objection challenges whether the assessment is correct. A taxpayer relief request, made on Form RC4288, asks the CRA to cancel or waive penalty and interest because of circumstances beyond your control, financial hardship, or CRA error. Reassessments processed under taxpayer relief cannot be objected to.

The two routes can run together. The CRA reported average relief processing times of about 16 months as of September 2026, so do not let a pending relief request delay your objection.

Protect Your Position with Coordinated Legal and Accounting Advice

The strongest audit and objection files come from an accountant who rebuilds the numbers and a tax lawyer who frames them against the Income Tax Act. Your accountant reconciles foreign receipts, currency conversions, and foreign tax credit schedules.

Counsel identifies the legal basis for each disputed item, manages communications with the Canada Revenue Agency, and keeps privilege in mind before sensitive explanations go into writing.

We work alongside clients' accountants in exactly this way, through an integrated tax and legal strategy that carries from the audit response through the objection. Disputes often reveal structural problems too.

A personally held foreign account that funds business activity may point to a need for holding company planning or a reorganization such as a Section 85 rollover once the dispute is resolved.

Owners preparing for a sale should treat an open reassessment as a due diligence issue. Buyers will ask about it, and unresolved tax exposure can affect eligibility planning for the lifetime capital gains exemption and the price or indemnities in the purchase agreement.

Frequently Asked Questions

Do I need to report foreign income if I leave the money outside Canada?

Yes. Canadian residents report world income whether or not the funds are brought into Canada, converted to Canadian dollars. If the foreign property cost more than $100,000 at any point in the year, Form T1135 is also required.

Can the CRA review my personal bank records during a corporate audit?

Yes. During a CRA audit, personal bank statements, mortgage documents, and credit card records are treated as records that may relate to the return under review. Auditors can also examine records of family members and related corporations or trusts.

Does asking the CRA to adjust my return preserve my objection deadline?

No. An adjustment request does not stop the notice of objection deadline from running. If you missed the deadline while waiting on an adjustment, you can apply for an extension within one year, but filing the objection on time is far safer.

Can I make a voluntary disclosure after a CRA audit has started?

Not for the issues under audit. The Voluntary Disclosures Program requires that your application be submitted before an audit or investigation begins on the disclosed information against you or a related taxpayer. Unrelated matters outside the audit's scope may still qualify.

Can I appeal if the CRA has not decided my income tax objection?

Yes. Once 90 days have passed since you filed an income tax objection without a decision, you can file a Tax Court appeal. For GST/HST objections, the waiting period is 180 days.

Should my accountant or a tax lawyer help with my objection?

Both, in most audit disputes involving foreign income. Your accountant rebuilds the figures, and a tax lawyer frames the legal arguments, protects privileged communications, and is required to represent a corporation in a General Procedure appeal unless the Court grants leave.

Our corporate lawyer support in Toronto and the surrounding region includes coordinating with your existing accountant from the first audit letter onward.