GST/HST audit: what it means and how to prepare

Why GST/HST audits are separate from income tax audits

Canada's Goods and Services Tax (and the Harmonized Sales Tax in participating provinces) is governed by the Excise Tax Act, not the Income Tax Act. This means GST/HST has its own registration requirements, filing obligations, penalty provisions, and audit procedures. A CRA auditor examining your income tax return is not necessarily the same person who would audit your GST/HST account — these are often separate auditors working from different CRA divisions.

If CRA selects your business for audit, they may conduct both audits simultaneously or at different times. An income tax audit finding unreported revenue will almost certainly trigger a GST/HST audit as well, since unreported revenue likely means unremitted GST/HST. The assessments from each audit are separate and may be appealed separately.

Registration thresholds and obligations

Your business must register for GST/HST if your worldwide taxable sales exceed $30,000 in any single calendar quarter or over four consecutive calendar quarters. Once registered, you must collect GST/HST on taxable supplies, file regular GST/HST returns (monthly, quarterly, or annually depending on your filing frequency), and remit net tax (GST/HST collected minus input tax credits).

Common GST/HST audit triggers

CRA's GST/HST audit risk scores assess businesses based on their industry, size, filing history, and the patterns in their returns. Common triggers include:

• Large input tax credit (ITC) claims: Claiming significant ITCs relative to your revenue, or a large one-time ITC claim in an otherwise stable return, will attract review.
• Persistent refund positions: If your business consistently files for GST/HST refunds (claiming more ITCs than you collect), CRA will verify the claims. Zero-rated exporters and builders often legitimately receive refunds, but CRA scrutinizes these.
• Missing GST/HST registrations: CRA uses third-party data to identify businesses that should be registered for GST/HST but are not. If CRA determines your revenue exceeds the registration threshold and you have not registered, they can retroactively register you and assess net tax from the date you should have registered.
• Industry targeting: CRA periodically conducts targeted audit programs in specific industries: construction, real estate, the new-home builder sector, and the sharing economy (Airbnb, Uber, freelancers) have all been recent focus areas.
• Discrepancies between income tax and GST/HST returns: CRA compares reported revenue on your T2 or T2125 with the taxable sales reported on your GST/HST returns. Large discrepancies — even when explainable — trigger reviews.
• New residential housing: GST/HST on new housing, self-supply rules for builders who live in the homes they build, and HST rebate claims for new housing are heavily audited.

Input tax credit (ITC) issues

Input tax credits are the mechanism by which registrants recover the GST/HST they paid on business purchases. Incorrectly claiming ITCs is one of the most common issues CRA finds in GST/HST audits.

Documentary requirements for ITCs

To claim an ITC, you need a receipt or invoice that meets CRA's documentation requirements. For purchases under $30, a receipt showing the total amount paid is sufficient. For purchases between $30 and $149.99, the receipt must also show the supplier's name (or trade name) and the date. For purchases of $150 or more, the receipt must also show the supplier's GST/HST registration number, a description of the goods or services, and the amount of GST/HST charged. Many businesses miss the registration number requirement — if your supplier is not GST/HST registered and you claimed the ITC, it will be disallowed.

Personal use and 50% rule

You can only claim ITCs for purchases used in your commercial activities. If a purchase is used partly for business and partly personal (a vehicle, a home office), you can only claim the business-use proportion as an ITC. For meals and entertainment, the 50% limit that applies for income tax purposes also applies to ITCs — you can claim only 50% of the GST/HST paid on eligible meals and entertainment.

Timing of ITC claims

ITCs generally must be claimed within four years of the filing deadline for the return in which you were first eligible to claim them. Missing ITCs cannot be claimed indefinitely — if you have unclaimed ITCs from several years ago, check whether you are still within the four-year window.

ITCs on capital property

The rules for ITCs on capital property (assets used in your business worth more than $1 million, called "capital real property") are more complex and may require adjustments if your use of the property changes. A CPA or tax lawyer familiar with GST/HST should review significant capital property acquisitions.

Exempt vs. taxable supplies

Not all supplies are taxed the same way under the Excise Tax Act. Understanding the difference between taxable, zero-rated, and exempt supplies is fundamental to getting your GST/HST right.

Taxable supplies

Most goods and services provided in Canada are taxable supplies, subject to 5% GST or the applicable HST rate in your province. If you are a registrant and you make taxable supplies, you collect GST/HST and can claim ITCs on your inputs.

Zero-rated supplies

Zero-rated supplies are technically taxable at a rate of 0%. They include most basic groceries, prescription drugs, medical devices, and exports of goods and services. As a supplier, you charge 0% GST/HST on zero-rated supplies, but you can still claim full ITCs on the inputs used to make those supplies — making zero-rated suppliers often eligible for refunds.

Exempt supplies

Exempt supplies are not subject to GST/HST at all. Common examples include most financial services, residential rent (long-term), health care services, child care, and most educational services. If you make exempt supplies, you do not charge GST/HST — but critically, you also cannot claim ITCs on the inputs used to make those supplies. Businesses that make a mix of taxable and exempt supplies must apportion their ITCs.

Misclassification risks

A common audit issue arises when a business misclassifies a taxable supply as exempt, fails to charge GST/HST, and does not remit what should have been collected. CRA can assess the business for the unremitted GST/HST even if the business never collected it from customers. Real estate transactions, health-related services, and financial products are areas where classification errors frequently occur.

Audit process and timeline

A GST/HST audit generally follows the same stages as an income tax audit, but the focus areas differ:

1. Notification: CRA sends an audit notification letter identifying the GST/HST reporting periods under review and requesting records.
2. Records review: The auditor reviews your GST/HST returns, supporting ledgers, sales invoices, purchase invoices, and bank statements for the periods selected.
3. Proposal: If the auditor identifies discrepancies — unremitted GST/HST, disallowed ITCs, or misclassified supplies — they issue a proposal letter detailing the proposed adjustments.
4. Response: You have an opportunity to respond to the proposal with additional documentation or explanations.
5. Notice of Assessment: If the auditor proceeds, CRA issues a Notice of Assessment under the Excise Tax Act, separate from any income tax assessments.

Timeline: A GST/HST correspondence audit may resolve in 2–3 months. A comprehensive field audit covering multiple years can take 6–18 months.

Penalties and interest

Late filing penalties

If you file your GST/HST return late and owe a balance, you will be assessed a late-filing penalty. The penalty is 1% of the balance owing, plus 0.25% per month for a maximum of 12 months (total maximum 4%). Repeat late filers face higher penalties.

Gross negligence penalties

CRA can assess a gross negligence penalty equal to 25% of the net tax owing if they determine that false statements were made knowingly or with gross negligence. This is in addition to the tax owing and interest.

Interest

Interest accrues daily on unpaid GST/HST balances at the prescribed rate (the Bank of Canada rate plus 4%). Interest is compounded daily and is not tax-deductible. CRA interest rates are adjusted quarterly and can be significant for large balances over extended periods.

Directors' liability

One feature of GST/HST law that does not apply the same way in income tax is directors' liability. Directors of a corporation can be personally liable for a corporation's unremitted GST/HST if the corporation cannot pay. This is a significant risk for owner-managers of small corporations — your personal assets can be at risk if your corporation fails to remit GST/HST. Due diligence is a defence: if you took reasonable steps to prevent the failure, you may avoid personal liability.

Voluntary remittance

If you realize your business has collected GST/HST but failed to remit it, or has incorrectly claimed ITCs, the best course of action is generally to correct the error proactively. Options include:

Amend your GST/HST return: For errors in recent reporting periods, you can file an amended return to correct the error. This will generate a balance owing plus interest from the original due date, but avoids the complication of an audit assessment.

Voluntary Disclosure Program: For more serious issues — significant unreported revenue, multiple years of non-compliance, or failure to register — CRA's Voluntary Disclosure Program (VDP) may provide relief from penalties and partial interest relief. See our Voluntary Disclosure guide for eligibility requirements and the application process.

Being proactive — correcting errors before an audit begins — consistently results in better outcomes than waiting for CRA to find the issue. If you are uncertain whether your GST/HST reporting is correct, a CPA who specializes in indirect taxes can review your compliance and identify any issues before CRA does.