What to Do if CRA Audits Your Medical Practice
When a Canada Revenue Agency (CRA) audit letter lands in your inbox, it’s normal to feel a jolt of stress. Your first instinct might be to call the auditor or start emailing documents. Pause. The steps you take in the next 24–72 hours shape the outcome of how far the audit goes, what it costs, and whether penalties are proposed.
As a regulated profession, physicians are generally lower-risk than cash-heavy sectors like hospitality or construction. That’s good news but it’s not immunity. Reviews still happen, often driven by GST/HST classification issues, deposit-vs-revenue mismatches, personal-use benefits, or Personal Services Business (PSB) patterns. The advantage with Dexado is simple: we’re led by an ex-CRA auditor who understands how files are selected, how auditors test, and how to keep scope contained. And most important we focus on audit prevention, the highest-value way to protect your time and your practice.
The first 24–72 hours: set the tone, control the scope
Day 1: Appoint, clarify, organize.
- Appoint a representative and route all communication through them. This prevents casual comments from widening scope.
- Clarify scope in writing: years, accounts, and issues under review. Ask for the initial document request (IDR) in a checklist format.
- Set up your evidence room: a simple folder system (by year → account → document type) avoids version confusion later.
Day 2: Assemble the core package.
Provide exactly what’s requested—clean, complete, and labeled: filed returns and Notices of (Re)Assessment, general ledger, trial balance, bank/credit card statements, physician billing reports (OHIP/private/clinic), and GST/HST returns with working papers. For vehicles, have contemporaneous mileage logs. For home office, document square footage and business use. Resist the urge to overshare—quality beats quantity.
Day 3: Build the response plan.
Create a response tracker listing each IDR item, who owns it, and due dates. If timing is tight, request a reasonable extension with a concrete plan. Keep calls brief and follow with a written summary to preserve the record.
How CRA audits actually unfold
Most medical practice audits follow a predictable flow:
- Initial contact and document request. The auditor outlines scope and requests records.
- Interviews and fieldwork. They test transactions, compare deposits with reported revenue, and review GST/HST classifications and personal-use expenses.
- Proposal letter. If changes are proposed, you’ll receive a detailed letter explaining the auditor’s methodology.
- Representations and resolution. Your representative responds—challenging assumptions, filing corroborating evidence, and proposing precise corrections, if any.
- (Re)assessment or no-change. If reassessed, you may accept, negotiate limited changes, or file a Notice of Objection.
Knowing the cadence lets you prepare evidence proactively instead of scrambling.
Medical-practice hot spots CRA scrutinizes
1) GST/HST on health services and products
Most physician services are exempt, but not everything around your practice is. Cosmetic procedures, product sales (e.g., skincare), and certain non-insured services can be taxable. Small classification errors, repeated over months, compound quickly.
- Example: If $150,000 of cosmetic revenue was treated as exempt in Ontario, uncollected HST is $19,500—plus interest and potentially penalties.
- Point-of-sale mapping: Keep separate codes for exempt services, taxable services, and product sales. Tie POS reports to your GST/HST return working papers.
- Quarterly review: Every quarter, run a quick mapping test—spot-check invoices, ensure taxable items charged HST, and reconcile POS totals to the return.
2) Income matching: deposits vs reported billings
Auditors compare bank deposits to reported revenue. Differences arise from clinic transfers, reimbursed costs, inter-account movements, or timing between OHIP statements and deposits. The defense is a monthly deposit-to-revenue reconciliation that tells the story for unusual inflows (payer, period, purpose). Clear narratives stop a simple query from morphing into a methodology fight.
3) Personal Services Business (PSB) risk for incorporated physicians
If your professional corporation (PC) bills only one clinic, operates under direction and control, and bears minimal risk, CRA may argue you’re an incorporated employee (PSB). Consequences include higher corporate tax, denial of many deductions, and exposure to penalties. Strengthen your position before an audit:
- Contract language that shows independence: right to refuse assignments; control over schedule; ability to substitute a qualified physician; provision of your own equipment or tools where practical; payment per engagement with invoicing; commercial risk for corrections or re-work; ability to work for multiple payers.
- Revenue diversification: pick up per-diem locum shifts at unrelated clinics, occasional OR coverage, telemedicine platforms, medico-legal consulting, or academic/CPD teaching. Even modest third-party revenue helps demonstrate a real business.
- Operational evidence: professional website, your own practice management systems, insurance in your PC’s name, and documented marketing or business development.
4) Shareholder benefits, loans, and personal-use items
Two recurring pain points for professional corporations:
- Shareholder loan account: Best practice—aim for no balance (no “due from” and no “due to”). If a debit balance exists, paper it properly: a written loan agreement, interest at least at CRA’s prescribed rate, and a repayment schedule. Make interest payments annually and record them; issue slips where required. If funds were personal, consider dividends or payroll instead of leaving a lingering loan. Strategically, clearing any debit balance by the corporate year-end or within the following year reduces exposure to shareholder-benefit inclusions. Avoid “round-tripping” repayments (CRA watches for repay-and-reborrow patterns).
- Personal-use benefits: For vehicles, keep contemporaneous mileage logs; for home office, document square footage and business-use percentage. For phones and mixed-use items, set reasonable policies and allocations. Proactive benefit calculations beat CRA estimates.
Why medical practices still get audited - even as a “lower-risk” sector
Regulation and third-party reporting reduce risk, but they don’t eliminate it. Risk-based selection flags anomalies in e-filed returns; random audits exist; and GST/HST reviews are common because classification errors compound with interest. As your earnings rise, lifestyle vs reported income also draws attention. That’s why Dexado emphasizes audit prevention routine reconciliations, documentation standards, and pre-filing checks make your file uninteresting from a CRA perspective (exactly what you want).
If CRA proposes changes: how Dexado responds
A proposal letter isn’t the end it’s the start of formal advocacy. We obtain the auditor’s working papers, test their methodology, and fill gaps with targeted evidence.
- Deposits re-characterized as income? We reconcile to known sources (OHIP/private, clinic transfers, inter-account moves) and document timing differences.
- GST/HST mapping disputes? We walk through codes, invoices, and the medical-exempt criteria.
- PSB allegations? We marshal contractual independence, diversified revenue, and operational indicators of real business risk.
Where an error exists, we propose a precise, supportable correction no open-ended fishing. Clear writing, organized exhibits, and a constructive tone help team leads view your file as reasonable and cooperative an ex-CRA perspective that measurably improves outcomes.
Special case: Net Worth audits (and why they’re so punitive)
When CRA distrusts the books, they may estimate income by measuring changes in assets and liabilities plus living costs. For physicians with investments or multiple properties, this can inflate “income” if assets are misread. Expect scrutiny of:
- Real estate: principal residence vs cottage vs rental; mortgages and renovations.
- Vehicles and luxury items: purchases, leases, and insurance.
- Investments and family structures: non-registered portfolios, family trusts, and Holdcos.
- Large, unexplained deposits: gifts, inheritances, insurance proceeds, or inter-family loans.
Your defense is a meticulous, line-by-line rebuttal: document source of funds (gift letters, wills, loan agreements), correct asset values, and trace flows between corporate and personal accounts (incorporation can blur lines clean tracing is critical). Containing a Net Worth audit early helps avoid gross-negligence penalties.
Your rights during an audit - plain language
You have the right to professional treatment, to be represented, and to reasonable timelines. You have the right to know what’s under review and why. If reassessed and you disagree, you have the right to object.
- Objection timelines: For corporations, the deadline is 90 days from the date on the Notice of (Re)Assessment. For individuals (T1), it’s the later of 90 days from the notice or one year after the normal filing deadline for that year. Missing the deadline complicates things—act early.
- Paying during dispute: For many income-tax disputes, individuals do not have to pay the disputed amount while the Objection is reviewed (interest may accrue). GST/HST is different—payment is often required first, then appeal. We’ll map the cash-flow strategy before you decide.
- Cost-benefit lens: Not every adjustment is worth contesting. We’ll quantify tax, interest, penalty exposure, and odds of success so you can choose between acceptance, negotiation, or Objection with eyes open.
Myth vs Reality
Myth: “If I hand over everything immediately, the audit ends faster.”
Reality: Over-disclosure expands scope. Provide exactly what’s requested—clean, complete, and on time—through your representative.
Myth: “Net Worth audits only hit cash businesses.”
Reality: Any small business, including medical practices, can be assessed with Net Worth if CRA distrusts the records.
Myth: “PSB doesn’t apply to doctors.”
Reality: It can. Contracts, control, and real business risk—not your profession—drive CRA’s analysis.
Prevent the next one: Dexado’s audit-proofing for doctors
The best audit result is the one that never begins. Dexado’s CRA Audit Prevention program is built around repeatable rhythms and modern tooling:
- Monthly deposit-to-revenue reconciliation tied to OHIP and private billing, with a brief narrative for outliers. We provide a one-page template your team can keep up in under 30 minutes.
- GST/HST mapping refresh twice a year to validate POS codes for exempt services vs taxable services/products, with a quick invoice spot-check.
- Shareholder-loan hygiene: aim for a nil balance; if a loan exists, formalize it (agreement, prescribed-rate interest, repayment plan) or convert to dividends/payroll where appropriate.
- PSB risk review: contract tune-up plus pragmatic revenue diversification steps that actually fit your clinic realities.
- Technology for evidence: secure cloud bookkeeping, receipt-capture for expenses, and a mileage-log app to keep personal-use benefits defensible.
- Pre-filing “mock audit” by an ex-CRA auditor: we sample logs, benefits, and GST/HST mapping before CRA does—so your file looks boring (in the best way).
Mini-cases from the field (anonymized):
- PSB flag averted: A PC billing one clinic added periodic locum shifts and rewrote its agreement to clarify independence, invoicing, and substitution. CRA closed the review with no PSB reassessmen
- HST mis-mapping corrected: A cosmetic-procedure stream was being marked exempt. We remapped POS, quantified tax, and negotiated a reduced assessment with interest relief considerations based on prompt voluntary correction.
When to escalate: Notices of Objection and beyond
If a reassessment misses context or misapplies rules, file a Notice of Objection. Strong Objections start with a clean audit record: IDRs, timelines, call notes, and evidence gathered during the audit. We prepare the Objection, marshal facts, and position your case for Appeals. From there, we discuss practical path partial concessions, interest relief requests, or, if necessary, litigation counsel referrals.
A calm close and a clear next step
Audits are disruptive, but they’re not a verdict. With disciplined first steps, focused evidence, and experienced representation, doctors can navigate the process and move on. Whether you’ve just received a letter or you want to audit-proof your medical practice before filing season, Dexado is ready to help bringing an ex-CRA perspective to protect your time, your practice, and your peace of mind.
Call to action: Book a focused consultation. We’ll review your CRA letter, map the first 72-hour plan, identify hot-spots (PSB, GST/HST, shareholder loans), and set a timeline for response and resolution.
References
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- CRA – Keeping Records
- CRA – GST/HST Guidance on Exempt Health Care Services
- CRA – Personal Services Business (PSB) Guidance and Interpretation
- CRA – Taxpayer Bill of Rights
- CRA – Objections and Appeals (Individuals and Corporations)
- CRA – Net Worth Audit Method (Information Circulars/Guidance)
Disclaimer
This article is for educational purposes only and does not constitute accounting, tax, or legal advice. Every situation is unique; obtain advice tailored to your circumstances before acting. Dexado Accounting & Tax Professional Corporation assumes no liability for actions taken based on this content.
