How to Respond to a CRA T2 Audit Letter — 9 Steps (2026)

Receiving a CRA audit letter for your corporation is not a crisis if handled correctly — but a poor response can turn a routine review into a multi-year reassessment, penalties, and directors’ personal liability. This 9-step guide walks Ontario owner-managers through the CRA T2 audit response process Bader uses in 2026, from the initial letter to Notice of Objection or Tax Court election. Do not answer CRA directly — every substantive response should go through your CPA and, if needed, tax lawyer.

1. Step 1: Read the letter carefully and identify what CRA is asking for

   Identify: (a) the CRA officer’s name, division (Audit Division typically), phone, and file number; (b) the tax years and returns under review; (c) the specific items requested (T2 supporting schedules, general ledger, source documents, contracts); (d) the response deadline (usually 30 days but often extendable); and (e) whether the letter is a Notice of Proposed Assessment (formal, requires 30-day response to avoid statutory reassessment) or an audit inquiry (informal, more flexible). Do not respond to any substantive question yet.

2. Step 2: Grant your CPA and/or tax lawyer authorization to represent you

   Complete Form AUT-01 Authorize a Representative to give your CPA authority to communicate with CRA about the audit. Submit via CRA My Business Account or through your CPA’s Represent a Client (RAC) portal. For sensitive audits, also engage a tax lawyer under solicitor-client privilege — communications between you and your lawyer are privileged, communications with your CPA are not.

3. Step 3: Request an extension if needed and confirm scope in writing

   Contact the CRA auditor within one week to (a) acknowledge receipt, (b) request an extension of 30-60 days if the request is complex, and (c) confirm in writing the exact scope of the audit — tax years, returns, and specific issues. Extensions are usually granted for reasonable requests. Confirming scope prevents “scope creep” into unrelated years or issues.

4. Step 4: Assemble the T2 audit binder — organized, complete, minimal

   For each year under review, assemble in a labelled binder: (a) filed T2 return with all schedules, (b) audited or reviewed or NTR financial statements, (c) general ledger and trial balance, (d) source documents supporting the items CRA specifically asked about (contracts, invoices, board resolutions), (e) tax-planning memos for material transactions (s.85, s.86, s.88, s.55, LCGE crystallization), and (f) prior-year working papers. Do not include anything CRA did not ask for.

5. Step 5: Review each response for privilege, accuracy, and consistency

   Before delivering, review every document for: (a) solicitor-client privilege (lawyer memos — do not include), (b) accuracy (any error becomes evidence), (c) consistency with prior-year filings and with the current-year T2, and (d) responsiveness (address what CRA asked, no more). If any material inconsistency exists, discuss with your CPA before disclosing.

6. Step 6: Deliver the response in writing and document the transmission

   Deliver the response package via CRA secure messaging in My Business Account (preferred), courier with tracking, or in-person delivery with acknowledgment. Send a covering letter listing every document included and confirming the response is complete. Retain the transmission proof for at least seven years.

7. Step 7: Attend the audit interview only with your CPA or lawyer present

   CRA may request an in-person or virtual interview with the taxpayer, director, or controller. Never attend alone. Prepare with your CPA the day before covering the likely questions. Answer only what is asked. Do not speculate, do not volunteer new information. If a question is unclear, ask CRA to rephrase in writing.

8. Step 8: Review the Proposal Letter and prepare rebuttal or negotiation

   After field work, CRA typically issues a Proposal Letter setting out proposed adjustments. Review each proposed adjustment with your CPA. Prepare a written rebuttal citing the Income Tax Act, CRA Folios, Interpretation Bulletins, and case law where applicable. Negotiate on facts and law — not on emotion or fairness. Many proposed adjustments are withdrawn or reduced through a well-supported rebuttal.

9. Step 9: File a Notice of Objection or proceed to Tax Court if reassessed

   If CRA issues a Notice of Reassessment you disagree with, file a Notice of Objection using Form T400A within 90 days of the reassessment date. This preserves your right to Tax Court appeal. During objection, the reassessed tax is not required to be paid for CCPCs. If Appeals confirms the reassessment, appeal to Tax Court within 90 days of the confirmation. Engage a tax lawyer for Tax Court proceedings.

Frequently Asked Questions

Should I call the CRA auditor directly?

No. Every substantive communication should go through your CPA under AUT-01 authorization, or your tax lawyer under solicitor-client privilege. Direct communication with CRA increases the risk of unintentional admissions.

What is the deadline to respond to a CRA audit letter?

Typically 30 days from the date of the letter for informal audit inquiries; strict statutory 90 days for a Notice of Objection following a reassessment. Extensions to the 30-day audit response are usually granted on reasonable request.

Can I skip the objection stage and go straight to Tax Court?

No. The Notice of Objection is a mandatory prerequisite to Tax Court under s.169 of the Income Tax Act. File Form T400A within 90 days of the reassessment.

Does the audit reassessed tax need to be paid before objection?

For CCPCs, half of the reassessed amount is generally not collectible during objection (subsection 225.1(1)). For large corporations, full payment or acceptable security may be required. Interest continues to accrue on unpaid amounts.

How long does a CRA T2 audit take?

Simple audits (single-issue review): 3-6 months. Multi-year comprehensive audits: 12-24 months. Appeals if objected: 12-36 additional months. Tax Court appeals: 18-48 months. Total dispute lifecycle can exceed 5 years for complex reassessments.

Authoritative Sources

• CRA — Corporate income tax audit
• CRA — Form T400A Objection Income Tax Act
• CRA — Form AUT-01 Authorize a Representative

Expanded technical guidance

Common pitfalls in responding to a CRA T2 audit letter

• Missing the 30-day response window. Most CRA T2 audit letters demand a response within 30 days. Missing this triggers a proposal letter and formal reassessment — engage a CPA immediately on receipt.
• Providing raw source documents without context. Dumping bank statements without a reconciliation memo invites CRA to interpret ambiguously. Always package documents with a clear supporting narrative.
• Failing to invoke the audit protocol. Under CRA’s Taxpayer Bill of Rights, taxpayers are entitled to be represented, to have questions in writing, and to have a reasonable time to respond. Document CRA’s requests and your responses in writing throughout.

Forms, filings, and deadlines

The T2 audit typically begins with an Information Request Letter (IRL) or Query Letter — no formal form; response deadline stated in letter (usually 30 days, sometimes 60). If CRA proposes reassessment, they issue a Proposal Letter giving another 30 days to respond before formal Notice of Reassessment (NORA) issues. Objection deadline: file T400A Notice of Objection within 90 days of NORA date. Companion documents: audit engagement letter with CPA/lawyer, taxpayer’s written response memo, supporting schedules, and any expert opinions (valuation, industry expert). Reference: ITA s. 152 (assessment authority), s. 165 (objections), s. 231.1 (audit powers), CRA Information Circular IC71-14R4 (The Tax Audit).

Worked example — WIP/holdback recharacterization

Construction Ltd. showed $2M work-in-progress at fiscal year-end under IFRS 15. CRA proposed converting WIP to accrued revenue, adding $1.4M to income → $370K in proposed tax. Response memo cited s. 12(1)(b) proper timing of income recognition + s. 34 professional exclusion for accrued but unbillable amounts. Result: CRA withdrew proposal after 2 rounds of correspondence. This mirrors the Mr. Z construction case study outcome.

Worked example — related-party expense reasonableness

CRA proposed disallowing $180K in management fees paid by Opco to Holdco under s. 67 reasonableness test. Response: benchmarking study showing comparable arm’s length management fees at 8-12% of revenue; Opco’s fee at 10.5% within range. Attached: engagement letter documenting scope of Holdco services, time logs, deliverables. CRA accepted; no adjustment.

Worked example — asset classification for CCA

CRA proposed reclassifying $340K in Class 8 (20%) equipment as Class 10.1 luxury vehicles (30% + $36K ceiling). Response cited detailed purpose-of-use analysis + manufacturer specifications + industry usage documentation. CRA accepted Class 8 for 4 of 5 assets; 1 asset reclassified. Net adjustment $12K vs proposed $85K.

Related Insight resources

Corporations facing a CRA audit letter should also review Bill C-31 CRA audit powers which expanded CRA’s information-gathering authority in 2024. See the Mr. Z construction WIP/holdback case study for a $185K proposed adjustment cleared through audit defence. For rental portfolios facing an active-vs-property income reclassification, the Ms. D landlord case study preserves $92K in CCA claims.