Healthcare Tax Guide · Ontario · Licensed CPA

Healthcare CRA Audits: Why Practices Get Selected and What Happens Next

What draws the CRA to a medical, dental or clinic practice, the HST and shareholder loan errors that account for most assessments, what an auditor asks for, how revenue is verified against OHIP and third-party records, and how to respond so the scope does not widen. Written by a licensed Canadian CPA.

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Healthcare practices are audited because they are high-income, their revenue is independently verifiable against OHIP and third-party payer records, and they share a small number of predictable errors: input tax credits claimed against exempt revenue, shareholder loans that never clear, family salaries that cannot be supported, and personal costs in the practice. Most assessments trace back to treatment that was wrong from the start, not to a judgment call that went badly.

Why Practices Get Selected

A medical or dental practice is an attractive audit target for reasons that have nothing to do with the practitioner's honesty. The income is high, so an adjustment is worth making. The revenue is independently verifiable, because OHIP and third-party payers already report what they paid you. And the corporate and personal returns are tightly linked, so one thread pulls several.

Selection is largely comparative. The CRA knows what expense ratios look like across a specialty, and a practice sitting well outside that range invites a question. So does a large shareholder loan, a sudden change year over year, family members on payroll, or HST claimed by a practice whose revenue is mostly exempt. For the wider picture please see our healthcare CPA services.

The Errors That Account for Most Assessments

Issue	What Goes Wrong	Why It Is Found
Input tax credits on exempt revenue	HST recovered on costs of an exempt practice	Registration and exempt billings are both visible to the CRA
Mixed practice apportionment	Full ITCs claimed where only part of the revenue is taxable	The taxable and exempt split does not support the claim
Shareholder loans	Draws accumulate, balance never cleared in time	It sits on the balance sheet in plain view
Family salaries	Pay well above market for minimal or undocumented work	No records of hours, duties or a comparable rate
Personal expenses	Vehicle, travel, meals and home costs run through the practice	Implausible percentages and statements that do not match
Revenue against remittances	Reported revenue below what OHIP records show	The CRA holds the third-party figure already
Associate arrangements	Independent contractor in name, employee in substance	The paperwork does not match how the clinic runs
Conference and travel	Professional purpose attached to a personal trip	Destination, duration and dates tell the story

The HST Trap, and It Is the Big One

Most core healthcare services are exempt. That means you charge no HST on them, and you generally cannot recover the HST you pay on your costs. The instinct to register and claim input tax credits, which is correct for almost every other business, is precisely wrong for an exempt practice, and it produces one of the cleanest assessments the CRA can raise.

The harder cases are mixed practices. A dental practice with cosmetic work and retail products, a clinic renting rooms to other practitioners, a physician providing administrative services or third-party medical reports: each has taxable revenue alongside exempt revenue, and the input tax credits must be apportioned accordingly. That apportionment is where practices get it wrong, in both directions. Please see our HST exempt healthcare services guide.

Shareholder Loans: The Slow Accumulation

Money that leaves the corporation and is neither salary nor dividend has to be somewhere, and it is usually a shareholder loan. Practitioners draw what they need through the year, the balance grows quietly, and nobody treats it as urgent because no cash changed hands at year end.

It becomes urgent when the loan is not repaid within the required timeframe, at which point the amount can be included in personal income, and the practitioner discovers that money already spent is now taxable. The balance sits on the balance sheet where any auditor can see it. It is one of the most avoidable findings in professional practice work, and it is almost always a bookkeeping and planning failure rather than an aggressive position.

How Revenue Gets Verified

This is the part practitioners underestimate. The CRA does not need to reconstruct your billings from your books, because for physicians and many practitioners the payer already reports what was paid. OHIP remittances and third-party payer records give an independent revenue figure before your return is even opened.

Timing differences between remittance and recognition are normal and explainable. An unexplained gap is a different matter, because it stops being a question about one figure and becomes a question about whether the ledger can be relied on at all. Once that question is live, the scope tends to expand.

Review or Audit, and Why the First Letter Matters

Factor	Review	Audit
Scope	One item, often one year	The books themselves, potentially several years
Typical trigger	A specific figure looks unusual	A review answered poorly, or a pattern across years
What is requested	Support for the item queried	Ledger, statements, payroll, minute book, loan detail
How it usually ends	Closed on documentation	Assessment, sometimes across linked personal returns
Where it goes wrong	Answering more than was asked	Records that were never maintained properly

A great many audits began as reviews that were answered badly. Auditors ask open questions, and practitioners answer them helpfully and at length, because that is how a clinician handles a question. The instinct that serves you with patients works against you here. Answer the question asked, with the documents that support it, and nothing further.

What to Do When the Letter Arrives

Read the deadline first. The dates in CRA correspondence are strict, and options that exist this week disappear next month.
Do not respond off the cuff. A quick reply feels cooperative and frequently widens the scope. Nothing should go back before you know what is actually being asked and what it implies.
Work out what it is really about. A question about one expense is sometimes a question about one expense. Sometimes it is a probe. The difference determines the response.
Have a CPA manage the correspondence. Not because you have something to hide, but because scope control is a skill. See our audit support and representation.

If the Assessment Is Wrong

An assessment is not the end of the process. You can object formally, and the objection is considered by a different part of the CRA than the one that assessed you, which matters more than it sounds. Deadlines are strict and missing them is costly. Gross negligence penalties in particular are worth challenging where they have been applied to what was genuinely an error, because the threshold for them is higher than mere mistake. Please see our objections and appeals service.

Fixing It Before They Find It

Where a return contained an error or an omission, the position is materially better if you raise it than if they do. The Voluntary Disclosures Program may allow correction with relief that stops being available the moment the CRA makes contact. Timing is the entire point, and practitioners who suspect a problem and wait to see whether it surfaces generally make the outcome worse. Please see our voluntary disclosures and past account clean-up services.

Most audit findings are set up years earlier. The ITC claimed on an exempt practice, the shareholder loan nobody cleared, the spouse's salary with no record of the work: none of these is a judgment call that went against the practitioner. Each is treatment that was wrong from the day it started and simply had not been looked at yet.

Case Study: Dental Practice, Ontario

A dental corporation came to us with a CRA letter querying its input tax credits. The practice had registered for HST and been claiming full ITCs on all of its costs, when the substantial majority of its revenue was exempt clinical work and only the cosmetic and retail side was taxable. Alongside it sat a shareholder loan that had grown across three years of drawings, and a spouse on payroll with no record of duties or hours. We apportioned the ITCs correctly across the exempt and taxable revenue, restated the affected periods, quantified the shareholder loan exposure and structured its repayment before it could be included in income, and documented the spouse's actual administrative role and a defensible rate. We handled the correspondence throughout, and the file closed on the item queried without expanding into the years and the personal return that were plainly at risk. The figures here are illustrative of the work we do, not a specific client file.

ITCs apportioned. Loan resolved before inclusion. Scope held to the question asked.

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Frequently Asked Questions: Healthcare CRA Audits

Why would the CRA audit a medical or dental practice?

Usually because something in the return looks unusual against comparable practices: an expense ratio out of line with peers, a large shareholder loan, HST claimed on an exempt practice, family members on payroll, or a sharp change year over year. Healthcare practices are also high-income and largely cash-reconcilable, which makes them worth the CRA's time.

What is the difference between a review and an audit?

A review is a request to support a specific item, often handled in one letter with the right documents. An audit is broader, examines the books themselves, and can extend to other years. Many audits begin as reviews that were answered badly, which is why the first response matters more than people expect.

What triggers a healthcare practice audit most often?

In our experience: input tax credits claimed against exempt healthcare revenue, shareholder loan balances that never get cleared, family salaries that cannot be supported, personal expenses in the practice, and expense ratios that sit outside the norm for the specialty. Most are avoidable with correct treatment from the start.

Can the CRA audit my professional corporation and me personally?

Yes, and it often does both, because a professional corporation and its owner are financially intertwined. A shareholder loan, a taxable benefit or a family salary all appear on both sides. An audit of the corporation frequently expands into the personal return once something on that link looks wrong.

How far back can the CRA go?

Generally three years from the date on your notice of assessment for most taxpayers, but that limit does not apply where there has been misrepresentation attributable to neglect, carelessness or wilful default, or fraud. In those cases the CRA can reopen older years. The distinction matters enormously in practice.

What is the biggest HST risk for a health practice?

Claiming input tax credits against exempt revenue. Most core healthcare services are exempt, which means you charge no HST and generally cannot recover the HST you pay on your costs. Practices that register and claim ITCs anyway create a clean, easily identified assessment. See our HST exempt healthcare guide.

My practice has both exempt and taxable revenue. What then?

Then you are a mixed practice and your input tax credits must be apportioned, because only the taxable side supports recovery. This is where cosmetic work, retail products, room rentals and administrative services to other practitioners create real complexity, and where the CRA looks first.

Why do shareholder loans cause so many problems?

Because money drawn from the corporation that is neither salary nor dividend sits in a shareholder loan, and if it is not repaid within the required timeframe it can be included in your personal income. Practices often accumulate years of small draws without realising the balance has become a tax problem.

Can I pay my spouse a salary from my practice?

You can, if the work is real and the pay is reasonable for what they actually do. A genuine wage for genuine administrative or bookkeeping work is deductible. Paying a family member well above market for minimal work is a common reassessment finding, and it needs to be documented rather than asserted.

What about paying my children through the practice?

The same test applies, and it is applied more sceptically. The work must be real, the rate reasonable, and the payment actually made. Dividends to family members raise a separate issue entirely, because the tax on split income rules restrict what was once common practice for professional corporations.

What personal expenses get found in healthcare audits?

Vehicles claimed at implausible business percentages, travel with a conference attached to a holiday, meals that were not business, home costs without a qualifying workspace, and family expenses run through the practice account. None of it is subtle, and finding one item generally means the auditor looks harder at everything else.

Are conference and CME costs deductible?

Generally yes, where the education maintains or updates skills used in your practice and the primary purpose of the trip is professional. Where a conference is attached to a family holiday, the personal portion is not deductible and the whole claim invites scrutiny. Documentation of the professional purpose matters.

What records does the CRA ask for in a healthcare audit?

Typically the general ledger and trial balance, bank and credit card statements for the practice and sometimes personally, billing records and remittance summaries, payroll records, invoices supporting significant expenses, shareholder loan detail, and the corporate minute book. The list expands where answers raise further questions.

How does the CRA verify my practice's revenue?

Against sources it already holds. For physicians and many practitioners, OHIP remittances and third-party payer records provide a reliable revenue figure independent of your books. Revenue reported below what those sources show is one of the fastest ways into a full audit.

What if my books do not match my OHIP remittances?

The difference needs to be explainable with your own records, not ignored. Timing differences between remittance and recognition are legitimate and common. An unexplained gap is not, and it moves the file from a question about one number to a question about the reliability of the whole ledger.

What happens if I ignore a CRA letter?

The CRA proceeds without you. It can assess on the information it has, which is rarely favourable, and the burden then falls on you to displace an assessment already issued. Deadlines in this process are strict, and missing them removes options that were available a month earlier.

Should I talk to the auditor myself?

You can, but there is real risk in it. Auditors ask open questions, and practitioners tend to answer helpfully and expansively, which frequently widens the scope. Having a CPA manage the correspondence keeps the exchange to the question asked. See our audit support and representation.

Can you deal with the CRA on my behalf?

Yes. With authorisation we handle the correspondence, assemble the documentation, answer the questions asked, and keep the file within its proper scope. You continue seeing patients rather than assembling ledgers. This is what our CRA audit resolution service does.

What if the auditor gets it wrong?

An assessment is not the end of the process. You can object formally, and the objection is considered by a different part of the CRA than the one that assessed you. There are strict deadlines. See our objections and appeals service.

What are gross negligence penalties?

A significant additional penalty the CRA can apply where it considers a false statement was made knowingly or in circumstances amounting to gross negligence. It is materially more than ordinary interest, and it is also one of the areas most worth challenging, because the threshold is higher than mere error.

How long does a healthcare audit take?

It varies with the scope, the quality of the records and how the correspondence is handled. A focused review answered properly can close in weeks. An audit where records are poor and answers generate new questions can run many months. The records you kept before it started largely determine which one you get.

Can I fix a problem before the CRA finds it?

Often, yes, and it is a materially better position. Where a return contained an error or an omission, the Voluntary Disclosures Program may allow correction with relief that is not available once the CRA has contacted you. Timing is the whole point. See our voluntary disclosures.

What if my bookkeeper made the error?

It remains your return and your assessment. Responsibility for what was filed rests with the taxpayer, and pointing at a bookkeeper does not displace it. What good records and a credible explanation can do is influence whether the CRA treats an error as an error or as something worse.

Does incorporating make an audit more or less likely?

Neither by itself, but it changes the surface area. A professional corporation adds a corporate return, shareholder loans, payroll and potentially family compensation, each of which is a place where something can be wrong. See our medical professional corporation rules.

Are dental practices audited differently from medical?

The mechanics are the same but the risk profile differs. Dental practices typically have more taxable revenue, cosmetic work, retail products and lab arrangements, which makes the HST apportionment more complex and more frequently wrong than in a purely exempt medical practice.

What about clinics with associates and cost-sharing?

These arrangements are a common source of trouble. Whether an associate is an employee or genuinely independent, and whether cost-sharing has been documented and charged correctly, both affect HST and payroll. The paperwork frequently does not match what actually happens in the clinic.

How do I reduce my audit risk?

Correct treatment from the start, particularly on HST and shareholder loans, real support for family compensation, personal expenses kept out of the practice, revenue that reconciles to your remittances, and books maintained monthly rather than reconstructed annually. Most audit findings trace back to something that was never set up right.

What does it cost to have you handle an audit?

It depends on the scope, and we quote an exact flat fee upfront once we know what the CRA is asking for. There is no hourly billing and no meter running while you wait. All fees include HST. Please book a consultation and bring the letter.

I have received a CRA letter. What should I do first?

Read the deadline, do not respond off the cuff, and do not send anything before you know what is actually being asked and what it implies. Then speak to a CPA. The first response frames everything that follows, and it is far easier to set the scope correctly than to narrow it later.

How do I get started?

Please book a free consultation and bring the CRA letter, your last filed returns and a sense of how your books are kept. We tell you what the CRA is actually asking, what your exposure looks like, and quote a flat fee to handle it. Book Free Consultation →

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