Canada Emergency Wage Subsidy (CEWS) and Canada Emergency Rent Subsidy (CERS) were lifelines for businesses during the COVID-19 pandemic. Now, the Canada Revenue Agency (CRA) is actively auditing these subsidy claims to claw back funds from ineligible or overstated applications. As of June 30, 2025, the CRA had denied or adjusted about $1.2 billion in CEWS payments after audits, and these post-payment reviews will continue through at least the end of 2025 and likely beyond. In this article, we explain the common red flags that might trigger CRA scrutiny of your CEWS or CERS claims, and how to avoid or address them. Business owners across Canada should be aware of these audit triggers to ensure full compliance and prepare documentation in advance.
Why CRA Audits CEWS and CERS Claims
The sheer scale of the CEWS and CERS programs has prompted intense CRA oversight. The CEWS alone disbursed roughly $100 billion to employers in 2020–2021. The CRA employs a risk-based approach to select files for audit, using data analytics and cross-checks rather than auditing everyone (https://www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/compliance/compliance-snapshot-cews-for-businesses/cews-post-payment-audits.html). In initial phases, some claims were randomly sampled to gauge compliance levels, but audits now focus on high-risk indicators learned from those pilot reviews. Even honest businesses may find their claims under review as part of CRA’s effort to validate eligibility and accuracy. However, most employers have tried to follow the rules: over 90% of subsidy amounts reviewed were confirmed as correctly claimed. The CRA’s own reports note that many adjustments result from mistakes or missing paperwork rather than deliberate fraud. Still, certain patterns and inconsistencies are far more likely to raise red flags and lead the CRA to take a closer look.
Common Audit Triggers and Red Flags for CEWS/CERS
The following are some common triggers that can attract CRA scrutiny of your wage or rent subsidy claims. These red flags range from calculation discrepancies to documentation gaps and signs of potential abuse. Understanding them will help you double-check your claims and be prepared if the CRA comes knocking.
1. Revenue Drop Discrepancies or Manipulation
Eligibility for both CEWS and CERS hinged on a significant drop in revenue for each claim period. The CRA is laser-focused on verifying revenue reduction calculations. A major red flag is any discrepancy between the revenue decline you claimed and other filings such as GST/HST returns, income tax returns or financial statements. In fact, the Auditor General found many businesses that received CEWS did not show the required revenue drop in their GST/HST filings. The CRA cross-checks such data, and if your reported sales don’t align with the claimed percentage decline, expect an audit. Roughly 14% of audited claims flagged by the Auditor General had insufficient revenue decline to meet CEWS criteria.
Deliberately artificially reducing your revenue to qualify is especially risky. For example, if a business deferred income or shifted sales between entities just to meet the threshold, the CRA views this as abusive.
2. Claiming Ineligible Employees or Businesses
Another trigger for CRA audits is claiming subsidies for people or entities that do not meet the eligibility criteria. CEWS was intended for eligible employers paying eligible employees, and CERS for eligible businesses with qualifying properties. If a claim included ineligible individuals or businesses, that’s a red flag. Common issues include:
Fictitious or non-existent employees:
The CRA uncovered cases where employers claimed CEWS for employees that didn’t actually work for them (canada.ca). Claiming subsidy for someone not on your legitimate payroll is a surefire trigger for investigation. Similarly, listing employees who had already left or were not receiving wages during the period can result in denial. CEWS rules excluded employees who had not been paid for 14+ days within a claim period, so including such employees improperly can be flagged.
Non-arm’s-length or related employees:
You can claim CEWS for family members or owners on payroll only if they were being paid before the pandemic under certain conditions. Sudden addition of a spouse or child as a salaried employee just to get the subsidy is suspect. Auditors will examine employment contracts, payment proofs, and whether services were actually rendered for family members. Claims for non-arm’s-length employees will be scrutinized to ensure they were genuinely employed and not overpaid solely to maximize CEWS.
Ineligible business entities:
CERS and CEWS each defined which entities qualified (e.g. corporations, partnerships, nonprofits, etc., excluding wholly tax-exempt institutions). If a business did not meet these definitions or was not registered as required (for instance, not having a CRA payroll account or business number by the cutoff date), the claims can be denied.
In summary, integrity of your payroll and business status is critical. The CRA will verify that your business existed and qualified, and that each employee claimed was real, on payroll, and eligible during the claim period. False statements or certifications about eligibility can attract hefty penalties. Always ensure any person or company you included in your subsidy application meets the criteria, and keep documentation (pay stubs, employment agreements, etc.) to prove it.
3. Large or Unusual Claim Amounts and Calculation Errors
Outlier claims – particularly extraordinarily high subsidy claims – tend to trigger a closer look. The CRA’s automated risk assessment flags claims that don’t statistically make sense or appear too generous relative to the business’s profile. For instance, if a small business with modest payroll suddenly claims the maximum wage subsidy for dozens of employees, that discrepancy stands out.
Even honest mistakes in calculations can raise questions. According to CRA data, about 27% of adjustments to CEWS claims were due to calculation errors by applicants. Common errors include misapplying the formula, using the wrong reference periods, or failing to prorate wages correctly. These mistakes can lead to either over-claims (triggering audits to recover excess) or under-claims. The CRA will adjust any incorrect amounts, but an obvious error (especially one that inflated your subsidy) may prompt them to review other periods for systemic issues.
Likewise, unusually high subsidy claims relative to company size or industry can trigger audits. If your claim was at or near the maximum allowed every period, the CRA might verify if you truly had enough eligible expenses or wages to support that. They compare data across businesses – for example, a claim significantly larger than peers in your sector could be flagged for verification. This is similar to how claiming unreasonable expenses on a tax return (like extremely high deductions compared to income) is a known audit red flag. For CEWS/CERS, the agency wants to ensure no one overstated their payroll or rent costs to receive a higher subsidy.
4. Missing or Inadequate Documentation
Failure to provide supporting documents is one of the most common issues that turn a review into an audit. Over 27% of cases where the CRA made adjustments involved a lack of supporting documentation or no response from the claimant. In other words, many businesses got into trouble simply because they couldn’t substantiate their claims when asked.
The CRA may send a request for information or an initial audit contact letter requiring a trove of records – from financial statements and payroll registers to minute books and lease agreements. This can be daunting, but responding adequately and in a timely manner is important to obtaining a favourable outcome. If you ignore CRA correspondence or fail to submit proof, auditors will assume your claim was improper. They can deny the claim by default for lack of evidence. Key documents you should have ready include: proof of revenue drop documents (sales journals, general ledger, bank statements), payroll records (pay stubs, T4 summaries, payroll ledgers), proof of remuneration paid (receipts for wages or rent payments), and any attestations or elections you filed with your application. For CERS, keep proof of revenue drop documents, any attestations or elections filed with you application, and rent or mortgage documents (lease agreements, rent receipts, property tax bills, etc.) to show your claimed property expenses. The CRA explicitly instructs businesses to retain all records supporting their subsidy claims, as they may ask for them at any time.
5. Use of High-Risk Preparers or Aggressive Filing Tactics
Who prepared your claim can also be a factor in CRA’s risk model. The agency is cracking down on third-party preparers (consultants, accountants, or advisers) who promoted overly aggressive or fraudulent subsidy claims. If your applications were filed by someone on the CRA’s radar for questionable practices, your file may be marked for audit even if everything else appears fine.
CRA data shows that among “preparer-linked” claims (cases involving certain flagged advisors), a staggering 94% of audited files resulted in adjustments or denials. Many of these involved small businesses that may have been enticed by unscrupulous tax consultants. The issues uncovered included schemes like claiming fictitious employees, using inactive payroll accounts, or even creating companies purely to claim CEWS. In fact, the majority of CEWS claimants denied by the CRA had used third parties to file their applications, indicating a strong correlation between aggressive preparers and non-compliance. The CRA has identified over 1,700 high-risk claimants tied to such preparers, many of whom also applied for CERS, and these are all under special review.
6. Overlapping or Duplicate Subsidy Claims
The government introduced multiple support programs during COVID-19, and claiming them in combination could trigger audits if not done correctly. The CRA cross-references CEWS and CERS claims with other programs to ensure there’s no double dipping. For instance, some employers also received the 10% Temporary Wage Subsidy or Work-Sharing benefits. If you claimed the 10% wage subsidy, you were required to reduce your CEWS claim by that amount for the same period. Failing to do so (whether accidentally or intentionally) would create an obvious over-claim that flags your file. Similarly, businesses that later transitioned to the Canada Recovery Hiring Program (CRHP) had interactions with CEWS – you couldn’t get both for the same period beyond a certain point. The CRA automatically set CEWS to $0 for periods where CRHP was claimed, when applicable. If someone attempted to circumvent these rules (for example, by trying to claim CERS for a period they were already getting another exclusive benefit), it would prompt a review.
Another overlap issue is affiliated entities splitting claims. The CERS program capped the total rent expenses for affiliated groups, requiring an allocation agreement among affiliates. If two companies in the same group both claimed the maximum CERS for the same location without proper allocation, the CRA will investigate. The CRA expects you to keep a copy of any agreement on the percentage of subsidy each affiliate would claim to prove you did not exceed the limits.
Also, claiming rent subsidy for a property that doesn’t qualify (e.g., a home office or personal residence) is a red flag – home offices were explicitly excluded from CERS eligibility. If a business operates from home and tried to claim CERS for home expenses, the CRA will likely deny it and could audit to see if there were other ineligible claims.
How to Protect Yourself and Prepare for Possible Audits
Understanding these red flags is the first step to avoiding problems. Here are some proactive steps for business owners to stay on the right side of a CRA audit:
- Maintain thorough records: As emphasized, keep all supporting documents for revenues, payroll, and rent. The CRA can audit any claim period at their discretion, even months or years later, so retain records for as many years as possible. Good record-keeping alone can significantly reduce audit stress.
- Review your claims for accuracy: It’s not too late to double-check the math and criteria of past claims. If you find an error, consult a professional about correcting it or voluntarily repaying to avoid penalties down the line. Honest mistakes are usually viewed more leniently if corrected proactively, whereas waiting for the CRA to find them could result in penalties.
- Be responsive and cooperative: If the CRA contacts you (by a phone call or an audit letter), respond promptly and professionally. Ignoring a CRA audit letter will not make it go away – it will make matters worse. Even if you need more time, communicate that. The initial audit proposal letter generally gives 30 days to respond, and extensions may be granted if you have a valid reason. Use that time to gather your documentation or seek a tax lawyer’s help, rather than missing deadlines.
- Consult a tax professional: Facing a subsidy audit can be complex, especially if large amounts are at stake. Getting advice from an experienced tax lawyer can help you navigate the process and avoid self-incrimination while still fulfilling your obligations. They can also communicate with the CRA on your behalf, ensuring you provide only the necessary information and nothing that could inadvertently open up unrelated issues. Remember, your goal is to satisfy the auditor’s questions, not to volunteer extra details that might trigger further audits.
- Act ethically going forward: Lastly, the best defense against audits is compliance. Now that you know what triggers scrutiny, be diligent in future filings. For any new government program or tax filing, avoid cutting corners or aggressive moves that could raise eyebrows.
Conclusion
CEWS and CERS audits are a reality that thousands of Canadian businesses are facing as the CRA ensures pandemic aid went to those who truly qualified for it. By being aware of these common CRA audit triggers – from revenue discrepancies and ineligible claims to documentation lapses and risky advisors – you can better assess your own risk and prepare accordingly. Most businesses that played by the rules have little to fear, as the CRA has noted a high rate of compliance overall. But if you do find yourself under the CRA’s microscope, understanding why you might have been flagged will help you respond effectively.
Ultimately, the key is to stay organized, honest, and proactive. If you’re uncertain about your CEWS or CERS claims or have received an audit notice, don’t panic. Our firm has extensive experience guiding business owners through CRA audits and appeals. We can help you address any red flags and ensure your rights are protected throughout the process. Feel free to reach out for a consultation.
