Audit Exemption (Consent to Waive the Auditor)
An audit exemption, often called a consent to exemption from audit, lets a private corporation skip the statutory audit of its annual financial statements. Under section 148 of Ontario's Business Corporations Act, a corporation that is not an offering corporation is exempt for a financial year if all of its shareholders, including holders of non-voting shares, consent in writing for that year. There is no revenue or asset threshold. Federal corporations use a similar rule in section 163 of the CBCA.
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Key Takeaways
- An Ontario corporation that is not an offering corporation can skip the statutory audit for a financial year if every shareholder consents in writing for that year.
- Every shareholder includes holders of non-voting and preferred shares, so one missing signature means the exemption does not apply.
- Neither the OBCA nor the CBCA sets a revenue or asset threshold for the audit exemption; revenue tiers appear in not-for-profit legislation instead.
- The exemption removes the auditor but not the duty to prepare annual financial statements and place them before the shareholders.
- Lenders, investors and franchisors can still require audited or reviewed statements by contract even when the statute does not.
What Is an Audit Exemption?
By default, Ontario's Business Corporations Act (OBCA) expects shareholders to appoint an auditor to examine the financial statements placed before them each year. Most owner-managed corporations never do, because the statute lets them opt out. The opt-out, usually called an audit exemption or a consent to exemption from audit, is a written consent signed by every shareholder and kept with the annual resolutions.
The exemption removes the auditor, not the accounts. The directors must still approve annual financial statements prepared in accordance with generally accepted accounting principles and place them before the shareholders. A corporation that is not an offering corporation must send them to shareholders at least 10 days before the annual meeting, or before the written resolutions that replace it are signed, unless a shareholder has said in writing that they do not want a copy. The exemption simply means no auditor's report is attached.
The Rules in Ontario and Federally
Section 148 of the OBCA exempts a corporation from the auditor requirements for a financial year if two conditions are met: it is not an offering corporation, and all of its shareholders consent in writing to the exemption for that year.
- Every shareholder means every shareholder. The consent must come from all of the shareholders, including holders of non-voting or preferred shares issued in an estate freeze or to an investor. Two-thirds, or even all the voting holders, is not enough.
- One year at a time. The consent covers a particular financial year and has to be renewed annually, which is why it sits in the annual resolutions package.
- Offering corporation is a narrow concept. A corporation is an offering corporation if it has filed a prospectus for securities that are still outstanding, or if any of its securities have been listed on a recognized stock exchange in Ontario, unless the Ontario Securities Commission has ordered that it has ceased to be one. A startup that raised money privately under prospectus exemptions is not one, so it can still use the exemption if every investor signs.
- One refusal means an audit. Any shareholder can withhold consent. The shareholders must then appoint an auditor by ordinary resolution, and if the corporation has no auditor, a shareholder can ask the court to appoint one.
| Ontario (OBCA) | Federal (CBCA) | |
|---|---|---|
| Provision | Section 148 | Section 163 |
| Who can use it | A corporation that is not an offering corporation | A corporation that is not a distributing corporation |
| Consent required | All shareholders, in writing | All shareholders, including those not otherwise entitled to vote |
| How long it lasts | The financial year consented to | Until the next annual meeting |
| Revenue or asset test | None | None |
The federal text is in section 163 of the CBCA.
The Revenue Threshold Myth
Some online guides say an Ontario corporation must be audited once its revenue or assets pass a certain figure. For business corporations, that is wrong. Neither OBCA section 148 nor CBCA section 163 contains any revenue, asset or employee test. A private corporation with $40 million in sales can waive the audit if every shareholder signs; a two-person corporation with $50,000 in sales cannot if one shareholder refuses.
Revenue tiers do exist in not-for-profit law. Ontario's Not-for-Profit Corporations Act, 2010 ties the choice a not-for-profit corporation makes between an audit, a review engagement or neither to its annual revenue, approved by an extraordinary resolution of members. Those tiers are easily confused with the business-corporation rules.
What does push a private business toward an audit is usually contractual: a lender's reporting covenant, an investor's information rights, a franchisor's requirements or a surety's bonding conditions. The statute permits the waiver; it does not stop a counterparty from demanding more.
Audit vs. Review vs. Compilation
An exempt corporation still chooses what its accountant does with the year-end numbers. The three common engagements differ in the assurance they give a reader.
| Engagement | What the accountant does | Assurance | Typical reader |
|---|---|---|---|
| Audit | Gathers evidence, tests records and controls, and gives an opinion under Canadian Auditing Standards | Reasonable (high) assurance | Statutory audit where there is no exemption; larger lenders and investors |
| Review engagement | Makes inquiries and performs analytical procedures, without detailed testing | Limited assurance | Bank covenants, some investors and franchisors |
| Compilation engagement | Assembles statements from the owner's records without verifying them | No assurance | Most owner-managed corporations and their tax filings |
For periods ending on or after December 14, 2021, compilations follow CSRS 4200, and the old Notice to Reader has been replaced by a compilation engagement report. A section 148 exemption permits a review or a compilation but does not require either; the level is a business decision driven by who relies on the statements.
How to Document the Exemption
- Confirm the corporation is not an offering corporation.
- Pull the securities register and list every shareholder of every class, including non-voting, preferred and holding-company shareholders.
- Prepare a consent for the specific financial year to the exemption from the audit requirements under section 148, or, for a federal corporation, a resolution not to appoint an auditor under section 163.
- Have every registered shareholder sign: a holding company through its authorized signatory, and shares held for a family trust by the trustees in whose names they are registered. The OBCA allows the consent to be signed in counterparts.
- File the signed consent in the corporate minute book with the annual resolutions approving the financial statements.
Missing consents are a frequent finding when a buyer's or lender's lawyer reviews the minute book, and repairing the gap is harder once a shareholder has left on bad terms. Our corporate compliance checklist and guide to corporate minute books show where the consent fits in the annual cycle. It is one of the few approvals that needs more than a special resolution, and a shareholder agreement can settle the question in advance, for example by committing shareholders to sign each year or by giving an investor the right to demand an audit.
Practical Example
Juniper Analytics Inc., an Oakville software company, has two founders, Thandiwe Okonkwo and Felix MacLeod, who hold all the voting common shares. Three years ago it issued non-voting preferred shares to an angel investor, Petra Desrosiers, for $250,000. Each year the founders signed a consent waiving the audit, and the company's accountant prepared compiled financial statements.
When Juniper applies for a $750,000 operating line, the bank's lawyer reviews the minute book and notes that Petra never signed the consents. Because section 148 requires all shareholders, the company was not exempt for those years. Juniper's lawyer obtains Petra's signed consent for the current year, records the history in the minute book, and agrees with the bank to deliver review-engagement statements going forward. The line is approved, and the shareholder agreement is amended so every future investor must sign the annual consent.
Frequently Asked Questions
Does my small Ontario corporation need an audit?+
Not if it qualifies for the exemption. A corporation that has not offered its securities to the public can waive the audit each year if every shareholder signs a written consent. Most owner-managed corporations do this and have their accountant prepare compiled or reviewed statements instead. If even one shareholder refuses to sign, the shareholders must appoint an auditor for that year.
Is there a revenue limit for waiving an audit in Ontario?+
No. The Business Corporations Act ties the exemption to two conditions only: the corporation is not an offering corporation, and all shareholders consent in writing for the year. Size does not matter. Revenue thresholds you may see online come from not-for-profit statutes or from lender and investor requirements, not from the rules for business corporations.
What is the difference between a Notice to Reader and a review engagement?+
A Notice to Reader was the old report on a compilation, where an accountant assembles financial statements from the owner's records without checking them. Compilations now follow CSRS 4200 and come with a compilation engagement report. A review engagement goes further: the accountant makes inquiries and performs analytical procedures, and gives limited assurance that nothing suggests the statements are materially misstated.
Do non-voting shareholders have to sign the audit exemption?+
Yes. Section 148 of the OBCA requires the consent of all of the shareholders, and section 163 of the CBCA expressly includes shareholders not otherwise entitled to vote. Corporations that have issued preferred shares in an estate freeze, to a family trust or to an investor often overlook this, which leaves the exemption ineffective for that year.
How often does the audit exemption need to be signed?+
Every year. Under the OBCA the consent applies to a specific financial year, and under the CBCA the resolution lasts only until the next annual meeting. Most corporations sign it with the annual resolutions that approve the financial statements, elect directors and confirm officers, so it stays current as long as the annual package is completed.
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