Proposed CRA audit powers sound alarms

The proposed new powers would “significantly increase the stakes for taxpayers when it comes to participating in and managing the audit process,” said Timothy Fitzsimmons, a partner with Fasken LLP in Toronto.

“Some of these proposals are court- or quasi-courtlike processes,” Fitzsimmons said. “This is … a move away from what you might typically think of as an administrative process.”

Tax advisors who spoke with Investment Executive also said that how the CRA would apply the proposed changes if they pass is unclear, as is which taxpayers the agency might target.

“There’s no restriction in the powers [outlined in the draft legislation], which means they could be used equally against any taxpayer,” said Natalie Worsfold, senior tax litigator and managing partner with Counter Tax Litigators LLP in Toronto.

Said Fitzsimmons: “It doesn’t appear that these powers are directed at one group in particular.”

In the 2024 federal budget, the government proposed amending the information-gathering provisions in the Income Tax Act to “enhance the efficiency and effectiveness of tax audits and facilitate the collection of tax revenues on a timelier basis.”

The government stated it was responding to a 2018 report from the Office of the Auditor General that noted “the provision of information by some taxpayers lagged for months or even years, making it more difficult for the CRA to collect tax owing.”

On Aug. 12, Finance Canada released draft legislation to implement the proposals, the consultation for which closed on Sept. 11. As of press time, the government had not tabled legislation.

Among the new proposals, the CRA would be allowed to issue a notice of non-compliance when a person has not complied, in full or in part, with a request for information as part of an audit.

The CRA would be allowed to extend the normal reassessment period for the issue related to the notice of non-compliance by however long the notice is outstanding.

The CRA would also be allowed to extend the normal reassessment period for all taxpayers who seek a judicial review of a requirement or notice issued by the CRA. The extension would cover the duration of the review.

The proposals also include two new penalties. The first would be $50 per day, up to a limit of $25,000, for any taxpayer with an outstanding notice of non-compliance. The penalty would not apply if the notice of non-compliance is successfully appealed.

The second penalty would apply when the CRA obtains a compliance order against a taxpayer and would equal 10% of the taxes owed. The penalty would apply only if the order relates to taxes of more than $50,000 owed in a year.

Currently, the main consequence for ignoring a compliance order is a contempt order, “which is time-consuming [for the CRA] to obtain and does not generally impose a material financial cost on the taxpayer,” the budget document states.

Tax advisors who spoke with IE suggested the proposed expanded audit powers are overly broad and the penalties too onerous, particularly for taxpayers with few resources to access legal advice or to dispute the tax agency’s order.

“It has a chilling effect,” said Ryan Minor, director of taxation with CPA Canada in Sudbury, Ont.

A Sept. 11 submission to Finance Canada from the Joint Committee on Taxation of the Canadian Bar Association and CPA Canada stated that imposing an automatic 10% penalty on taxes owed for non-compliance, unrelated to the overall conduct of the taxpayer or the amount of tax in dispute, was “arbitrary” and “punitive.”

“The penalty simply serves as a sledgehammer to coerce taxpayers into giving up information they may have a legal basis to retain,” the committee stated.

Tax lawyers appeared most concerned about the CRA compelling testimony under oath. The CRA didn’t get the power to compel oral interviews from taxpayers until 2022.

Fitzsimmons wondered whether the CRA would commission the oath, or if lawyers from the CRA or Justice Canada would be present during an interview.

“Certainly, just on that point, I could never advise a client to participate in that process without their own counsel present,” he said.

Minor said CPA Canada had “early-stage” discussions with the CRA on how the agency would administer the rules, including what procedural protections taxpayers will have, should the rules pass. The CRA is “amenable to working with us,” Minor said.

In an Oct. 30 email to IE, the CRA did not confirm if it had had discussions with CPA Canada regarding how the CRA would apply the proposed powers.

However, the CRA said it is “committed to constructive engagement with the tax community as these policies and processes are developed. For these measures in particular, the CRA is committed to evaluating and implementing the appropriate oversight mechanism.”

The CRA also said that given Finance Canada’s consultations “are still underway in respect of the draft legislative proposals,” it had “not yet issued any guidance on the administration of the legislation,” but that it would make more information available “in due course.”

Fitzsimmons said he believes the CRA already has extensive audit powers at its disposal and that the agency does not need the expanded powers.

“In my experience, taxpayers, in good faith, participate in the audit process to do whatever they can with the scarce internal resources that they have,” Fitzsimmons said.

He anticipates taxpayers will “need tax professionals earlier than ever before to make sure that risk in this process can be managed and brought in for a safe landing at the end of the audit.”

Worsfold said that financial advisors can help clients by making sure they preserve documents.

The proposed expanded audit rules “push the normal reassessment period,” Worsfold said, adding that because the proposed notice of non-compliance provisions require taxpayers to make best efforts to produce information, she anticipates more clients under audit will reach out to financial advisors and their firms to find documents.

This article appears in the forthcoming November issue of Investment Executive.