New proposals to expand the audit powers of the Canada Revenue Agency (CRA) under the Income Tax Act could significantly raise the risk that Canadian taxpayers will find themselves in court or subject to penalties – even before a tax audit is concluded.
Background
The CRA is Canada’s largest federal agency by headcount with vast enforcement and compliance powers under the Income Tax Act and Excise Tax Act. The federal government has allocated billions of dollars of funding for tax compliance and enforcement each year, and the CRA alleges there is a “tax gap” of uncollected tax revenues in the range of $20 billion per year.
The CRA has stated that, in its view, uncollected taxes are due in large part to the domestic underground economy, aggressive international tax planning, and payment non-compliance. The CRA selects files for audit based on risk assessment, which may involve factors including industry risk, complex corporate entities or structures, assets classes and values, and comparisons by geography and demographics. Further, we anticipate the CRA, like many federal agencies, will begin using artificial intelligence in its audit processes.
The CRA’s audit powers must be exercised reasonably, and many CRA audit requests follow a normal course (i.e., review of employment, business, financial, accounting records, etc.). New reporting rules require taxpayers to proactively disclose certain tax and business information, and taxpayers under audit must dedicate often scarce internal resources to responding to CRA requests for information and documents. Yet a 2018 Auditor General Report identified that the CRA did not consistently apply the law across all audit files, and 60% of taxpayer objections were fully or partially allowed (i.e., the audit result was overturned).
However, it appears to be the government’s view that funding for enforcement staff and resources has not been sufficient. In Budget 2024, the government proposed to add several new measures to the Income Tax Act (and other tax statutes) that will further extend the CRA’s audit powers and will require additional disclosure and responsiveness from taxpayers under audit. It is becoming apparent that businesses may require specialized tax dispute counsel for managing even routine audits.
Notice of Non-Compliance
Budget 2024 introduced a new type of audit notice in proposed section 231.9. Under the proposed new provision, a “Notice of Non-Compliance” may be issued by the CRA where the taxpayer has not complied (in full or in part) with an audit query or requirement issued under the various audit provisions in the Income Tax Act. The Notice is outstanding from the date of issuance to the date the CRA determines the taxpayer has complied with, or made reasonable efforts to comply with, each audit query or requirement in respect of which the Notice was issued. A taxpayer who has been served with a Notice of Non-Compliance is subject to a penalty of $50 for each day the Notice is outstanding, to a maximum of $25,000. Additionally, a taxpayer may challenge the Notice within 90 days of issuance, following which the CRA may confirm, vary or vacate the Notice. A further application for review of the Notice may be made to the Federal Court. While the Notice of Non-Compliance is outstanding, the normal reassessment period (or any extended reassessment period) does not run.
Questioning Under Oath
Budget 2024 proposed to add new section 231.41, which would authorize the CRA to require a taxpayer to respond to an audit query or requirement either orally, under oath or affirmation, or by affidavit.
Compliance Orders
Budget 2024 proposed to amend section 231.7 to add a new penalty provision. Section 231.7 contains the rules regarding the Federal Court’s authority to grant a compliance order, which is typically sought by the CRA where a taxpayer may be refusing to disclose certain information or documents. Failure to comply with a court’s compliance order is contempt of court, and punishable by fine or imprisonment. Budget 2024 proposed to add a penalty equal to 10% of the aggregate tax payable by the taxpayer for the year or years to which the compliance order relates. The proposed penalty would not apply where the tax payable in the year is less than $50,000.
Reassessment Deadlines
Various provisions in the Income Tax Act extend the normal reassessment period – i.e., the period of time in which the CRA may issue any reassessment of a taxpayer’s tax year – upon the occurrence of certain events, typically certain court or review processes that may interrupt or delay the audit. However, certain procedural matters do not “stop the clock” on the reassessment deadline. Budget 2024 proposed consequential amendments to section 231.8 to expand the application of the “stop the clock” rules to apply in situations where the taxpayer seeks judicial review of a CRA requirement or during the time that a Notice of Non-Compliance is outstanding.
Conclusion
The proposed changes create greater risk for taxpayers that routine audits could involve court processes for disclosure, evidence given under oath, and potential fines or penalties for even innocent non-compliance with audit requests. In extreme cases, failure to comply may be contempt of court. Businesses should consider the resources they may require to manage a tax audit, and consultation with specialized tax dispute counsel is recommended.
The Budget 2024 proposals were subject to a consultation process that concluded on September 11, 2024, after which we expect the proposals will be included in a second budget bill. We expect the proposals to become law in late-2024 or early-2025.
