A close look at CRA’s new audit powers

The CRA is set to receive broad new powers to compel taxpayers to comply with its requests for information, documents and assistance during audits. Taxpayers may find it more difficult and costly to exercise their right to withhold information to which the CRA is not entitled, such as information subject to solicitor-client privilege or involving unnamed third parties.   

These measures were proposed in the 2024 federal budget in response to the Auditor General’s 2018 report, which criticized the CRA for tolerating longer response times from large corporate taxpayers than from individuals despite the obvious differences between these types of taxpayers that would affect their respective response times. The proposals were included in the draft legislation provided with the 2024 budget but have not yet been presented in a bill to Parliament.  

The first of four proposals will allow the CRA to issue a new notice of non-compliance (NNC) to taxpayers who have not complied with requests for audit assistance or information. A penalty of $50 per day (to a maximum of $25,000) applies while the NNC is outstanding. Further, the normal reassessment period is extended by the period of time the notice remains outstanding.  Taxpayers can request that the CRA review the NNC and then request a judicial review of the decision with the Federal Court. The NNC may be vacated if the CRA or the Federal Court determines that it was not reasonable for the CRA to have issued the NNC.    

This proposal raises several concerns. A new CRA and Federal Court review process is likely to add more time and expense to the audit process for both the taxpayers and the CRA. The penalty provisions are intended to target taxpayers who simply refuse to cooperate with the CRA, but they don’t distinguish between these taxpayers and taxpayers who have legitimate concerns with the nature of any information demanded (e.g., information subject to solicitor-client privilege). Taxpayers with legitimate concerns may be discouraged from exercising their right to withhold documents because of the potential for penalties. Overall, these proposals may preclude important discussions between the CRA and taxpayers and put significantly more power in the CRA’s hands to compel taxpayers to produce any information. 

The second proposal allows the CRA to require that taxpayers’ information or documents be provided under oath or affirmation. But this proposal doesn’t include the kind of administrative procedures and protections that are provided in courts when people make statements under oath (e.g., a recording by a court reporter). As a result, taxpayers may feel they need to engage legal counsel to prepare for questioning under oath, adding more time and expense to the compliance process. 

The third proposal affects compliance orders, which the CRA can currently obtain from a court to direct a taxpayer to comply with CRA information requests. The 2024 budget states that these orders have not been effective in compelling taxpayers to comply. The budget proposes an automatic penalty once the CRA obtains a compliance order against a taxpayer.  The CRA will also be able to seek a compliance order to require a person to provide foreign-based information or documents. 

Taxpayers that have been issued a compliance order will receive an automatic penalty equal to 10 per cent of the aggregate amount of tax payable for each taxation year to which the order relates. The legislation does not provide a behavioural threshold to be met before the penalty is applied or discretion to vary the penalty based on the degree of non-compliance. For example, this penalty would apply if the Federal Court determined that only one document out of 20 requested should have been disclosed to the CRA. Other penalty provisions dealing with egregious conduct use terms such as “culpable conduct” or “gross negligence” to signal the type of conduct to which the penalty applies. This penalty could give the CRA significant power and discourage taxpayers from exercising their right to contest CRA information requests when there are legitimate reasons to argue for non-disclosure.  

Finally, the “stop the clock” rules currently extend the reassessment period before a year becomes statute-barred when a taxpayer seeks a judicial review of a CRA notice or requirement. These rules apply to a compliance order as well. The 2024 budget states that these rules currently do not apply to all situations where a taxpayer does not comply with a CRA notice or requirement. As such, the budget proposes to extend these rules to apply during any period that a notice of non-compliance or compliance order is outstanding. The rules would also apply when the CRA has issued a notice to a person who does not deal at arm’s length with the taxpayer, even if that person has no economic relationship with the taxpayer. 

The proposed new CRA audit powers seem to be an overreaction to the Auditor General’s 2018 report. The tax community is concerned about the implications of providing the CRA with these broad new audit powers, which can be applied indiscriminately against compliant and non-compliant taxpayers. CPA Canada and the Canadian Bar Association’s Joint Committee on Taxation are working on a submission to the Department of Finance expressing their concerns with the current legislative proposals. CPA Canada has also assembled a working group to recommend checks and balances that should be administered by the CRA to ensure these proposed new powers are exercised responsibly.