The CRA objections process: when should CPAs call in a lawyer?

An accountant might call on a tax lawyer or dispute resolution specialist at any time during the appeals process—or even earlier (Getty Images/Jose Luis Pelaez Inc)

In some more complex tax objection cases, a practitioner might decide to engage the services of a tax dispute resolution/litigation lawyer. Suitable cases usually involve more complicated questions of legal interpretation and can be fairly significant in financial or other terms, says Mark Tonkovich, a partner with Blake, Cassels & Graydon LLP. They might also involve a recurring issue that affects taxes in subsequent years, so it may be that much more important for the taxpayer to get a clear answer on the issue. Also, although not covered here, the procedural issues for large corporations are more complex and obtaining legal advice at the objection stage should be considered.

While many of the more financially significant cases involve corporations, some do arise with individuals as well. Even so, these cases tend to be few and far between: “It’s not every day or even every year that most individuals face significant tax issues with the CRA,” says Tonkovich. “But, when they do, it might be either the taxpayer or the accountant who decides to bring in a tax dispute resolution specialist. When it is not clear whether to consult a tax litigator, it is usually better to seek professional advice rather than to risk getting too far into the appeals process without putting your case on the best strategic and legal footing.”

TYPICAL CASES

Current issues that might require the expertise of a tax lawyer or tax dispute resolution specialist include:

• Residence: The CRA may question whether a taxpayer is actually resident in or outside of Canada and, consequently, the extent to which they are subject to Canadian income tax. For example, a couple might have retired and moved to a warmer climate and are no longer resident in Canada, but they still have substantial income from their business activities or other kinds of investments. Alternatively, someone who is from abroad may have developed extensive ties within Canada, but without believing themselves to be factually resident. “The CRA might assert that there are significant Canadian tax liabilities that they have not accounted for,” says Tonkovich.
• Foreign property: If a taxpayer doesn’t report their ownership of certain kinds of foreign property on their annual tax returns, they can be subject to very significant tax penalties, notes Tonkovich. “And that can happen even if they don’t receive any significant income from the property,” he adds. “The circumstances surrounding the particular ownership of the property and any potential reporting errors can be very important in avoiding or resolving this type of tax issue.”
• Home flipping: Say, for example, that a taxpayer buys a home, renovates it, and then sells the home without living in it for long, which can happen for a host of entirely legitimate reasons. If they claim the sale was of their principal residence, the CRA may question that claim and consider whether the taxpayer was acting for personal or commercial reasons. “Even when the profits are reported as capital gains (rather than as exempt), CRA may believe they were actually fully taxable business income,” Tonkovich explains. It should be noted that a new flipping rule denying capital gains treatment in certain situations was proposed in the 2022 federal budget.

EARLIER IS BETTER

Although tax dispute resolution specialists can be brought in at any time — from before the initial audit through to the point when a case is being prepared to go to court — they are often called during an audit or at least early in the objections process. “The earlier a tax dispute resolution specialist comes in, the greater the opportunities they have to fully consider the issue and develop the best and most efficient dispute resolution strategy,” says Tonkovich.

CPA David Posner, a partner at Zeifmans LLP, adds that, by bringing in a specialist early, it may be possible to reduce the assessment—and hence the balance to be paid. “Let’s say the taxpayer is initially assessed for $1 million. The specialist may help get the amount reduced to $500,000. That way, you have already saved the taxpayer half. Then, if you continue your appeals or end up in Tax Court, your starting threshold is lower.”

Tonkovich agrees that “it’s not unusual to have partial resolutions through the audit or objection process, and then to have the remainder set the stage for the next stage of a dispute, such as when a client decides they want to go to court.”

GOING TO TAX COURT

If a taxpayer’s objection is not successful, they may decide to take their case to the Tax Court of Canada. Sometimes taxpayers may even decide to bypass the objection process and go straight to court, once 90 days have elapsed from the filing of the objection.

Whether it makes sense to proceed directly to court will depend on the circumstances. For example, if the CRA has released administrative positions or guidance on an issue with which a reassessed taxpayer disagrees, it may be unreasonable to expect the appeals officer to come to a different view in that particular situation. In that case, says Tonkovich, it will often make sense to take the issue directly to Tax Court to streamline the process.

Depending on the path a taxpayer chooses to resolve their disagreement with the CRA, they stand to benefit from the combined expertise of a CPA and tax dispute resolution/litigation lawyer. As Tonkovich explains, “It’s really about making sure that your clients have the right team to cover all the different facets that need to be covered to maximize the chances of favourably resolving their dispute. And, as always, the sooner you put that team together, the better the results are likely to be.”

STAY TAX AWARE

Learn more about when and how to file an objection, and how to use the CRA’s taxpayer relief program for clients.

Plus, keep up to date on important tax issues, such as managing and mitigating tax practice risks, running a high-quality tax practice, and understanding tax rules for PSBs with our tax blog.