Canada Audit Proposal Would Bring Big Noncompliance Consequences

Canada’s proposal to expand the discretionary powers of the Canada Revenue Agency would alter the audit playing field and could influence how taxpayers approach audits in 2025.

According to budget documents, the proposed amendments would “enhance the efficiency and effectiveness of tax audits and facilitate the collection of tax revenues on a timelier basis.” The amendments were proposed in draft legislation released in August, which largely mirrored the proposals released with the budget.

If enacted as proposed, the amended provisions would impose harsh consequences on noncompliance with information requests—no matter how broad and unreasonable they might be—and introduce substantial uncertainty for taxpayers. These amendments will undoubtedly affect how the CRA conducts audits and how taxpayers approach them.

Since the proposals haven’t yet been tabled in Parliament, it’s unclear when the amendments will be enacted and what their ultimate scope will be. However, some expansion of the CRA’s audit powers appears inevitable.

Audit Impact

Three proposed changes to the CRA’s audit powers would likely affect audits moving forward.

First, the amendments would enable the CRA to require that information in an audit be given under oath and affirmation. Given the potential for the CRA to use this information against the taxpayer in assessing, taxpayers need to ensure that personnel who are interviewed by the CRA are adequately prepared.

Currently, when a taxpayer doesn’t provide requested information, the CRA can apply to the court for an order to fulfill the request.. The second significant amendment would introduce a mandatory penalty when the CRA successfully obtains such an order. The penalty would equal 10% of the aggregate tax payable for each taxation year covered by the order if more than CA$50,000 of tax is owed in the year. This penalty would apply regardless of whether the information obtained by the CRA ultimately leads to an assessment or the taxpayer complies with the order.

The risk of such a harsh penalty may deter taxpayers from challenging CRA requests for information, even if the taxpayer has a reasonable basis for a challenge. The penalty also creates significant uncertainty for taxpayers—a final determination of the aggregate tax payable for a given year can take years, if not decades, and the CRA can assess the penalty at any time.

The last significant proposed amendment would allow the CRA to issue a new type of notice called a notice of noncompliance. Unlike the order described above, the CRA doesn’t need court approval to issue a noncompliance notice. Rather, it can issue the notice any time it determines that the taxpayer hasn’t complied.

There are two automatic consequences when the CRA issues a notice of noncompliance. First, the taxpayer would be liable for a CA$50 ($36) penalty for each day the notice is outstanding up to a maximum of CA$25,000. Second, the normal limitation period within which the CRA must assess tax owed, if any, would be suspended for the taxpayer (and any non-arm’s-length person) from the time the notice is issued until the CRA determines there has been compliance.

It isn’t always clear whether two taxpayers are dealing at non-arm’s length for tax purposes, and sometimes it depends on factual circumstances. There also is no obligation on a taxpayer or the CRA to notify other members of the corporate group of a noncompliance notice . So, a taxpayer in such a group may not be aware that the time limit for the CRA to assess has been suspended.

Knowing the CRA is running up against the time limit can affect how taxpayers approach audits. When a taxpayer receives a noncompliance notice, it will be important for all other related taxpayers in its corporate group to be aware of the notice—particularly in a corporate group that could have numerous ongoing audits, and therefore, numerous outstanding noncompliance notices.

Outlook

The proposed amendments cumulatively could prompt the CRA to issue overly broad and potentially unreasonable requests during an audit. Given the harsh consequences of noncompliance, taxpayers would have to carefully consider whether to challenge such requests or comply.

In any event, taxpayers would be well advised to develop and maintain good working relationships with the CRA. If taxpayers can work collaboratively to ensure that information demands are appropriately framed, the CRA may be less likely to take compliance action.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Pooja Mihailovich is partner in the tax group at Osler, Hoskin & Harcourt, specializing in tax litigation and dispute resolution.

Leandra Gupta is an associate in the tax group at Osler, Hoskin & Harcourt, specializing in tax controversy and litigation.

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