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| John L. Hill |
The Canada Revenue Agency (CRA) has expanded its audit powers. CRA auditors, supposedly under the authority of s. 231.41 of the Income Tax Act, are exercising powers that police would not have in a criminal investigation. Changes outlined in a Ways and Means Motion to amend the Income Tax Act, introduced during Canada’s 2024 budget, allow CRA auditors to question taxpayers and compel interviews under oath or in writing. The CRA can require answers, information or documents to be provided in person, via video conference or through other electronic means, and it can do so under oath, in writing or by affidavit. Failure to comply may result in penalties of up to 10 per cent of the tax owed and fines of up to $25,000 for refusing to provide oral or written statements in response to CRA questions.
The legislation does not require the presence of legal counsel before answering questions. These answers can later be used in court to support a government claim of tax law violation. Furthermore, it does not have to be the corporation’s president or other executive who provides the self-incriminating statements. The CRA can issue its demand and receive answers under oath even before the company’s top-level management is aware that the audit is underway.
Prior to the inclusion of s. 231.41, the CRA’s audit powers, contained in ss. 231 to 231.5 of the Income Tax Act, provided for an application to the Tax Court for the appointment of a person as a hearing officer who has the powers of a commissioner under the Inquiries Act. However, those provisions permitted a person being investigated to be present and represented by counsel.
There is no provision for counsel to be consulted, retained or present under the new s. 231.41 provisions.
The revised audit powers give the CRA tools not available to police conducting searches and afford no presumption of innocence to the taxpayer. These changes were made despite the 2019-2020 annual report in which the Taxpayers’ Ombudsman, Sherra Profit, concluded that CRA policies and procedures are “systemically oppressive” toward vulnerable, Indigenous, rural and remote populations.
Natalie Worsfold, a partner and tax litigator at the Toronto firm Counter Tax Litigators LLP, sees the new rules as creating a shift that makes audits more adversarial.
Worsfold was also critical of the new requirements for corporations to file their T2 returns electronically. That requirement was enacted on June 22, 2023, in Bill C-47, the Budget Implementation Act, 2023, No. 1. Although the government claims that the necessity of avoiding Canada Post as a means of filing corporate tax returns was well publicized, the federal government was lax in keeping its website up to date.
Canadians who had shelf corporations or were involved in corporations with little or no income may have relied on a government website with the heading, “Where to send your corporation income tax (T2) return.” Following that headline were the words, “Most corporations with gross revenues in excess of $1 million are required to Internet file their T2 Corporation Tax return using CRA approved commercial software.” It then continues, “Where to file your paper return depends on where the corporation is located.” The site then lists the postal addresses of various tax centres across Canada. Many Canadians who believed their corporation had little or no income, certainly less than $1 million in gross revenues, felt confident they were complying with the legal requirement to file an annual tax return by mailing it. However, these taxpayers were jolted when, upon receiving their Notice of Assessment, even if no tax was owed, a penalty of $1,000 was imposed.
Unlike a situation where police may simply warn a driver before issuing a ticket, CRA imposed the penalty without exception. Worsfold admitted to being surprised that no exception applied to small or inactive corporations.
One taxpayer objected, seeking cancellation of the penalty and damages due to the negligent misstatement on the government website. The Department of Justice took the position that there is no contractual relationship between the CRA and the public. The CRA and public-facing guidelines are updated periodically and provide general guidance only, which is subject to verification against the relevant legislation and current policy guidelines. The CRA’s position is that even if government websites mislead, the taxpayer will still be liable for the penalty.
We will not have a judicial ruling on this issue. The Department of Justice, acting on behalf of the CRA, offered a settlement, which the taxpayer accepted. The taxpayer cannot disclose the terms of the settlement, as he is bound by a nondisclosure agreement.
Criminals can count on the Charter of Rights to protect them. Taxpayers dealing with the CRA seem to lack such protection.
John L. Hill practised and taught prison law until his retirement. He holds a JD from Queen’s and an LLM in constitutional law from Osgoode Hall. His most recent book, Acts of Darkness (Durvile & UpRoute Books), was released July 1. Hill is also the author of Pine Box Parole: Terry Fitzsimmons and the Quest to End Solitary Confinement (Durvile & UpRoute Books) and The Rest of the (True Crime) Story (AOS Publishing). Contact him at johnlornehill@hotmail.com.
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