The government says amendments to the information-gathering provisions in the Income Tax Act, which also include steeper penalties for non-compliance, will 'enhance the efficiency and effectiveness of tax audits' and speed up tax collection.Sean Kilpatrick/The Canadian Press
Sign up for the Globe Advisor weekly newsletter for professional financial advisors on our sign-up page. Get exclusive investment industry news and insights, the week’s top headlines, and what you and your clients need to know. For more from Globe Advisor, visit our homepage.
The Canada Revenue Agency (CRA) will get expanded powers to force taxpayers to provide information under oath during an audit, a new legal weight experts say is overreaching and will add costs and stress to the review process.
In 2022, the CRA got the go-ahead to require taxpayers to meet with its auditors in person or by video conference to answer questions during the audit process. The proposed amendments to the Income Tax Act included in the latest federal budget go even further. Under the new measures, a requirement or notice sent or served on a taxpayer “may require that the person provide any answers to questions, information or documents sought by the Minister under those sections orally, under oath or affirmation, or by affidavit.” (Oaths and affirmations are vows to tell the truth; an affidavit is a sworn written statement).
Legal experts believe the change is extreme and say the Finance Department has provided little guidance on how the new rules will be applied and what penalties could be imposed. There are also worries the new powers could be used in a way disproportionate to the intended purpose, which could lead to unfair or unequal treatment of taxpayers.
“For Canadian taxpayers, the implications of this proposal are significant. The requirement to provide information under oath or affirmation adds a layer of legal gravity to the audit process, potentially increasing the consequences of providing false or incomplete information,” states a recent article from three lawyers at Davies Ward Phillips & Vineberg LLP, adding that “it is unclear why Finance proposed such expansive and draconian powers.”
The budget says amendments to the information-gathering provisions in the Income Tax Act, which also include steeper penalties for non-compliance, will “enhance the efficiency and effectiveness of tax audits” and speed up tax collection.
CRA auditors are ‘not judges’
Élisabeth Robichaud, a partner in the tax and tax disputes practices at Davies Ward Phillips & Vineberg LLP in Montreal, says forcing taxpayers to provide information under oath or affirmation, or by affidavit, is a major change that goes beyond the scope of CRA audits. She likens it to giving testimony in a courtroom.
“The risk of the interview turning into a cross-examination is a legitimate concern because an audit isn’t an investigation. The tax authorities aren’t there to put taxpayers into a corner,” she says. “An audit is supposed to be a collaborative process, and they’re there to make sure they obtain all of the correct and accurate information, not to trick taxpayers.”
Ms. Robichaud says the CRA appears to want to use interviews to assess a taxpayer’s credibility, which she argues isn’t its role.
“They’re not judges; their job is not to evaluate whether or not the taxpayer is a good witness when pressed to answer questions orally,” she says.
“We’re concerned that without clear guidelines, the interviews will be used as a tool to attack taxpayers and collect improper information … by bullying taxpayers into answering certain questions that they shouldn’t have to, or because they’re just nervous when meeting with tax officials,” Ms. Robichaud adds. “The proposed use of oaths now goes a step further in turning the administrative civil audit process into one that resembles an investigation or trial preparation.”
Michael Friedman, partner at McMillan LLP in Toronto, says the requirement to provide the CRA information under oath in an audit seems excessive and will force affected taxpayers to pay extra legal and accounting fees to have the proper paperwork drawn up.
“The vast majority of taxpayers want to answer questions, so it seems like an exceptional cost to deal with what may be a narrow problem,” he says. “It will be interesting to see how extensively the CRA uses the provision.”
Mr. Friedman says the changes could also have the opposite effect, creating more non-compliance, especially if taxpayers don’t have a legal or tax advisor to help them and choose to deal directly with the CRA.
“You could have taxpayers throwing up their hands and saying, ‘I don’t know what an affidavit is, so I’m just going to ignore it,’ which will make matters worse,” Mr. Friedman says.
Tougher penalties for non-compliance
The budget also includes new and steep penalties for taxpayers not complying with CRA audit requests.
One provision includes a new 10-per-cent penalty for taxpayers who have received a CRA compliance order if they owe more than $50,000 in a relevant tax year. The budget says the proposed penalty “would create an incentive for taxpayers to comply with the original request for information or assistance.”
The budget also includes a measure to enable the CRA to issue a new “notice of non-compliance” to taxpayers who haven’t responded to previous requests for information, including a $50 penalty for each day the notice of non-compliance is outstanding to a maximum of $25,000.
“The rules are exceptionally broadly crafted, without sufficient thought to their scope and how they may apply in unintended circumstances,” Mr. Friedman says.
The budget also proposes to “stop the clock” on the three-year reassessment period when a taxpayer seeks judicial review of any CRA requirement or notice related to an audit. The new rules suspend the running of the reassessment period until the judicial review of the information request or issuance of a notice of non-compliance is complete, which Mr. Friedman says can take years.
“It runs counter to and in the face of what a limitation period is intended to do, which is to give taxpayers comfort that tax years are eventually closed and also impose some burden on the government to act with reasonable diligence,” he says. “It’s not a tax-efficient change.”
How advisors can help clients prepare
Matthew Pollock, an associate lawyer at Rosen and Associates Tax Law in Toronto, says the CRA’s expanding powers will make it more important for advisors to ensure their clients’ tax information is detailed and up to date in case they’re audited.
“Lawyers and accountants will need to be even more meticulous with their clients,” he says.
If there’s an audit, advisors should also help taxpayers understand their rights, legal position and options, Mr. Pollock says, especially given the proposed new rules.
Advisors can also prepare clients for potential oral interviews by ensuring they know how to respond to the CRA’s inquiries accurately without providing unnecessary or irrelevant information.
“And if you don’t know the answer, just tell them you don’t know and will get back to them. You want to ensure the information is accurate,” Mr. Pollock says.
For more from Globe Advisor, visit our homepage.