A taxpayer cannot bring an application for a court order preventing the CRA from exercising its power to demand records and information even where the taxpayer believes that the CRA would be estopped from issuing an assessment for a matter to which the records and information relate. Continue reading
Steve Suarez, “FCA To Hear Atlas Tube Appeal” 27:12 Tax for the Owner-Manager (December 2019), discusses Canada (National Revenue) v. Atlas Tube Canada ULC, 2018 FC 1086. The Federal Court held that an accounting firm’s due diligence report on the tax attributes and exposures of a target corporation was not privileged and was subject to disclosure to the CRA. The taxpayer has appealed the decision. The author argues that the Federal Court judge made a number of errors of law in arriving at its decision.
Automobile benefits are fish in a smaller barrel for CRA auditors. If all else fails, the auditor can recover something for his or her time by reassessing them. (My experience on the subject is probably not representative. Nevertheless, it’s the rare reassessment I contest where some kind of benefit isn’t reassessed for a company-owned car.)
A client of mine shows us how it’s done. (I’m telling this story with his permission.) His company was subject to a desk audit for $120,000 of vehicle expenses incurred over two years. The CRA gave him 30 days to respond. He responded in 20 days—without consulting me, I might add—with 2,000 pages of materials. The result? The CRA did not adjust one penny of the expenses claimed.
He also volunteered to me that, in seventeen years of business, his company has never been late with a single remittance of health tax, WSIB (across ten provinces), HST/GST, CPP/EI or employee income tax.
Clients sometimes complain to me that they have given records to a CRA auditor who then returns only some of the records or returns them in a disorganized state that makes them difficult to work with. Accordingly, if a client asks me about a CRA demand for records, I usually counsel them to provide copies or to keep copies of what is provided. This can be onerous, but the alternative is to risk losing records, if the CRA is careless with them, and then have the Tax Court blame you for it. See MacDonald v R, 2019 TCC 169 (informal procedure), in which we read the following:
 The Appellant presented himself as an executive-level businessperson who dealt primarily with telecommunications company executives. Having in mind the duties statutorily fixed upon taxpayers to retain relevant records per subsections 260(1) and (6) of the Act [sic—presumably the reference should be to section 230], set out above, I must observe that the Appellant exhibited inadequate acumen and prudence in not retaining a copy of the expense records bundle that he sent to CRA.
Sunita Doobay, “The MNR’s Audit Powers” Canadian Tax Highlights 27:3 (March 2019) reviews three important recent cases on CRA audit powers, namely Cameco, 2017 FC 763 (power to require oral interviews), BP Canada Energy Company, 2017 FCA 61 (power to compel production of tax accrual working papers), and Atlas Tube Canada ULC, 2018 FC 1086 (power to compel production of a due diligence report).
Postscript July 10, 2019 The CRA has stated that it will not appeal Cameco and that it will continue to request, but not attempt to compel, interviews with employees. The CRA has also released AD-19-02R, “Obtaining Information for Audit Purposes”, which outlines CRA audit policy after Cameco and BP Canada. John G. Bassindale and Robert G. Kreklewetz, “FCA Restricts CRA Interviews of Employees” Tax for the Owner Manager 19:3 (July 2019)
Postscript July 13, 2019 See also Kevin O’Reilley and Fred O’Riordan “Further Clarity Concerning the CRA’s Power To Compel Oral Interviews” Canadian Tax Highlights 27:6 (June 2019) and Timothy Fitzsimmons and Angelo Bertolas “CRA Guidance on Obtaining Taxpayer Information” Canadian Tax Highlights 27:6 (June 2019)
Canada (National Revenue) v Cameco Corporation, 2019 FCA 67, aff’g 2017 FC 763, held that the CRA, on an audit, cannot compel a taxpayer to submit to oral questioning. Of course, a refusal to answer oral questions can lead to the Minister drawing an adverse inference. (Does the Minister ever do otherwise?) Ashvin Singh, “CRA Cannot Require Oral Interviews” Canadian Tax Focus 9:2 (May 2019).
According to Neil Armstrong’s summary of Alexandra MacLean’s paper at the 2018 CTF Annual Conference (“CRA Audits of Large Corporations – The view from ILBD”), CRA Tax Services Offices and programs are assessed by “tax earned by audit” for the purposes of allocating resources. The result, predictably, has been that auditors made adjustments that, too often, needed to be reversed by Appeals.
Although Ms MacLean’s paper is about large audits, her observation seems apt for owner-managed businesses as well. Accountants who represent such clients have mentioned to me repeatedly a growing intransigence on the part of CRA auditors. I have encountered a number of audits where Appeals ended up making large changes because the audits weren’t well founded in the facts or the law (or both).
Apparently the CRA is working to fix this problem. Ms MacLean also notes, however, that the CRA is dealing with statutes where there is “substantial interpretive uncertainty”. She expressed confidence that the government would move forward quickly with a comprehensive review of those statutes for the purpose of reforming and simplifying them so that business owners and other taxpayers will have more confidence they are complying with the law when filing tax returns.
Ha ha ha ha. I made up that last part, of course. In reality, we’ll be stuck with the patchwork mess that is the Income Tax Act for at least the remainder of my professional life.
The taxpayer in Canaada (National Revenue) v Stankovic, 2018 FC 462, had held a bank account in Switzerland that French authorities disclosed to the CRA under the French treaty. The French authorities, it appears, had obtained the information about the account in contravention of French law.
The taxpayer tried to oppose a compliance order on Charter grounds on the basis that the CRA inquiry related to the taxpayer’s potential criminal liability and that the information from the French authorities had been obtained illegally.
After applying the Jarvis (2002 SCC 73) factors, the Court held that the CRA inquiry was civil in nature so that the Charter did not protect the taxpayer. Moreover, the Court held that the CRA had obtained the information in question legally. That the French authorities might have obtained the information illegally did not violate the Charter because it applies only to Canadian state actors.
Anthony Sylvain, “The CRA’s Win Against Undisclosed Offshore Accounts” 8:4 Cdn Tax Focus (Nov 2018).
In Bauer, 2018 FCA 62, the CRA commenced an investigation into whether the taxpayer had evaded taxes. The CRA investigator issued requirements to several banks under section 231.2 to obtain information on the taxpayer. The CRA then used that information to prepare net worth assessments. The taxpayer’s notice of appeal from the assessments alleged that the information from the banks was inadmissible in the Tax Court proceedings because it had been obtained in a manner that violated his section 8 Charter rights. The Tax Court struck the allegation as having no reasonable prospect of success, even if true. The Federal Court upheld the Tax Court decision. Mr Justice Webb wrote the following for a unanimous court:
 In my view, even though an investigation had commenced that could lead to charges being laid under section 239 of the ITA, this does not preclude the CRA from using requirements to obtain information or documents that could be used only in relation to the reassessments. Both the reassessments and any charges under section 239 of the ITA ultimately relate to the underlying tax liability of the taxpayer. Therefore, there is a common element in both matters—the determination of the unreported income of the taxpayer for a particular year. Common facts will be needed for both the administrative reassessment and the penal charges under section 239 of the ITA.
 While using requirements under section 231.2 of the ITA to obtain information or documents after an investigation has commenced may result in that information or those documents not being admissible in a proceeding related to the prosecution of offences under section 239 of the ITA, it does not preclude that information or documents from being admissible in a Tax Court of Canada proceeding where the issue is the validity of an assessment issued under the ITA. It is the use of the information or documents that is relevant, not who at CRA issued the requirement for information or documents.
 In Piersanti the issue was the admissibility of certain documents in a hearing before the Tax Court of Canada in relation to Mr. Piersanti’s liability under the Excise Tax Act, R.S.C. 1985, c. E-15. The documents had been obtained as a result of requirements that had been issued under that Act while the CRA was investigating Mr. Piersanti to determine if criminal charges should be laid. In confirming the admissibility of such documents this Court noted, at paragraph 5, that ““[a] taxpayer’s Charter rights are engaged when an audit becomes a criminal investigation””. Since these Charter rights are engaged when this criminal investigation commences, these Charter rights, that could affect the admissibility of documents in court proceedings, must relate to proceedings arising from this criminal investigation and not to proceedings that do not relate to the commission of a criminal offence under the ITA or the Excise Tax Act.
 In relation to the appeal of his reassessment, Mr. Bauer is in the same position as any other taxpayer appealing a net worth assessment that is based on documents received following the issuance of a requirement under section 231.2 of the ITA. He should not be in a better position simply because he was also under investigation in relation to section 239 of the ITA.
These days, in so many aspects of our lives, we are the product (as the saying goes). Retailers, for example, offer loyalty programs because, among other things, they allow our spending habits to be tracked. It turns out that the retailers aren’t the only entities interested in our spending habits, however. The CRA could use these programs to determine whether we have unreported income (eg by obtaining information about our cash purchases from a retailer). See Steven Raphael and Robert G. Kreklewetz, “Loyalty Program Data May Assist the CRA” 25:10 Canadian Tax Highlights (October 2017), which discusses Rona Inc. c Canada (Revenu national), 2017 CAF 118.