The Department of Finance recently released draft legislation that would implement certain amendments to further expand the Canada Revenue Agency’s (CRA) audit powers.
The new legislation would allow the CRA to, among other things, (i) require taxpayers to give information under oath or affirmation, (ii) issue notices and impose financial penalties for non-compliance with information requests, and (iii) pause the normal limitation period for reassessment in certain circumstances involving non-compliance.
In the current audit environment, taxpayers should consider five key measures to protect their interests.
- Preserve and assert privilege. The CRA cannot compel the disclosure of information or documents that are subject to solicitor-client privilege. Moreover, the new proposed penalties will not apply if a taxpayer has not complied with a demand because it reasonably believes that the information or documents sought are privileged.
- Monitor CRA published policy. Although not legally binding, published guidelines governing the CRA’s conduct of an audit can be informative if senior CRA personnel or a reviewing Court are considering whether discretionary audit powers have been exercised reasonably. Under its own published policy, the CRA is obligated to, among other things, provide taxpayers with clear timelines, state the consequences of failing to comply with a request for information and make requests proportional to the scope of an audit.
- Request and document CRA explanations. The CRA is obliged by law to exercise its discretionary audit powers reasonably, in good faith and only for bona fide purposes. Having made a demand for information, an auditor can be expected to explain the connection between the request and the audit or compliance issue. Taxpayers should document these explanations and consider challenging unreasonable requests.
- Object to assessments imposing disproportionate or unfair penalties. If a taxpayer objects to an assessment of a compliance order penalty, the CRA is required under the proposed legislation to vacate or vary the assessment if it determines that the penalty is, in the circumstances, disproportionate or unfair.
- Contest demands for information where appropriate. The Court exercises discretion in deciding whether to grant a compliance order and may impose conditions. It may consider the feasibility of a demand when presented with evidence that compliance would be impossible or unduly strenuous or if the information sought is tangential to the audit. Where the circumstances warrant it, judicial review should be considered.
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