CBA and CPA Joint Report: Taxpayers May Face Severe Consequences

Special Guest Columnist Geoff Currier

When it comes to disputes with Canada Revenue Agency, there is a presumption that the individual or company will receive fair treatment by the Agency and under Canadian law. However, a report from Audit Powers Working Group of the Joint Committee on Taxation of the Canadian Bar Association and Chartered Professional Accountants of Canada raises four areas of concern about proposed changes to CRA powers.

The report states that under draft legislation released in August “We believe that these proposed provisions do not include appropriate procedural protections or appeal rights, are overbroad and are unnecessarily onerous for taxpayers.”

OATH OR AFFIDAVIT. The legislation would require taxpayers  to swear under oath or by affidavit that the information they are providing is accurate.  For the Joint Committee, this was a simple area to dispute. It’s pointed out in the report that CRA already has extensive powers to compel taxpayers to provide information and that there are significant penalties  in place to deal with non compliance. The powers include the ability to have a Federal Court issue a compliance order and go so far as to be able to have a taxpayer criminally convicted for providing false information to CRA.

The report suggests that the proposed legislation would potentially increase costs for ordinary taxpayers and that it fails to include necessary checks and balances against the use of the proposed powers to compel under oath testimony. Based on its analysis, the Committee suggests scrapping this clause altogether.

NOTICE OF NON COMPLIANCE. The second issue relates to the Minister’s ability under the legislation to issue a Notice of Non Compliance. Such a notice could be issued despite a taxpayer making every sincere effort to provide all of the necessary information to CRA. More important, though, is that the legislation fails to address whether or not the NNC takes into account the legality of the notice.

The report says, “The Minister should not be permitted to issue an NNC – which it can do without judicial authorization – when a taxpayer has refused to provide information on the basis of solicitor-client privilege.”  It also references the Supreme Court ruling which clearly states that solicitor-client privilege must be “jealously guarded.”

There is a potential conflict between what the Minister, who would issue the NNC, would consider reasonable, and what a court might rule in the same situation. The Committee concludes “The NNC regime is procedurally unworkable in circumstances where a taxpayer has exercised their right to refuse to produce a privileged document in response to a Requirement.” And, as with the first area of concern, smaller taxpayers would be placed under a severe disadvantage if served with an NNC. It suggests instead a right of substantive appeal to court.

AUTOMATIC PENALTIES IN ADVANCE. The third example of flaws in the legislation is perhaps the most concerning as it is the most arbitrary. The legislation will allow for an automatic penalty for a compliance order issued by the Federal Court. What this means is that “The penalty is calculated as 10% of the aggregate amount of tax payable by the taxpayer for each year in respect of which the compliance order was issued.”

The report argues that the penalty should not be automatic and cites several examples in which it could be applied unfairly. One such example is that of a corporation which provides 95% of the required documentation and withholds the other 5% based on solicitor-client privilege. The penalty might still be arbitrarily applied. Other examples are cited in the report as well, including the possible imposition of such a penalty in a case of good will dispute with CRA.

The recommendation is that the penalty be only applied in cases of clearly egregious conduct and that a judge be permitted to apply the penalty not exceeding a specific amount.

SUSPENSION OF NORMAL REASSESSMENT PERIOD. Lastly, the Committee voices concerns over the suspension of the normal reassessment period.  The report lists a number of potential scenarios in which the normal reassessment period can be suspended to the disadvantage of the taxpayer, among them “the normal reassessment period of a taxpayer can be suspended for actions beyond the taxpayer’s control or because of audit scrutiny of a non-arm’s length person with tax issues that have nothing to do with the taxpayer.”

The report suggests that there should be no suspension of the reassessment period if a court has vacated an NNC.

Bottom Line.  Changes were proposed to the Income Tax Act in 2022 but proper assessment of those changes has yet to be made. Under the new proposed legislation, the powers of CRA and the Minister would be greatly expanded, with serious consequences for taxpayers. The report concludes that the Auditor General, Canadian taxpayers and the Justice Minister should all be consulted before considering any of the proposed changes to the Income Tax Act.