Draft legislation tabled last week to enhance the CRA's audit powers didn't include a testimony-under-oath provision from previous versions.Sean Kilpatrick/The Canadian Press
The federal government has dropped a proposal to give the Canada Revenue Agency the power to compel testimony under oath during an audit, a move that tax practitioners are praising.
Last week, the government tabled draft legislation included in Bill C-31 that would expand the CRA’s audit powers significantly, including giving the agency the power to levy new penalties when a taxpayer fails to comply with an audit request.
However, the draft legislation did not include the testimony-under-oath provision that had been featured in previous versions of the draft legislation released for consultation.
Pooja Mihailovich, partner and co-lead of the tax controversy and litigation group with Blake, Cassels & Graydon LLP in Toronto, called the CRA’s reversal on compelled testimony “a significant and welcome change” in a response sent by e-mail to questions from The Globe and Mail.
“Many [tax] practitioners rightly view compelled testimony under oath as moving audits toward an inquisition-style process, with potentially serious consequences for taxpayers, including exposure to perjury if answers later proved inaccurate,” Ms. Mihailovich said.
Bhuvana Rai, tax lawyer and founder of Mors & Tribute Tax Law in Toronto, said in an e-mail that the government’s now-dropped compelled-testimony provision had “none of the procedural safeguards we normally see. It also appeared to be unnecessary given [the] CRA’s existing powers to compel evidence.”
In the 2024 federal budget, the government proposed expanding the CRA’s information-gathering powers to “enhance the efficiency and effectiveness of tax audits and facilitate the collection of tax revenues on a timelier basis.”
The proposals were meant to address concerns that taxpayers were taking too long to provide information to the CRA, making it difficult for the agency to collect taxes.
Although the draft legislation the government tabled last week drops the controversial provision and softens some other proposals, “the balance of power in the audit process continues to shift toward the CRA,” Ms. Mihailovich says.
Under the proposals, the CRA would have the power to issue a new notice, called a notice of non-compliance, in cases in which the taxpayer hasn’t complied with an audit requirement. The notice carries a penalty of $50 a day to a maximum of $25,000. The normal reassessment period is paused while a notice is outstanding.
The CRA would also be able to impose a penalty of 10 per cent (changed from “up to” 10 per cent in the 2025 draft proposals) of taxes owed when it obtains a compliance order against a taxpayer. The penalty wouldn’t apply if the taxes owing for the year are less than $50,000.
Finally, the CRA would be allowed to extend the normal reassessment period for taxpayers seeking a judicial review of a requirement or a notice.
That means “the ultimate tax liability could be uncertain for many years, even if the [CRA] was ultimately wrong about whether the information request was lawful,” Ms. Rai says. “Ultimately, this appears to punish taxpayers for exercising their rights to dispute assessments.”
The draft legislation also allows the CRA to issue a notice of non-compliance to third parties who may have information about a taxpayer’s potential tax liability, including financial institutions, accountants and advisors.
However, the agency must obtain a compliance order before issuing a notice to a third party, a requirement that wasn’t included in previous versions of the proposals.
Should the expanded audit power become law, it would become even more important for taxpayers and advisors to keep organized records, respond “carefully and strategically” to audit requests, document communications and seek advice early to understand legal rights and obligations, Ms. Mihailovich says.
“The CRA’s powers are not unlimited,” she says. “It is still required to exercise its audit powers reasonably and in good faith, and solicitor-client privilege remains protected.”