The Department of Finance recently released draft legislation to implement proposals set to give the Canada Revenue Agency expanded new audit powers.Sean Kilpatrick/The Canadian Press
The federal government is set to give the Canada Revenue Agency (CRA) expanded new audit powers, including the power to compel testimony under oath and to impose new non-compliance penalties, despite tax advisors’ concerns that the proposals raise risks and costs for taxpayers unnecessarily.
On Aug. 15, the Department of Finance released draft legislation to implement the proposals, replacing draft legislation it released in August, 2024, to advance the same changes, but which was not tabled in the House of Commons last fall. The revised proposals are out for consultation until Sept. 12.
Although the newest set of draft legislation includes some relieving measures relative to the 2024 proposals – including the removal of penalties if the taxpayer’s non-compliance is based on a reasonable belief that information is covered by solicitor-client privilege – it kept the 2024 proposals substantially in place.
“It’s surprising [the CRA] doesn’t think it has the tools to do its job within the existing legislation,” says Bhuvana Rai, tax lawyer and founder of Mors & Tribute Tax Law in Toronto, and a former tax-litigation counsel with the Department of Justice.
Ms. Rai says she’s particularly concerned with the lack of checks and balances, such as a right to request that the proceedings be recorded, included in the draft legislation for taxpayers providing testimony under oath.
“You might think this is just for tax, that at the end of the day, it’s just a [tax] bill, but now there’s a statement under oath that you’ve made that can be used against you for any purpose,” Ms. Rai says.
Timothy Fitzsimmons, partner with Fasken Martineau DuMoulin LLP in Toronto, says it’s uncertain how CRA audit teams would use the proposed powers to compel testimony under oath.
“You start to anticipate that there could be more inefficiencies rather than efficiencies because counsel now has to be involved early on,” he says. “People are providing sworn statements; they need to be knowledgeable, they need to be truthful and accurate, and that’s a process that can require a lot of time and a sort of careful navigation.”
John Oakey, vice-president of taxation with CPA Canada in Dartmouth, N.S., says he’s concerned that the draft legislation lacks guardrails to protect taxpayers who are dealing with the CRA in good faith, particularly individuals and small businesspeople who may not have access to sophisticated tax and legal advice.
“There’s no intent built into the legislation, such as with gross negligence penalties or anything like that, which means it’s broadly applicable,” Mr. Oakey says.
In the 2024 federal budget, the government proposed expanding the information-gathering powers of the CRA to “enhance the efficiency and effectiveness of tax audits and facilitate the collection of tax revenues on a timelier basis.”
The government was responding to a 2018 report from the Office of the Auditor General that said, in some cases, taxpayers were taking too long to provide information to the CRA, making it difficult for the agency to collect taxes.
Among the other proposed expanded audit powers, the CRA would be able 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 comes with a penalty of $50 a day to a maximum of $25,000. The normal reassessment period is paused while the notice is outstanding.
The CRA would also be allowed to extend the normal reassessment period for taxpayers seeking a judicial review of a requirement or a notice issued by the CRA, and assess a penalty of up to 10 per cent (amended from a flat 10 per cent in the 2024 draft legislation) of taxes owed when the CRA obtains a compliance order against a taxpayer. The penalty wouldn’t apply if the taxes owing for the year were less than $50,000.
The increased penalties raise costs and risks for taxpayers and tax advisors alike, Mr. Oakey says.
For example, in situations in which he has pushed back against the CRA for asking for client information he believed it did not have a right to have, “I could take a very strong stance without the taxpayer being penalized,” Mr. Oakey says.
“If I [were to] take that strong stance now [under the proposals], because it’s at the discretion of the CRA to issue a notice of non-compliance, my client could get penalized.”
Mr. Fitzsimmons says the costs to comply with an audit under the expanded rules would affect individuals and small business owners, who may not have the resources that a large corporate taxpayer would have, disproportionately.
Immigrants to Canada who may be looking to repatriate money held in foreign accounts may also be affected disproportionately by the expanded audit powers, Ms. Rai says.
“The CRA is extremely skeptical of any money you bring from the other country,” she says. “They’ll often assume it’s the result of unreported business income,” as opposed to a repatriation of assets held abroad.
Given that relatively few changes were made to the 2025 draft legislation relative to the previous set, and the short end-of-summer consultation period, Mr. Oakey expects the government to introduce the proposals in the upcoming fall budget largely as is.
Mr. Fitzsimmons also says Ottawa is likely to proceed with the changes.
“If the new government under our current prime minister had a different approach [relative to the previous government], and if the top of the Department of Finance and the CRA had a different approach, we would’ve seen broader amendments to the proposals,” he says.