CRA controls its audit process, and the Courts won’t intervene
It’s been well established, in Court cases over many years (e.g., Main Rehabilitation Co., 2004 FCA 403), that if you’re appealing an income tax (or GST/HST) assessment, the only issue the Tax Court of Canada can address is whether the assessment is legal and correct. How the CRA behaved during the audit process doesn’t matter. Even if the auditor acted unreasonably, once you’ve been assessed you have to show the Tax Court why the assessment is wrong, and the auditor’s actions are irrelevant. (And if the assessment is for GST/HST or source deductions, CRA Collections will force you to pay the assessment even while you’re appealing, long before you can get to the Tax Court.)
So what do you do if a CRA auditor is acting unreasonably – say, by proposing an assessment that is clearly wrong?
You can’t go to the Tax Court during the audit. Unless there’s an assessment to appeal, the Tax Court doesn’t have any legal basis to consider your case.
You can approach the auditor’s Team Leader or more senior management for help, but often they will support the auditor, unless you can show a clear violation of CRA policy or clearly wrong interpretation of the law (and sometimes even in those cases).
If you’re still stuck, you can file a “Service Complaint” within the CRA.
If that still doesn’t get you anywhere, you can ask the Taxpayer’s Ombudsman for help, and the Ombudsman can make recommendations to the CRA. But those recommendations aren’t binding, and it’s the CRA’s decision as to how it will audit, and whether or when it will reassess you.
So are there any other legal options?
Yes – in theory. The Federal Court has jurisdiction over the CRA. If the CRA has made a decision you disagree with (other than issuing an assessment that you can appeal to the Tax Court), you can apply to the Federal Court for “judicial review”, and seek an order such as “mandamus” (Latin for “we order”) or an injunction, to order the CRA what to do or not do.
The problem with this is that, as two recent cases show, the Federal Court in practice is very unlikely to intervene. The cases are Safe Workforce Inc. (2019 FC 645), and Ghazi (2019 FC 860).
In the first case, Safe Workforce (SW) was being audited by the CRA. The auditor issued a proposal letter, proposing to reassess. SW asked for all information in the auditor’s file about SW (so it could better reply to the proposal), and while some information was disclosed, the CRA’s response to further requests was that SW should file an Access to Information Act request. SW applied for disclosure, but the CRA’s Access to Information department was slow in responding. After some months went by, the auditor indicated he would “close the file” and issue the assessment. SW complained to the auditor’s superiors, and the Assistant Director Audit of that CRA office confirmed that the auditor could go ahead and issue the assessment.
SW then brought an application in Federal Court for judicial review, seeking an injunction to stop the CRA from issuing the assessment until the Access to Information disclosure had been provided, so that SW could make further submissions. Seems reasonable?
The government brought a motion to strike out the judicial-review application on the basis it could not possibly succeed. SW countered with a motion seeking an interim injunction to prevent the assessment from being issued until the judicial-review application had been heard.
The Federal Court dismissed both motions. The Court ruled that it was premature to dismiss the application, because it could conceivably succeed. But the Court also declined to issue an interlocutory injunction, as there was no indication that SW would suffer “irreparable harm” by having the assessment issued, since it could appeal to the Tax Court.
Thus, in effect, SW lost its case because the CRA can now proceed to issue the assessment. As the judge wrote, “there is no statutory or common law obligation to allow the Applicant to participate in the audit process”. In other words, an auditor’s proposal letter is an administrative courtesy with no legal status, and doesn’t give you a legal right to stop the assessment from being issued.
Ghazi was a somewhat similar case. Ghazi was being audited by the CRA, which proposed to assess him for HST not collected on the sale of two real estate properties. His lawyer asked the auditor for the facts that the auditor was assuming to support the proposed assessment and penalties.
Ghazi sought to have the Assistant Director Audit of that CRA office change auditors, and move the file to a new audit team. When she refused, Ghazi applied to the Federal Court for judicial review. He sought an order requiring the CRA to take the auditor and team leader off the audit.
The Federal struck out Ghazi’s application for judicial review without a hearing, as it had no legal chance of success. Any complaints Ghazi had about the audit team’s conduct could be addressed by the CRA Ombudsman. Ghazi’s real objective was to stop the assessment being issued, which was not something the Federal Court would do. Ghazi had an adequate remedy of appealing the assessment to the Tax Court of Canada.
As one can see from these two cases, in practice one cannot get any help from the Courts in trying to stop an audit assessment. If you have no luck with CRA management or the Ombudsman, the assessment will be issued, and all you can do is appeal to the Tax Court. And if the assessment is for GST/HST or source deductions, you’ll be forced to pay even while you’re appealing.