The Income Tax Act gives the CRA wide powers to access your accounting records, bank records, and any other documents it can find or demand.
An auditor can ask for records about you from you, your bank, your accountant, your employer or almost anyone else you deal with, such as investment dealers, casinos, insurers, customers or credit-card issuers.
Under section 231.1 of the Income Tax Act, an audit request must be complied with. If the person from whom information is requested does not comply, the auditor will normally issue a Requirement for Information under section 231.2. This is a formal document, delivered in person or by registered mail, which requires the person to comply. Not complying is an offence that can be prosecuted.
In practice, if a person does not comply with a Requirement for Information, the CRA then escalates to obtaining a compliance order under section 231.7 from the Federal Court, which is served on the person. Continued non-compliance then constitutes contempt of Court, and will usually land the person in jail. This is a very effective tool to ensure compliance!
There are very few exceptions to these rules. As long as the documents or records being sought are reasonably relevant to the audit of a taxpayer, the CRA is normally entitled to request them.
One important exception is lawyers’ offices (including offices of notaries in Quebec). Due to the Supreme Court of Canada’s ruling in the 2016 Chambre des notaires case, the CRA cannot at present demand documents from a lawyer or law firm, even if those documents are not subject to solicitor-client privilege.
Another exception is documents protected by solicitor-client privilege, even if they are not in a law office. This privilege covers communications to or from a lawyer for the purpose of obtaining legal advice. However, if the document is in someone else’s hands — e.g., your accountant’s office — then privilege may have been waived and the document might not be protected. Guard carefully any privileged documents, and ensure that if copies go elsewhere, it is on the basis that privilege is not being waived!
Also, if the taxpayer is unidentified and the CRA wants to use a business’s records to find taxpayers of a certain class — such as all customers of a particular tax advisor or all real estate agents paid by a particular broker — then a Court Order is required before the Requirement for Information can be issued.
Finally, note that if the CRA has internally moved from an audit to a criminal investigation, then the above audit powers cannot be used to gather information for a prosecution, and evidence collected by audit request, Requirement for Information or compliance order will not be admissible as evidence in the prosecution. (It can still be used to support a tax assessment and as evidence in Tax Court in an appeal of that assessment.) This rule, under the 2002 Supreme Court of Canada Jarvis case, does not apply to evidence collected while the CRA is only auditing the taxpayer and has not begun a criminal investigation.
In general, you should assume that any documents about you and your financial affairs that exist anywhere other than in your lawyer’s office may become available to the CRA.