Canada Revenue Agency (CRA) auditors have significant power to demand information from taxpayers, who can be required to provide all documents relating to their business activities and finances, and can now be required to answer questions as well. Lawyer-client privilege protects any communications with one’s lawyer (or a notary in Quebec) relating to legal advice, but aside from such privilege, taxpayers can be required to cough up vast amounts of information and data.
However, some taxpayers resist this, and the CRA over the years has had to go to the Federal Court of Canada many times to get a “compliance order”, ordering a taxpayer to provide records that the CRA had demanded and should have already provided. Even when such an order is issued, with non-compliance constituting “contempt of Court” and subjecting the taxpayer to fines and/or jail time, some taxpayers have still not complied. The reported case law in this area includes some cases with extensive legal wrangling that goes on for years, as taxpayers try to keep certain details of their affairs, including trusts, corporations and partnerships, out of the CRA’s hands.
The April 16, 2024 federal Budget includes proposals regarding “non-compliance” that will give the CRA powerful new tools to get such information.
First, if the taxpayer doesn’t comply with CRA demands and the CRA has to get a “compliance order” from the Federal Court, that will automatically trigger a penalty of 10% of the taxpayer’s federal tax payable for each year under audit. This penalty will apply even if the taxpayer complies immediately with the compliance order. It will also apply, as currently proposed, to all of the tax payable for each year, not just the tax that was still owing or tax that the audit uncovers. So it will be a severe penalty in many cases. CRA audit demands often cover 510 years or more; imagine being subjected to an extra tax of 10% of the tax already paid for each of those years.
Second, the CRA will be able to send a recalcitrant taxpayer a “Notice of Non-Compliance”. (This will be an earlier stage than seeking a Federal Court compliance order.) If the taxpayer still does not comply with the demand for information, this notice will trigger a penalty of $50 per day, maximum $25,000 (after 500 days).
The Budget proposes other strengthening of CRA’s administrative powers as well, including the ability to demand that a taxpayer provide answers “under oath or affirmation”. The advantage to CRA of this is that lying to the CRA then constitutes perjury, which is a criminal offence under the Criminal Code.
All penalties and fines are non-deductible, by the way, even if the cost is incurred for business purposes.