Canada: Latest Step In CRA's New Audit Approach: "Risk Assessment" Interviews With Large Businesses


In the next few weeks, the Canada Revenue Agency ("CRA") plans to conduct individual risk-assessment interviews with a select group of 50 large businesses. These taxpayers face the prospect of being labelled "high-risk," a designation that will likely come with significant costs related to increased audit scrutiny.

It is important for potential interviewees to understand what to expect from this process, and what their rights are, in order to prepare for the interview and determine the most effective way to participate.


The interviews are part of the CRA's new approach to large business audits. Instead of assigning audits based on a taxpayer's gross income,1 the CRA intends to select audits based on "risk". At the interviews, the CRA is expected to:

  • Explain its new audit approach;
  • Provide information regarding its initial risk assessment of the taxpayer and identify issues of concern for the next audit cycle; and
  • Ask for information regarding the taxpayer's own assessment of its tax risks.

The interviews are part of the first phase of the new risk-based audit approach, which is being introduced gradually over five years. Within five years, the CRA plans to meet with all large file taxpayers to discuss their risk categorization.


Letters issued to the selected taxpayers request a meeting to discuss items including "the potential benefits of adopting an engaged approach to compliance." The letter attaches a proposed list of questions for taxpayers, which include:

  • How are your tax risks identified, managed, reported and monitored? What are the names of the individuals involved in this process?
  • Will you disclose your own analysis of your tax risks?
  • Do you have a tax risk management committee? Who is on the committee? Will you provide meeting minutes?
  • Describe a situation where you were not compliant and explain what you did.
  • Do you use external tax planners? Are any paid on a contingency basis?

The questions invite taxpayers to disclose their own analysis of their tax risks. While most taxpayers have no issue providing the CRA with all records necessary to test the honesty and accuracy of their tax returns, it can be expected that many will take issue with disclosing their own mental impressions regarding their tax risks.


Taxpayers that participate in the interviews should prepare by:

  • Reviewing the CRA interview request letter and carefully considering the questions attached to the letter;
  • Discussing the scope of the CRA's authority to compel answers to the questions and decide in advance how much information to provide at the meeting;
  • Reviewing the internal processes for assessing tax risk and consider what information the CRA could compel the taxpayer to produce;
  • Considering which individuals should attend, what materials to bring to the meeting, if any, and who will take meeting minutes; and
  • Preparing questions for the CRA regarding the new risk assessment audit process including the benefits, costs, and specific changes the taxpayer can expect.

The most likely area for disconnect between the taxpayer and the CRA involves how much information the taxpayer should provide regarding its own assessment of its tax risks. As such, we discuss below:

  • perspectives of the CRA and taxpayers on this issue;
  • the scope of the CRA's authority to compel taxpayers to produce records; and
  • the impact of the CRA's request for taxpayer's own tax risk assessments.


The CRA's position is that taxpayers are obligated to disclose "concerns with regard to tax at risk" to assist the CRA to "identify audit issues".2 In other words, taxpayers must self-audit and disclose results to the CRA. The extent to which the CRA can compel disclosure of a taxpayer's own assessment of tax risks has not been tested in Canada. In the United States, the Internal Revenue Service has taken court action against taxpayers that declined to disclose such information, with mixed results.3

From the CRA's perspective, the audit process would be more effective and cost-efficient if taxpayers simply disclosed their own assessment of their tax risks; "The CRA's goal is to develop a useful and cost-effective program to better target its compliance efforts."4


Tax litigation is inseparable from the audit process because information gathered during an audit can be used against taxpayers in litigation. The CRA litigates tax issues regularly using the largest law firm in the country, the Department of Justice. As such, any requests for information from the CRA need to be considered knowing that the CRA has a dual role as both auditor and adversary.


Under the CRA's primary audit power, it has broad authority to "inspect, audit or examine the books and records of a taxpayer".5 This authority is necessary for the CRA to carry out the purpose for which it exists – assessing taxpayer's accuracy and honesty within a self-assessment system. This authority imposes obligations on taxpayers to:

  • maintain and disclose proper books and records;
  • provide "all reasonable assistance"; and
  • answer "all proper questions".6

Taxpayers should be aware that the CRA frequently asks for information that it cannot compel taxpayers to provide. For example, the CRA often requests access to legal opinions that are protected from disclosure by solicitor-client privilege.7 The CRA also requests information for the purpose of auditing unnamed persons (for example, a client list), even though the CRA has no authority to demand such information without judicial authorization.8 Taxpayers should consider the limits of the CRA's authority when considering an information request. Since "risk-assessment" interviews are a new process and the scope of the compliance obligation is unclear, we expect considerable discussion between the CRA and taxpayers regarding the appropriate level of disclosure.


Limitations on the CRA's authority to compel taxpayers to produce records include:

  • solicitor-client privilege;
  • purpose;
  • reasonability; and
  • relevance.

Each limitation is discussed briefly below.


The most important limitation on the CRA's ability to compel the production of information is solicitor-client privilege. Accountants and other professionals do not have this protection, and the CRA has made it clear that it can and will demand to see accountants' working papers and similar tax-related documentation where it chooses to do so.9

The current interviews are part of gradual changes in CRA audit practices that have evolved over the past several years. In response to these changes, many taxpayers have organized their tax risk assessment process so that many records are subject to solicitor-client privilege. In such cases, the taxpayers cannot be compelled to produce records that are properly subject to privilege. In some cases, privilege other than traditional solicitor-client privilege may apply, such as where legal advice is sought in anticipation of litigation.

Where taxpayers assert privilege, the CRA may request sufficient information in order to assess whether they wish to challenge the privilege claim. The focus in such privilege disputes is often: (i) whether the records at issue were produced as part of a solicitor-client relationship; and (ii) where privileged records were provided to a third party, whether privilege was waived.

Most large businesses consider how to manage their information flow so as to create and preserve solicitor-client privilege where possible. The CRA interview questions directed at accessing the taxpayers' own tax risks assessment are likely to result in large businesses analysing their process for identifying tax-risks and considering whether that process should be modified so that solicitor-client privilege applies to more records.


The CRA exists to verify taxpayers' accuracy and honesty within a self-assessing system, which is a distinctly "regulatory" function. The powers granted to CRA are limited to the carrying out of this regulatory function, as opposed to a policing or legislative function.

The CRA has, on occasion, tried to use its regulatory powers to carry out a policing function. In these cases, where the CRA demands records for the primary purpose of advancing a criminal investigation (i.e., tax evasion), the CRA has no authority to compel a response. Courts have confirmed that CRA's regulatory powers are not available where the CRA is carrying out a different function.10 Similarly, CRA document demands that are primarily directed at impeding a particular business activity have been overturned on the basis that they do not come within the "purpose" test of the CRA's regulatory powers.11


Any CRA request must provide a reasonable time to comply.12 In addition to challenging the reasonableness of the time given to comply, taxpayers may challenge the reasonableness of the number, scope and availability of the documents requested. Often CRA requests are necessarily over-broad because the CRA does not have the benefit of knowing what records the taxpayer maintains. Where the scope is perceived as unreasonably broad, discussions with the CRA are needed to try to reach a suitable compromise.

Where the CRA compels the production of records, such demand is a "seizure" within the meaning of the Canadian Charter of Rights and Freedoms.13 Since the Charter prohibits seizures that are "unreasonable", any requests must be reasonable in order to be enforceable. The vast majority of the CRA's requests for information are clearly reasonable. For example, a request for documents or information necessary to complete an audit is clearly reasonable. A demand to disclose a summary of potential uncertainties in one's tax filings may be considered unreasonable.


The CRA is granted authority to "administer and enforce the Act".14 As such, the CRA can only compel the production of records or information relevant to this purpose. In the vast majority of cases, relevance is clear and the CRA is entitled to the information requested. However, where relevance is unclear, it is important to consider whether this relatively low threshold is met. Where disputed, the Minister need only show that the requested records "may be relevant".15

Taxpayers may question the extent to which their own mental impressions are "relevant". The CRA's job is to gather the necessary factual information and to form its own view as to whether the law has been complied with. Where the CRA has been provided with all of the information necessary to form that view as to the accuracy of the taxpayer's returns as filed, it is not obvious that the taxpayer's own impressions are "relevant" to the administration or enforcement of the Act. This question has not yet been considered by a Canadian court.


There is an important public policy reason for large businesses to carefully and thoroughly analyse their tax risk. We all recall when public confidence in financial reporting collapsed after the bankruptcy of Enron and others. To rebuild public confidence, reporting issuers faced more stringent financial reporting standards, including an obligation to increase the quality and quantity of records related to the calculation of tax risk.

The records that the CRA now seeks include records generated in connection with the public policy goal of ensuring large businesses accurately calculate tax risks such that the financial statements accurately depict the financial position of the business. In order to calculate tax at risk, taxpayers must consider the strengths and weaknesses of their legal position, including the strength of witnesses and other evidence in the event that uncertain issues are litigated.

If the CRA can access records related to a taxpayer's own risk assessment, the quality and quantity of records maintained in connection with internal tax risk will decline. As noted by the United States Court of Appeal, if tax advisors who identify "uncertainties in their clients' tax returns know that putting such information in writing will result in discovery by the IRS, they will be more likely to avoid putting it in writing, thus diminishing the quality of representation. [Access to the records by the IRS] will have ramifications that will affect the form and detail of documents" prepared when assessing tax risks.16 The same considerations apply in Canada and the extent to which the CRA can access taxpayer records will impact the manner in which such records are prepared and maintained.


1 Currently, taxpayers with gross income exceeding $250 million are assigned a large case file manager and a team of auditors who together complete an annual audit. Taxpayers with gross income from $20 million to $250 million are selected for audit based on a complexity rating and are assigned to a single auditor.

2 Canada Revenue Agency Technical Statement "Acquiring Information from Taxpayers, Registrants and Third Parties," June 2, 2010, , at para 5.

3 See, for example: U.S. v. Deloitte LLP, 2010 WL 2572965 (D.C. Cir. June 29, 2010) and v. Textron Inc., 577 F.3d 21 (1st Cir. 2009), cert. denied, 2010 WL 2025148 (May 24, 2010). Many corporations in the United States with assets in excess of $100 million must file a schedule identifying uncertain tax positions, see:

4 Canada Revenue Agency, Income Tax Technical News No. 34, (April 27, 2006), available at

5 Section 231.1 of the Income Tax Act (Canada) (the "Act").

6 Sections 230, 231.1 and 231.2 of the Act.

7 Boilerplate language used in requirements issued by the CRA often includes a request for legal opinions (without notice to taxpayers that privilege may apply) and contains a caution that criminal prosecution may occur if the requested information is not disclosed.

8 Subsection 231.2(2). The CRA can generally compel such information to be produced after obtaining judicial authorization: Artistic Ideas v. Canada, [2005] 2 CTC 25 (FCA).

9 See, for example, Suarez, "Canada Updates Policy on Accessing Working Papers," Tax Notes International, Vol. 55, no. 3, July 20, 2009 at p. 172.

10 See for example: R. v. Jarvis, [2003] 1 CTC 135 (SCC) and R. v. Ling, [2002] SCR 214.

11 See for example: M.N.R. v. RBC Life Insurance Company et al., 2011 FC 1249 at para. 62 where J. Tremblay-Lamar writes: "It was not open to the Minister to seek ex parte authorization under the pretence of verifying compliance with the Act when her true purpose was to achieve through audits what the Department of Finance refused to do through legislative amendment."

12 Subsection 231.2(1) of the Act. See also R. v. MacDonald, [2005] 5 CTC 77 (BC PC).

13 Canadian Charter of Rights and Freedoms, Part I of the Constitution Act, 1982 being Schedule B to the Canada Act 1982 (U.K.), 1982, c. 11, s. 8.

14 Sections 231.1 and 231.2 of the Act.

15 See for example: 1144020 Ontario Ltd. v. M.N.R., [2005] 3 CTC 310 (FCTD) and Fraser Milner Casgrain LLP v. M.N.R., [2002] 4 CTC 210 (FCTD).

16 U.S. v. Textron Inc., 2009 U.S. App. LEXIS 1538, at p 36-37.

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