Introduction Tax Audit Questions – MNR v Cameco Corporation
MNR v Cameco Corporation (2019 FCA 67) shows that the Canada Revenue Agency's tax-audit powers—while broad—come with limits. The Federal Court of Appeal held that the Canada Revenue Agency couldn't compel a taxpayer or its employees to give oral answers during an audit.
Above all, the Cameco case reveals why you should retain an experienced Canadian tax lawyer early in the CRA tax audit process. Without the aid of a tax lawyer, you risk facing the unreasonable scrutiny of a CRA tax auditor who cares little about trampling your rights.
After reviewing the Canada Revenue Agency's tax-audit powers, this article examines the Cameco decision and discusses tax tips that you may draw from the decision.
CRA Tax Audit Powers under Section 231.1 and Compliance Order under Section 231.7
The Cameco decision revolved around the provision underlying the CRA's most basic audit power: section 231.1 of Canada's Income Tax Act.
By virtue of section 231.1, a CRA tax auditor may:
- inspect, audit, or examine any document of the taxpayer; and
- examine any property or process that "may assist [the CRA] in determining the accuracy of the inventory of the taxpayer or in ascertaining the information that is or should be in the books or records of the taxpayer or any amount payable by the taxpayer."
Moreover, to access the sought document or property for review, the CRA auditor may:
- enter a premises or business where the document or property is kept (or should be kept); and
- require any person on the premises "to give all reasonable assistance and to answer all proper questions."
If the taxpayer refuses to accommodate any of the above, the CRA tax auditor can, under section 231.7 of the Income Tax Act, pursue a court order forcing the taxpayer to comply or face sanction.
MNR v Cameco Corporation, 2017 FC 763
In 2006, the Canada Revenue Agency audited Cameco, which is a Canadian corporation and one of the word's largest uranium producers. The audit concluded in 2008 and led to Tax Court litigation involving Cameco's 2003 through 2007 taxation years.
In 2013, the CRA again audited Cameco for the same issue underlying the 2006 audit (this time, however, in relation to Cameco's 2010, 2011, and 2012 taxation years).
During the 2013 audit and while the Tax Court litigation remained active, the Canada Revenue Agency demanded that Cameco arrange interviews between a CRA auditor and 24 Cameco employees. On advice from its Canadian tax lawyers, Cameco refused. Cameco did, however, offer to reply to written questions.
In response, the CRA applied to the Federal Court of Canada for a compliance order under section 231.7 of the Income Tax Act. In particular, the Canada Revenue Agency sought an order forcing Cameco to arrange interviews whereby the CRA auditor could question the 25 employees.
Arguing before the Federal Court, the CRA noted the broad audit powers flowing from section 231.1 and alleged that "if written reasons are insufficient then [the CRA] must be allowed to compel people to attend a meeting." The CRA also insisted that "it is not for the person under audit to dictate the manner in which the audit is conducted."
The Federal Court refused to grant the compliance order—although it did agree with "the general interpretation of the law as presented by the [CRA]." The court grounded its decision on the ongoing Tax Court litigation and the possibility that the compliance order may prejudice Cameco in those proceedings:
- If I order the interviews to take place with a court reporter and legal counsel present as well as other procedural fairness indicia, then I have replicated what occurs at an examination for discovery in a Tax Court of Canada proceeding. However, instead of Cameco choosing their own proper officers for examination, if I were granting the application I would have allowed the Minister to pick 25 or more personnel to speak for Cameco. I cannot do it as it would disregard the Tax Court of Canada Rules and possibly prejudice the proceedings currently before the Tax Court of Canada, with subsequent tax years in the pipeline to be heard, by enabling the Minister to bolster evidence (if necessary) for subsequent trials regarding other audited years [para 47].
Moreover, the court noted that granting the compliance order would permit the Canada Revenue Agency to effectively sidestep the procedural safeguards of Tax Court litigation:
- The Tax Court of Canada has rules of procedure that provide for oral discovery. Some of the safeguards provided in the [Tax Court of Canada Rules] include that the taxpayer may choose its representative to be examined, there are rules to the scope of examination, there are consequences to refusing a question, and specific use can be made of the examination.
- If the Minister's position is accepted, the CRA can compel oral interviews from as many persons as they see fit without any procedural limits. Oral interviews as sought on these facts at the audit stage would undermine procedural safeguards provided at the appeal stage. Furthermore, the Minister could use an isolated statement by an employee which the taxpayer would be forced to disprove at trial [paras 48-9].
The Federal Court of Canada dismissed the CRA's application.
MNR v Cameco Corporation, 2019 FCA 67
The Canada Revenue Agency appealed the Federal Court's decision.
The Federal Court of Appeal, however, not only upheld the lower court's decision, it went further. The lower court's decision suggested that a CRA auditor couldn't demand interviews while the taxpayer was pursuing a Tax Court appeal involving similar issues. The Federal Court of Appeal, on the other hand, announced that section 231.1 of the Income Tax Act simply doesn't give CRA tax auditors "a general power to compel oral answers with respect to tax liability [para 34]." In other words, a taxpayer need not acquiesce to an oral interview with CRA tax auditors—regardless of whether the interview may prejudice active Tax Court litigation.
Granted, paragraph 231.1(1)(d) requires that one "give all reasonable assistance" and "answer all proper questions" when a CRA tax auditor has attended a business. But the appellate court drew a distinction between "an obligation to facilitate the auditor's access to documents, records, books, and information," on the one hand, and "responding to general questions with respect to tax liability or issues arising from the audit," on the other. The requirements in paragraph 231.1(1)(d) don't require a taxpayer to answer general questions about tax liability; they require a taxpayer to answer question that would aid the auditor in locating and reviewing records or documents.
Indeed, various statements in the Federal Court of Appeal's decision hinted that the holding wasn't limited to oral answers during an audit interview:
- "Independent verification through an audit is different than compelling answers to questions." [para 24]
- "[...] the fact that I have concluded that the Minister does not have the power to compel a taxpayer to answer questions at the audit stage [...]" [para 28]
That said, even if the Cameco decision allows taxpayers to refuse to answer any questions—orally or in writing—the court noted the disadvantages of entirely clamming up during a CRA tax audit.
However, the fact that I have concluded that the Minister does not have the power to compel a taxpayer to answer questions at the audit stage does not mean that the audit power has been rendered toothless in the face of recalcitrant taxpayers. It remains open to the Minister to make inferences when no answer is given. The Minister is also free to make assumptions and to assess on that basis. The tax liability arising from the Minister's assessment is statutorily deemed to be valid and binding (subject to appeal or reassessment), and in any appeal in the Tax Court of Canada, the onus rests with the taxpayer to destroy any factual assumptions the Minister has made. The Minister may also demand that large corporate taxpayers such as Cameco pay 50% of the assessed tax immediately. [para 28]
In other words, by entirely boxing out a tax auditor's questions, you may disadvantage yourself later when you need to rebut the assumptions that the auditor made in response to your silence.
Tax Tips: A CRA Tax Audit – A Balance of Avoiding Unfavorable Assumptions & Limiting Unreasonable Requests
The Income Tax Act grants the CRA with expansive tax audit power. And courts respect these powers. So, if you're the subject of a CRA audit, you won't find much legal justification for simply ignoring requests for documents and records.
But as Cameco makes clear: a tax auditor's powers come with limits. You need not answer the auditor's questions. Still, this choice may undermine your position should you need to object or appeal the reassessment, and you now need to rebut the auditor's outlandish assumptions. You must pick your battles.
You're better off seeking the advice of an experienced Canadian tax lawyer, who can advise you on your rights, ensure that the information you provide to CRA is both accurate and relevant, and determine when it may actually help your case to answer an auditor's questions.