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Editor's note: This article builds on our earlier overview of the proposed audit-power changes released in August 2025: What you missed in Budget 2024: Expanded CRA audit powers and penalties.
The next time the Canada Revenue Agency ("CRA") audits your business, the process could look more like a courtroom cross-examination. Under draft amendments to the Income Tax Act (the "ITA"), auditors would gain the power to compel sworn testimony, marking a major shift in how audits are conducted and how taxpayers should prepare.
This article outlines what is changing, why it matters, and how to protect yourself when audits take on a more formal tone.
What are the major changes?
The federal government's August 2025 draft legislation marks one of the most significant expansions of the CRA's audit powers in decades. Amongst a broader set of proposed amendments — including a new Notice of Non-Compliance regime and extended "stop-the-clock" reassessment rules — the most transformational change may be the CRA's new ability to compel taxpayers and others to provide answers under oath.
This new power, set out in the proposed section 231.41 of the ITA, fundamentally changes what an audit can look like. Until now, interviews could be compelled, but not under oath. Under the new regime, once a valid requirement is issued under sections 231.1, 231.2, or 231.6, the CRA may advance to requiring sworn answers under oath, affirmation, or by affidavit. The scope and procedures related to this new power are not yet defined.
How will the CRA's new power to compel sworn statements change audits?
This change effectively adds a court-style discovery dynamic to the audit process — which is a much earlier stage in the dispute process. Generally, sworn examinations would occur during the "discovery" phase of a Tax Court of Canada proceeding, and at a time when both parties already know the issues in dispute and have exchanged relevant documents. By contrast, when the CRA compels testimony during an audit, the taxpayer may still be in the dark about the precise CRA concerns and documents under review.
This creates risk for taxpayers because a requirement to provide statements under oath during the audit process could be more prejudicial than during discovery. In such a situation, the taxpayer may not fully understand the case being made against them. Therefore, it is wise to retain tax law advisors who have a thorough understanding of the transaction history involved. Practitioners familiar with the structure and purpose of prior transactions can help ensure that early audit statements remain accurate, consistent, and aligned with the facts, while also protecting privilege and process.
False or misleading answers could also expose individuals to consequences under the Criminal Code. In short, a request for sworn answers would no longer be a routine procedural step, it would be a quasi-judicial action requiring deliberate preparation and coordinated advice.
Why early statements can create legal risk during an audit
Before a formal oath request arises, casual or inconsistent statements early in an audit can determine its tone. If auditors perceive uncertainty or shifting explanations, they could escalate – first by issuing a formal requirement letter and then by invoking the sworn-answer power. Once that happens, taxpayers could more easily be bound to their answers given during an audit, with limited ability to refine them as facts and professional advice evolves.
For example, in an effort to be cooperative early in an audit, a company representative may provide informal explanations of certain shareholder advances, perhaps characterizing them as bonuses. Later, they may receive a requirement under s. 231.2 of the ITA, which subsequently indicates the advances should be characterized as loans. Ultimately, there may be a request for answers under oath if the CRA views the responses as inconsistent and central to the issue under review. What began as a cooperative exchange can quickly become a quasi-examination.
Because of this, involving legal counsel early (or even late, but before things escalate) can be crucial. Counsel can help frame responses, assert privilege and advise against statements that might inadvertently restrict a taxpayer's options as an audit progresses.
How taxpayers can prepare for CRA's expanded audit powers
In an audit context, taxpayers and advisors should consider the following:
1. Early legal involvement
Even limited participation by a lawyer, such as reviewing drafts or joining audit calls, can prevent privilege breaches and inconsistent statements.
2. Protect privilege and documentation
Keep legal advice separate from accounting files and clearly mark privileged materials. Once statements and documents are compelled, co-mingled files create risks of exposure.
3. Understand the trigger sequence
The power to compel sworn answers arises only after valid requirements are issued under s. 231.1, 231.2, or 231.6. Recognizing that sequence allows timely legal oversight.
4. Align audit and transaction knowledge
Better audit outcomes may occur when the same professionals who structured a transaction are also skilled at assisting with its audit, ensuring consistent explanations of intent, valuation, and documentation.
5. Avoid reactive compliance
Cooperate with auditors but pause before sending explanations that could concede legal positions or misstate intent.
What's next for businesses under the proposed CRA audit reforms?
For private and mid-market companies, the audit landscape is about to become more procedural and more consequential. With the addition of sworn-answer powers, what used to be information-gathering now carries evidentiary weight. Early missteps, imprecise answers, undocumented intentions and/or waived privilege can have long-lasting effects.
These measures remain in the form of draft legislation. The Department of Finance released the proposals on August 15, 2025, with consultations closing in September. While revisions are possible, the direction is clear: enforcement is tightening, and taxpayers must prepare for a more formal audit process. At this stage, procedural details remain very unclear, but even the draft framework creates meaningful risk and the need for careful preparation.
Conclusion
The CRA's ability to compel sworn evidence may be the most consequential audit reform in a generation. It effectively turns part of the audit into a cross-examination without the safeguards of a courtroom. That reality underscores the need for early, integrated legal input, not only to manage risk, but to preserve the integrity of a taxpayer's story and ensure that the intent behind their transactions is presented accurately and defensibly.
If you've received an audit inquiry or expect to, now is the time to review your processes. The Miller Thomson Tax Group can help you assess exposure, safeguard privilege, and prepare for a more formal CRA approach. Contact us to discuss your audit-readiness strategy and spark your next step toward compliance.
Common questions about the CRA's new audit powers
Q: Can the CRA really compel testimony under oath?
A: Potentially. The proposals remain in the form of draft legislation. However, if passed in the current form, once valid audit requirements are issued, the CRA could require sworn answers under oath, affirmation, or by affidavit.
Q: Does this mean audits will feel like court proceedings?
A: Potentially. The new powers introduce a quasi-judicial element to audits, similar to discovery in court. That's why legal guidance early in the process is increasingly important.
Q: What should businesses do now?
A: Begin documenting transactions clearly, involve legal counsel early, and ensure communications with auditors don't inadvertently limit your legal position.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
