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An Overview of the Canada Revenue Agency's Administrative and Enforcement Powers
The Canada Revenue Agency (CRA) possesses a wide range of administrative and enforcement powers in carrying out its mandate as the nation's tax authority.
These powers are extensive and complex, making the guidance of an experienced tax lawyer in Toronto essential when dealing with the CRA. This article will outline several of these powers, with particular emphasis on the most significant ones.
Coming Clean with the CRA: Relief Options and Reporting Obligations
To promote efficient tax administration, the Canada Revenue Agency (CRA) operates several compliance programs. One such initiative is the Voluntary Disclosures Program, which allows tax-noncompliant Canadians to come forward and correct past errors or omissions in exchange for relief from penalties and interest, as well as protection from criminal prosecution.
Another key measure concerns notifiable and reportable transactions. Under this regime, fee-entitled advisers, promoters, non-arm's-length persons related to those advisers or promoters; tax beneficiaries, expectant tax beneficiaries, or their agents; and other specified persons must report certain transactions with potential tax risks to the CRA for closer monitoring and enforcement.
How the CRA Conducts Tax Audits and What to Expect
The CRA verifies taxpayer compliance with tax legislation through a tax audit. Employees are less-frequently audited, as their income taxes are typically withheld and remitted by their employers, leaving little room for error or avoidance. However, tax audits are more likely where an employee operates a side business, participates in a tax shelter, or engages in an activity that creates opportunities for tax avoidance.
Most tax audits, however, focus on self-employed individuals or other entities, who generally have greater opportunities to underreport income or overstate deductions and in particular on businesses that are known for participating in the underground cash economy such as construction or hospitality should.
CRA tax audit selection often targets high-risk taxpayers based on factors such as substantial income, large claims for deductions, or relationships with certain trusts and partnerships. During an audit, the CRA can request information or documents from the taxpayer or relevant third parties, or seek other reasonable assistance related to the administration or enforcement of the tax statute. If a taxpayer refuses to provide the requested information, the CRA may make negative assumptions and reassess taxes accordingly.
The CRA can also apply to a court for an order compelling a person to provide the required information, if required by law. Failure to comply with a court order may result in contempt proceedings, civil liability, or even criminal prosecution and penalties. The CRA also possesses the authority to conduct inspections and judicially authorized searches of relevant premises to obtain records and data. Additionally, the CRA can impose penalties independently for non-compliance and may use information exchange powers under international treaties to obtain relevant data from other countries.
Once an audit is complete, the CRA typically issues a completion letter if no additional taxes are owed. If taxes are determined to be owing, the CRA usually issues a proposal letter giving reasons for such determination and providing the taxpayer 30 days to respond. After this period, if the CRA's position remains unchanged, a formal tax reassessment is issued.
The CRA's Reassessment Periods and Exceptions
The CRA generally has three years from the date a Notice of Assessment is issued to audit, reassess, or issue an additional assessment for the tax returns of an individual, trust, or Canadian-controlled private corporation (CCPC). For certain other taxpayers, the reassessment period is four years.
In certain cases, the Income Tax Act may extend the normal three-year assessment period. Extended reassessment periods apply in situations such as:
- Transactions between a Canadian resident and a non-arm's-length non-resident;
- Failure to report the sale of real property;
- Failure to file an accurate Form T1135 (Foreign Income Verification Statement);
- Failure to report a tax shelter when required;
- Failure to report a reportable or notifiable transaction; or
- Circumstances in which the reassessment period is tolled due to ongoing legal proceedings contesting a CRA demand for information.
Beyond these exceptions, the CRA may also reassess outside the normal period if the taxpayer provides consent, or if a misrepresentation or omission occurred due to carelessness, neglect, wilful default, or fraud.
What Happens After a CRA Tax Assessment: Objections, Appeals, and Collections
After an assessment or reassessment, a taxpayer may file a Notice of Objection with the CRA. If the taxpayer is dissatisfied with the outcome of the objection, the taxpayer can appeal to the Tax Court of Canada. Further appeals lie to the Federal Court of Appeal and ultimately to the Supreme Court, should the CRA continue to uphold reassessments that are unsatisfactory to the taxpayer.
For taxes such as GST/HST, payroll, non-resident withholding taxes, and certain other source remittances, a tax debt arises once the CRA issues the initial notice of assessment. At that point, the CRA may initiate enforcement or collection actions even if a Notice of Objection is pending. In such a situation, taxpayers can still apply for a discretionary stay pending the outcome of the objection. The CRA generally grants such stays if the objection shows reasonable grounds for success. In other situations, the CRA may seek a court order to override the standard 90-day wait period. For large corporations, the CRA can take action to collect up to half of the assessed taxes even while an objection is pending.
The CRA's collection powers include:
- Garnishee of wages or other sums owed to the taxpayer;
- Issuing collection letters;
- Offsetting tax refunds against outstanding balances;
- Seizing property or placing liens on real estate, bank accounts, or other assets;
- Requiring third parties who owe amounts to the taxpayer to pay the CRA directly.
Before beginning collection, the CRA has to provide written notice and make at least one attempt at verbal communication with the taxpayer.
Although less commonly used, the CRA also has criminal enforcement powers in cases of tax evasion. The agency may investigate and recommend prosecution to the Public Prosecution Service of Canada. Criminal tax cases require proof of intent and commission of the tax offence beyond a reasonable doubt. Tax evasion can arise from non-reporting of income, falsifying records, inflating expenses, or similar actions. Convictions may result in fines, imprisonment, and a criminal record.
Pro Tax Tips: Protect Yourself for a CRA Tax Audit
It is advisable for a taxpayer to retain records related to any tax filing for at least six years, and preferably longer. Doing so ensures that all supporting evidence remains organized and accessible in the event that the CRA decides to audit or reassess the filings.
The CRA's tax audit powers are extensive, and it is often unwise to navigate an audit without expert guidance or representation from an experienced Canadian tax lawyer. This is particularly important when the financial stakes for the taxpayer are high or if there is a possibility of prosecution for tax evasion.
Frequently Asked Questions (FAQs):
What actions can the CRA take if a taxpayer refuses to provide requested tax audit information?
If a taxpayer refuses, the CRA may make negative assumptions and reassess taxes accordingly. The CRA can also apply to a court for an order compelling compliance, and failure to comply with a court order may lead to contempt proceedings, civil liability, or criminal penalties.
How long does the CRA have to reassess a tax return, and what exceptions apply?
The CRA generally has three years from the date of a Notice of Assessment to reassess individual, trust, or Canadian-controlled private corporation (CCPC) tax returns, and four years for certain other taxpayers. Exceptions include transactions with non-arm's-length non-residents; unreported sales of real property; inaccurate Form T1135 filings; failure to report tax shelters, reportable or notifiable transactions; certain ongoing legal proceedings; or misrepresentation or omissions due to carelessness, neglect, willful default, or fraud.
When can the CRA begin collection actions, even if a Notice of Objection is pending?
For taxes such as GST/HST, payroll, non-resident withholding taxes, and certain other source remittances, the CRA may initiate enforcement or collection actions once the initial notice of assessment is issued. Taxpayers can request a discretionary stay pending the objection, which the CRA generally grants if reasonable grounds for success exist. For large corporations, the CRA can take action to collect up to half of the assessed taxes even while an objection is pending.
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.
