Budget 2024 introduced several proposals designed to give the Canada Revenue Agency (“CRA”) additional powers to obtain information and enhance compliance with information requirements. The proposed measures would apply to information requests under the Income Tax Act^[1], the Excise Tax Act and certain other tax statutes.^[2]

The stated intent of the proposed amendments is to “enhance the efficiency and effectiveness of tax audit and facilitate the collection of tax revenues on a timelier basis.”^[3] However, the proposed changes really have the effect of significantly tilting the playing field in favor of the CRA when it comes to collecting information from taxpayers, and threatens to limit reasonable protections that taxpayers currently have to withhold the production of privileged and confidential information.^[4]

This article will discuss three major changes: (i) a new penalty for compliance orders; (ii) a notice of non-compliance; and (iii) the ability to question under oath or affirmation.

Penalty for Compliance Orders

The first key proposed change is a penalty if the Minister obtains a compliance order.

Currently, if a person fails to provide access, assistance, information or a document, the Minister can apply to the Federal Court for a compliance order.^[5]

When issuing an order, the Federal Court already has broad discretion to impose “any conditions in respect of the order that the judge considers appropriate.”^[6] If a person fails or refuses to comply with an order, a judge may find the person in contempt of court and the person is subject to the processes and punishments of the court to which the judge is appointed.^[7] Under the Federal Courts Rules, a judge may order a person found in contempt to be imprisoned for a period of less than five years until the person complies with the order or may order the person to pay a fine.^[8]

Under proposed subsections 231.7(6) and (7), the taxpayer is automatically liable to a penalty if an order is issued in respect of a taxpayer’s failure to comply. The penalty will:

• Apply only if the taxpayer had tax owing of $50,000 or more for any one taxation year in respect of the compliance order; and
• Be equal to 10% of the total tax payable by the taxpayer in respect of the taxation year(s) to which the order relates.

The proposed penalty raises several issues. First, the proposed penalty fails to distinguish between taxpayers who engage in frivolous non-compliance and taxpayers, who, in good faith, assert their rights against the CRA.^[9] For example, a taxpayer may assert privilege over a document or may simply not be able to obtain the requested information. Under the current regime, adverse consequences only arise for failure to comply with a compliance order. However, under the proposals, a taxpayer will automatically be subjected to a potentially hefty penalty. The penalty proposal has been criticized as arbitrary and potentially unconstitutional.^[10]

Second, the statutory language is overbroad – the penalty applies to the aggregate tax payable for the year, not just the tax owing that relates to the information sought by the compliance order.

Third, the possibility of a penalty risks to create a chilling-effect on taxpayers’ willingness to assert privilege over certain documents. The risk of a compliance order typically arises when there is a dispute over privileged documents. Taxpayers may now feel forced to produce documents over which they would otherwise assert privilege. This raises constitutional concerns given that the Supreme Court of Canada has held that solicitor-client privilege must be “jealously guarded” and has quasi-constitutional status under Canadian law.^[11]

Notice of Non-Compliance

Proposed section 231.9 will give the CRA the new power to issue a “notice of non-compliance” if it determines a taxpayer has not complied with an information request. While a notice of non-compliance is outstanding:

• The normal reassessment period of the taxpayer and each person that does not deal at arm’s length with the taxpayer will be suspended for any taxation year to which the notice relates; and
• A penalty of $50 will apply each day, to a maximum of $25,000.

There is a two-stage review process for a notice of non-compliance: First, review by the Minister. If a person is unsatisfied with the Minister’s decision, they can seek a judicial review in the Federal Court.

This proposal turns the tables by giving the CRA significant powers without immediate judicial oversight. Under the current regime, the CRA has to make an application to the Federal Court to obtain a compliance order. Under the proposals, the CRA would have the power to issue a notice of non-compliance without judicial authorization. It would then be up to the taxpayer to challenge the notice. This would result in significant costs and delays, all the while the reassessment period is suspended not only for the taxpayer, but also for related parties who may not even be aware that their reassessment period is suspended.

Providing Information Under Oath or Affirmation

Proposed section 231.41 will permit the CRA to require taxpayers to answer information requests, either written or oral, under oath or affirmation, or by affidavit. This applies to requests or requirements under sections 231.1, 231.2, and 231.6.

This proposal is highly problematic, as it enables the CRA to conduct a quasi-discovery through a process that lacks the necessary procedural safeguards and rules that normally govern discoveries.^[12] For example, there is no requirement to notify the person being examined and no limits on when and how questioning will take place. There is also no guidance on how the evidence can subsequently be used in litigation.

Taxpayers should prepare carefully for any meetings with CRA auditors, seek advice where necessary, and answer any questions with the possibility of future litigation in mind.

[1] RSC, 1985, c. 1 (5^th Supp.) (the “Act”); all statutory references are to the Act.

[2] Air Travellers Security Charge Act, S.C. 2009, c. 9, s. 5; Underused Housing Tax Act, S.C. 2002, c. 5, s. 10; and Select Luxury Items Tax Act, S.C. 2022, c. 10, s. 135.

[3] Department of Finance, “Budget 2024 Tax Measures: Supplementary Information” at p. 31.

[4] This article will refer to taxpayers, but we note that the relevant sections may also apply to persons other than the taxpayer.

[5] Subsection 231.7(1).

[6] Subsection 231.7(3).

[7] Subsection 231.7(4).

[8] Federal Courts Rules, SOR/98-106, section 472.

[9] Tax Executives Institute, Letter to Minister Chrystia Freeland, RE: Budget 2024 Proposal to Expand CRA Audit Powers (May 29, 2024) at p. 7 (“Letter”).

[10] Letter at p. 7.

[11] Pritchard v. Ontario (Human Rights Commission), 2004 SCC 31, para 17; Dodek, Adam M., Solicitor-Client Privilege in Canada: Challenges for the 21st Century (February 14, 2011). Canadian Bar Association, 2011, Available at SSRN: https://ssrn.com/abstract=1761668 or https://dx.doi.org/10.2139/ssrn.1761668.

[12] Letter at p. 19-20.