Budget 2024 introduced proposed measures designed to give the Canada Revenue Agency (the “CRA”) additional powers to obtain information and “encourage” compliance with information requirements. These proposed measures will give auditors new tools to obtain information from taxpayers^[1] and more time to audit.

According to the Department of Finance (“Finance”), the purpose of the proposed amendments is to address delays in taxpayer responses to audit requests for information in order to “enhance the efficiency and effectiveness of tax audits and facilitate the collection of tax revenues on a timelier basis.”^[2] According to Finance, limits to the CRA’s existing information gathering powers “impede” the effectiveness of the CRA’s compliance and enforcement actions. However, there is a concern that the proposed changes really have the effect of significantly shifting the rules in favor of the house (i.e., 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.

The focus of the Budget announcement was on the Income Tax Act^[3] and the only legislative proposals were those pertaining to the ITA. However, Finance indicated that corresponding amendments would be made to the Excise Tax Act and certain other tax statutes.^[4] This article will focus on three major changes: (i) the notice of non-compliance; (ii) a new penalty for compliance orders; and (iii) new audit powers to question under oath or affirmation.

Notice of Non-Compliance

Potentially the most impactful measure for GST/HST purposes is granting auditors the new power to issue a “notice of non-compliance” (“NNC”) if the Minister of National Revenue (the “Minister”) determines a taxpayer has not complied with a requirement or notice to provide information or assistance issued by the CRA.^[5] 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 (emphasis added); and
• A penalty of $50 will apply each day, to a maximum of $25,000.

For GST/HST purposes, we expect that the tolling of the reassessment periods would be based on the taxpayer’s GST/HST reporting periods, which may be monthly, quarterly or annual. It is not clear whether a NNC for GST/HST purposes will apply to single periods for which it is issued or the NNC and its consequences will apply to all reporting periods under audit and how an auditor will make that determination.

There is a two-stage review process for a NNC: First, review by the Minister, which the Minister must provide within 180 days. If a person is unsatisfied with the Minister’s decision, it can seek judicial review in the Federal Court. A NNC can be vacated on the basis that it is unreasonable or on the basis that the person had reasonably complied at the time the NNC was issued with the initial requirement or notice.

Where the NNC is vacated on administrative appeal, it appears that the normal reassessment period will apply as the NNC will be deemed not to have been sent or served. Otherwise, the reassessment period will be extended for the period that the NNC remains outstanding.^[6] In fact, the reassessment period will be extended for all issues, not just those that relate to the information request and even if a court determines the NNC was unreasonable, the reassessment period clock will remain stopped for the period between when the NNC was issued and when it was vacated.

The introduction of the NNC will further tip the scales in the CRA’s favor by giving it significant new powers without immediate judicial oversight. Under the existing rules, the CRA must make an application to the Federal Court to obtain a compliance order. Under the proposals, the CRA will have the power to issue a notice of non-compliance without judicial authorization, leaving it up to the taxpayer to challenge the notice. This may result in significant costs and delays all the while the reassessment period is suspended not only for the taxpayer, but also for non-arm’s length parties who may not even be aware that their reassessment period is suspended.

There is a concern that the NNC rules may be subject to abuse by auditors. For example, in cases where an audit is reaching the end of the assessment period and the taxpayer is reluctant to issue a waiver, an auditor could make a voluminous information request with a relatively short response period so that if the taxpayer does not respond, the auditor can extend the reassessment period by issuing a NNC. Safeguards should be put in place to address this risk.

Penalty for Compliance Orders

Under the existing rules, if a person fails to provide access, assistance, information or a document, the Minister can apply to the Federal Court for a compliance order.^[7] In issuing an order, the Federal Court already has broad discretion to impose “any conditions in respect of the order that the judge considers appropriate.”^[8] 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.^[9] 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.^[10]

The Budget proposes to institute an automatic penalty if an order is issued in respect of a taxpayer’s failure to comply.^[11] 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, it fails to distinguish between taxpayers who engage in frivolous non-compliance and taxpayers, who, in good faith, assert their rights against the CRA, particularly when the matter at issue is not clear from a legal perspective.^[12] 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 once it is issued. However, under the proposals, a taxpayer will automatically be subject to a potentially significant penalty. The penalty proposal has been criticized as arbitrary and potentially unconstitutional.^[13]

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. It is not certain how the penalty will be determined for GST/HST purposes and whether it will be based on net tax or a reporting period, which can vary by registrant. This style of penalty is particularly concerning in the GST/HST context because, inter alia, the amount of net tax can vary significantly from one period to the next based on capital expenditures: while the disposition of a capital asset will generally result in income tax payable on a portion of the gain, net tax for a period will generally be increased by GST/HST on the entire consideration / proceeds of disposition. It is also worth noting that the tax to be collected and remitted by a registrant is not actually payable by the registrant, but rather by the registrant’s customers (who may no longer be available to pay the tax).

Third, the possibility of a penalty risks creating a chill on taxpayers’ willingness to assert their rights. In this regard, 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 because of the penalty risk. Given the Supreme Court of Canada’s holding that solicitor-client privilege must be “jealously guarded” and has quasi-constitutional status under Canada law, the penalty consequences raises constitutional concerns.^[14]

Providing Information Under Oath or Affirmation

The proposed measures will allow the CRA to require taxpayers to answer information requests, either written or oral, under oath or affirmation, or by affidavit.^[15] 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.^[16] 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.

Takeaways

If these proposed measures are implemented, 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. Of particular concern for GST/HST registrants is the risk of burdensome information requests that are used by auditors to prolong the assessment period and a more aggressive CRA position on privileged documents, knowing that registrants may be reluctant to challenge such requests due to the penalty risk if a compliance order is issued.

As noted above, draft legislation has only been issued for income tax purposes. It will be interesting to see how the proposed measures are modified for GST/HST purposes.

Navigating through these new measures can be quite challenging and McCarthy’s indirect tax team is here to help. The full McCarthy Tétrault’s Budget Tax commentary can be found here.

[1] This article refers to taxpayers, but we note that the relevant sections may also apply to persons other than the taxpayer including persons who do not deal at arm’s length with the taxpayer.

[2] Department of Finance, “Budget 2024 Tax Measures: Supplementary Information” at p. 31. Finance refers to the 2018 Report of the Office of the Auditor General noting that “the provision of information by some taxpayers lagged for months or even years, making it more difficult for the CRA to collect tax owing.”

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

[4] 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.

[5] For income tax purposes, the proposed rules regarding the notice of non-compliance are set out in proposed section 231.9 of the ITA.

[6] Subsection 231.8(1) of the ITA.

[7] Subsection 231.7(1) of the ITA.

[8] Subsection 231.7(3) of the ITA.

[9] Subsection 231.7(4) of the ITA.

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

[11] Subsections 231.7(6) and (7) of the ITA.

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

[13] Letter at p. 7.

[14] 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.

[15] Section 231.41 of the ITA. This applies to requests or requirements under sections 231.1, 231.2, and 231.6 of the ITA.

[16] Letter at p. 19-20.