The CRA has broad powers to audit taxpayers and demand information from taxpayers and third parties. There are few limitations on the power to audit and compel information. However, if a taxpayer becomes the subject of a criminal investigation, their rights under the Charter of Rights and Freedoms are engaged and act as a check on CRA power.
The CRA Power to Audit
Section 231.1 of the Income Tax Act confers on the CRA the power to audit taxpayers. Under this section, the CRA has the power to compel a taxpayer to make available their “books and records,” their “property in an inventory” and allows a CRA representative to enter any premises or place where business is carried on (though not a house, without permission or a search warrant). The section further requires a taxpayer to provide all “reasonable assistance” and answer “all proper questions” of the auditor.
This section is broad and includes few limitations on the power to compel documents, information and answers during an audit. The CRA cannot enter a house unless the CRA has been given permission or has obtained a search warrant. In subsection 231.1(1)(d), a taxpayer must “answer all proper questions.” However, there is no requirement to give oral answers. A taxpayer can insist on giving written answers (usually with the assistance of a representative, accountant or lawyer).
If a person fails to comply with CRA’s requests in the course of an audit, the CRA may seek a compliance order under section 231.7. After a compliance order is obtained, if the person continues to fail to comply, the violation is contempt of Court, which can carry a prison term.
The CRA’s Power to Compel Third-Party Information
Section 231.1 is usually applicable to taxpayers subject to a CRA audit. The CRA also has broad discretion to compel information from third parties (ie, taxpayers not subject of an audit) under section 231.2. The requests made under this provision are usually called “Requests for Information.” This section is supposed to be used in “situations where the information sought by the Minister is relevant to the tax liability of some specific person or persons, and when the tax liability of such person or persons is the subject of a genuine and serious inquiry.”
If a person does not comply with a request for information under section 231.2, the CRA can prosecute that person with failing to comply (subsection 238(1)) or the CRA may seek a compliance order (section 231.7).
Criminal Investigations
If the “predominant purpose” of a CRA inquiry has become a criminal investigation or possible prosecution, the CRA can no longer use its audit powers to collect information. Information collected using audit powers after an inquiry has become a criminal investigation cannot be used in a prosecution due to rights against self-incrimination and unreasonable search and seizure. To determine if an audit has crossed the threshold and become an “investigation” one has to look at various factors.
The CRA and Third Party Information
The CRA is quick to demand that individuals disclose their information or information about other taxpayers (see The CRA’s Power to Compel Third Party Information above). However, the CRA is reluctant to disclose third party information to others. Subsection 241(1) prevents the CRA or other government officials from disclosing information to a third party. Taxpayers’ own information can be disclosed to them and they can force the CRA to disclose it to them using a Privacy Act or Access to Information Act request.
Solicitor-Client Privilege
The CRA can use section 231.2 to request documents from lawyers with respect to their clients. Section 232 provides lawyers a solicitor-client privilege (SCP) defense if the lawyer is prosecuted for failing to comply with a request under 231.2.
There is no “accountant-client privilege” in Canada. Unless SCP can be claimed over documents in an accountant’s files, the documents may be seized by the CRA.
In a relatively recent case, Chambres des notaires’ du Quebec, c Canada (Procureur general), the Quebec Court of Appeal ruled that requirements for information under 231.2 issued to lawyers in Quebec and the exclusion of accounting records from SCP are violations to Section 8 (right against unreasonable search and seizure) of the Charter of Rights and Freedom and are of no force in Quebec. This matter was appealed to the Supreme Court of Canada and the SCC upheld the Quebec Court of Appeal’s decision. The requirement scheme, with respect to lawyers, and the definition of SCP in the Income Tax Act are unconstitutional.
If you have received a RFI or the CRA is seeking to perform an audit of you or your business and you have questions regarding the options available to you, please contact one of our tax lawyers for a free consultation.