The latest legislative efforts to strengthen the Canada Revenue Agency's (CRA) enforcement capabilities would create a new compliance landscape that taxpayers and advisors will need to navigate carefully.
Although the final version of Bill C-31 amends earlier proposals in response to feedback from the tax community, it nevertheless represents a significant enhancement of the CRA's audit and enforcement framework.
The introduction of compliance-order penalties, a new notice of non-compliance (NNC) regime, expanded information-gathering powers and changes to reassessment rules demonstrate the federal government's continued focus on strengthening tax compliance.
These changes will increase the importance of responding strategically and promptly to CRA audit requests and having documentation readily available.
In anticipation of these changes, taxpayers should review their document retention practices, confirm that records supporting significant tax positions can be produced efficiently and carefully evaluate CRA information requests as they arise. These considerations are particularly critical amid an increase in audit interviews as a result of changes to the Income Tax Act that took effect on Dec. 15, 2022.
Given the potential implications of these new rules, early engagement with the appropriate advisors may be particularly important where requests involve cross-border information, complex structures or disputes regarding the scope of information sought by the CRA.
Expanded information-gathering powers
One of the key changes under Bill C-31 is the expansion of the CRA's information-gathering authority.
Once enacted, the CRA would be empowered to collect documents for the purpose of enforcing international agreements, which should strengthen the agency's ability to obtain information related to cross-border tax matters.
This change is consistent with the federal government's broader focus on international tax compliance and cooperation with foreign tax authorities.
The legislation also builds on the CRA's existing audit powers by introducing additional enforcement mechanisms designed to encourage compliance with information requests and audit requirements.
New consequences for non-compliance
Bill C-31 introduced two significant enforcement tools: penalties relating to compliance orders and a new NNC regime.
Where a taxpayer fails to comply with certain CRA requests, the legislation provides the CRA with a mechanism to compel compliance by obtaining an order from a judge. The introduction of penalties associated with compliance orders increases the potential financial consequences of failing to provide requested information.
Similarly, the new NNC regime will create a formal process through which the CRA may address perceived non-compliance during an audit that does not require asking the court for an order. When the CRA issues an NNC, the recipient would accrue penalties daily while it remains outstanding.
The new legislation would also suspend the normal reassessment period rules while the NNC is outstanding. As a result, disputes concerning information requests may have implications beyond the immediate audit process that could affect the period during which the CRA can reassess a taxpayer.
Changes made in response to stakeholder feedback
This iteration of Bill C-31 is not identical to the earlier proposals released by the department of finance.
Following feedback from stakeholders and the tax community, several revisions were made:
