CRA set to strengthen tax compliance rules under new draft legislation

The federal Department of Finance’s latest draft legislation features sections aimed at strengthening the Canada Revenue Agency’s (CRA) compliance and enforcement powers. These changes reflect a continued focus on improving tax transparency and enforcement, particularly in cross-border contexts.

Amendments to strengthen the CRA’s compliance and enforcement measures were among the main proposals in the August 2025 draft legislation from the federal Department of Finance.

They build on previously announced measures from the 2024 federal budget which were delayed due to the prorogation of Parliament early this year.

Key changes include enhanced rules for foreign-based information requests, amendments to the requirements for information and documents and notices of non-compliance. These amendments would come into force upon receiving royal assent. 

Here is a look at the draft legislation’s proposed measures along with guidance for taxpayers to manage their compliance obligations and reduce the risk of penalties.

Foreign-based information 

Before the release of the draft legislation, the Income Tax Act permitted the CRA to request foreign-based information from a person who is either a Canadian resident or non-resident carrying on business in Canada. 

Foreign-based information refers to any information or document that is available or located outside of Canada that may be relevant to the administration or enforcement of the Income Tax Act.

Under the existing rules, the person was provided at least a 90-day period to either produce the information or file an application for the request to be reviewed by the Federal Court. The Federal Court could then confirm, vary or set aside the requirement if it was determined as unreasonable. 

If the person failed to comply or did not seek a review, the requested information or documents could not be used in any civil proceedings. Essentially, civil courts were barred from considering such evidence if the taxpayer did not respond to the CRA’s request. 

What the draft legislation proposes

• Expanding scope for information requests: The legislation would explicitly include enforcement and administration of listed international agreements, such as tax treaties. 

• Protection of privileged information: Penalties for non-compliance may not apply if the foreign-based information or documents that CRA is seeking are, in the taxpayer’s reasonable assessment, protected by solicitor-client privilege. 

• Right to object to non-compliance penalties: Taxpayers may object to an assessment of a penalty—and the CRA must waive or adjust the penalty—if it is determined to be disproportionate or unfair. 

• Oral information: Any information provided orally in support of these requests must now be given under oath or affirmation. 

• Timeline for compliance: Information requests must now specify that a taxpayer or any other person should provide the necessary documents or information within a reasonable time as outlined in the request. However, the existing minimum 90-day period rule still applies. 

• Reassessment period: The period between filing an application for judicial review of the information and the resolution of that process does not count toward the statutory limitation period for making tax assessments. 

• Exclusion from civil proceedings: Material that is barred from use in any civil proceedings now includes information or documents relating to the enforcement and administration of the act and the treaty. 

Requirement for information or documents 

The Income Tax Act also allowed the CRA to request information located in Canada that may relate to the act’s enforcement and administration or that of a listed international agreement, such as a tax treaty. 

However, if the request was directed to a third party for information on a person or group of persons, who are not explicitly listed on the request, it required prior approval from the Federal Court. These types of requests are known as unnamed persons requirements (UPR), as those individuals are not explicitly named in the request 

UPRs are subject to specific conditions, one of which being the information or document that CRA is seeking would relate to the enforcement and administration of the Income Tax Act only. 

The specificity in the act’s language prohibits the CRA from issuing a UPR to request information that does not relate to the act’s enforcement or administration. 

This limitation was evident in the recent judicial review in Canada (National Revenue) v. Shopify Inc., where the Federal Court denied the CRA’s request. In the case, the CRA sought information about merchants in Australia to assist Australian tax authorities through the Canada-Australia Tax Treaty. However, this objective fell outside the scope of enforcing or administering the Income Tax Act. 

What the draft legislation proposes

Regarding UPRs, the legislation will explicitly include enforcement and administration of listed international agreements like tax treaties. Had this been enacted earlier, it could have altered the outcome of the Shopify case mentioned above. 

However, there is a limit to the CRA’s authority to require a taxpayer or other person to provide information—including a return of income or supplementary return—in cases where the information and documents involve unnamed persons. 

The provisions regarding oral information, timeline for compliance, protection of privileged information and the right to object to non-compliance penalties—as previously discussed above—are also applicable to requirements for information or documents. 

Notice of non-compliance

Although not previously enacted, draft legislation was introduced in 2024 for the creation of notices of non-compliance. This measure was designed to help CRA retrieve information from taxpayers who failed to comply with a previous requirement or notice to provide assistance or information to the CRA.

Under the proposal, the CRA could issue a notice to a person who had not responded to prior requests on foreign-based information and domestically available information. Where a taxpayer disagreed with the notice, they were able to make an objection—prompting the CRA to review the notice. If the issue remained unresolved, they could seek a judicial review through the Federal Court.

Where the taxpayer failed to address the notice or the initial request, they would face a penalty up to 10 per cent of the aggregate tax payable for taxation years that the compliance order applied to. The reassessment period would also be extended for both the taxpayer and a person who is non-arm’s length with the taxpayer if the notice of compliance was outstanding. 

What the draft legislation proposes

The CRA can now issue a compliance order both before or after sending a notice of non-compliance to a taxpayer. 

The provisions regarding the reassessment period, timeline for compliance, protection of privileged information and the right to object to non-compliance penalties—as previously discussed above—are also applicable to notices of non-compliance. 

Tax community feedback

The Canadian Bar Association’s joint committee on taxation (JCT) raised some concerns when the legislation was introduced—notably regarding the proposed oath requirement. 

The JCT argued this measure was unnecessary as the CRA already possessed extensive powers to compel taxpayers to produce documentation. It noted this proposal would increase administrative and legal costs. 

The JCT said the legislation did not give taxpayers a fair opportunity to dispute the penalty associated with the notice of non-compliance. Under the previous proposal, the courts could only assess if the CRA’s decision was reasonable rather than if it was correct or appropriate. 

Further, the penalty did not have a threshold for misconduct—which the JCT felt could discourage legitimate disputes and coerce taxpayers into giving up information.

The committee also raised the stop clock rules that extend reassessment periods as an issue. It highlighted the potential for different reassessment periods when a notice of non-compliance is vacated by the CRA as opposed to by the courts.

While most of the 2024 proposals remained largely unchanged in the 2025 draft legislation, some improvements were made to enhance taxpayer protections.

The new draft rules allow taxpayers to object to penalties, and the CRA must vacate or vary its assessment if it is deemed to be disproportionate or unfair. The new rules also provide a safeguard for documents and information protected by solicitor-client privilege.