Audit process

When I’m assisting clients with an objection to or appeal from a reassessment, it is quite common for them to complain about the manner in which the CRA conducted the audit that spawned the reassessment. Sometimes clients complain about the mental and moral shortcomings of the auditor. More often, they believe that the auditor’s conduct was high-handed and unfair and that this is somehow relevant to their civil liability for tax under the Income Tax Act (Canada) (the “Act”) or some other tax statute. Ninety-nine times out of a hundred, one of my jobs will be to stop the clients from focusing on the auditor and the way he or she did their job and to get them to focus instead on the substance of the reassessment.

Substance Over Process

The tax courts generally have very little patience with arguments to the effect that the manner in which an audit was conducted should somehow affect a taxpayer’s civil liability under the Act. The leading case in this regard is Main Rehabilitation Co. v. Canada, 2004 FCA 403, in which the taxpayer alleged an “abuse of process at common law and under section 7 of the Charter of Rights and Freedoms in the conduct of an audit”. The Federal Court of Appeal described the allegations in the following terms:

The Notice of Appeal alleges that the disallowance of the expenses followed an audit which Main says was based on mala fides and an abuse of authority. It is said that a protracted and abusive audit was triggered by an anonymous false tip by a disgruntled shareholder. It was conducted by an “auditor” who had not yet passed her exams. And it was managed by the supervisor who was related to a municipal inspector who had dealings with directors, officers and employees, as well as being a friend of the disgruntled shareholder. The relief Main seeks in respect of these allegations is that the assessment be stayed.

The Tax Court struck out these allegations from the taxpayer’s pleadings, and the Federal Court of Appeal affirmed on the following grounds:

[6] [I]t is … plain and obvious that the Tax Court does not have the jurisdiction to set aside an assessment on the basis of an abuse of process at common law or in breach of section 7 of the Charter.

[7] As the Tax Court Judge properly notes in her reasons, although the Tax Court has authority to stay proceedings that are an abuse of its own process (see for instance Yacyshyn v. Canada, 1999 D.T.C. 5133 (F.C.A.)), Courts have consistently held that the actions of the [CRA] cannot be taken into account in an appeal against assessments.

 [8] This is because what is in issue in an appeal pursuant to section 169 is the validity of the assessment and not the process by which it is established (see for instance the Queen v. the Consumers’ Gas Company Ltd. 87 D.T.C. 5008 (F.C.A.) at p. 5012). Put another way, the question is not whether the CCRA officials exercised their powers properly, but whether the amounts assessed can be shown to be properly owing under the Act (Ludco Enterprises Ltd. v. R., [1996] 3 C.T.C. 74 (F.C.A.) at p. 84).

To similar effect is the decision of Justice Woods in Gallant v R, 2012 TCC 119. Poor Mr Gallant filed his tax return and claimed tuition tax credits that he calculated using a form provided by the CRA. Mr Gallant used the form correctly, but, unfortunately, the form was wrong: it allowed him to claim credits in excess of those actually permitted by the Act. The CRA reassessed him to deny the excess credits. Mr Gallant appealed to the Tax Court. Justice Woods responded as follows:

[11] I would first comment that I agree with the appellant that it is unfair for the CRA to require a taxpayer to calculate a deduction in accordance with a form, and then to reassess on a different basis. Taxpayers should be able to rely on forms that are required to be included with income tax returns. No suggestion was given that taxpayers were warned about the problem with Schedule 11.

[12] The circumstances are exacerbated in this case because the CRA did not pick up on the problem until fortuitously the taxpayer requested a change to the income tax return. Accordingly, most taxpayers may have been assessed in accordance with the form.

 [13] It is not enough, however, that a taxpayer has been unfairly dealt with by the CRA. Normally, this is not grounds for relief in this Court.

One hopes the CRA exercised its discretion to give Mr Gallant interest relief at least.

The High Hand

What about auditor behaviour that appears high-handed? What about an audit that might be thought to violate the privacy rights or constitutional rights of a taxpayer?

A taxpayer who is charged with tax evasion is engaged with the criminal law, and he or she will enjoy the Charter rights normally afforded to an accused. The taxpayer’s civil liability under the Act does not engage these rights, however, and the Act grants very broad powers to the CRA to conduct audits. Subsection 231.1(1) of the Act reads as follows:

An authorized person may, at all reasonable times, for any purpose related to the administration or enforcement of this Act,

 (a) inspect, audit or examine the books and records of a taxpayer and any document of the taxpayer or of any other person that relates or may relate to the information that is or should be in the books or records of the taxpayer or to any amount payable by the taxpayer under this Act, and

 (b) examine property in an inventory of a taxpayer and any property or process of, or matter relating to, the taxpayer or any other person, an examination of which may assist the authorized person in determining the accuracy of the inventory of the taxpayer or in ascertaining the information that is or should be in the books or records of the taxpayer or any amount payable by the taxpayer under this Act,

 and for those purposes the authorized person may

 (c) subject to subsection 231.1(2), enter into any premises or place where any business is carried on, any property is kept, anything is done in connection with any business or any books or records are or should be kept, and

 (d) require the owner or manager of the property or business and any other person on the premises or place to give the authorized person all reasonable assistance and to answer all proper questions relating to the administration or enforcement of this Act and, for that purpose, require the owner or manager to attend at the premises or place with the authorized person.

The subsection says nothing about warrants or providing notice or obtaining a court order to examine documents. Instead, the provision simply grants to the CRA very broad powers to examine anything that “relates or may relate” to the person’s liability under the Act.

Paragraph 231.1(1)(a) permits the CRA to require any person who has information relating to a taxpayer under audit to provide that information to the CRA. The CRA need not obtain any sort of prior authorization, and, arguably, the CRA is not required to inform the taxpayer under audit that the demand has been made.# The CRA, if it believes that a taxpayer is not providing adequate responses to demands for information, will often trot off to the taxpayer’s bank or banks and require them to provide account statements. We understand that it used to be necessary for the CRA to know what branch of a bank a taxpayer dealt with so that the demand could be sent to a person who would be able to respond, but it appears that the government has forced the banks to create central offices that are able to find taxpayer information regardless of the branch where the taxpayer does his or her banking.

Paragraph 231.1(1)(b) of the Act permits the CRA to examine “any property or process” of a taxpayer. It appears that the CRA relies on this provision and paragraph 231.1(1)(c) to require restaurant owners to accommodate auditors who wish to sit at a table in the restaurant during its hours of operation for a number of days and observe the restaurant’s operations, its personnel and the comings and goings of customers.

Paragraph 231.1(1)(c) grants the CRA the power to “enter into any premises or place where any business is carried on”.# Typically the CRA will provide advance notice of a visit to a taxpayer’s place of business, but the paragraph does not require any such notice, and we have heard that auditors will sometimes appear at a business and demand the right to download information then and there from a point-of-sale terminal (for example).#

The courts have held that, under paragraph 231.2(1)(a), the CRA has the power to compel taxpayers to complete questionnaires and forms that are not prescribed form or returns under the Income Tax Regulations.

Subsection 231.5(2) of the Act provides

No person shall, physically or otherwise, interfere with, hinder or molest an official (in this subsection having the meaning assigned by subsection 241(10)) doing anything that the official is authorized to do under this Act or attempt to interfere with, hinder or molest any official doing or prevent or attempt to prevent an official from doing, anything that the official is authorized to do under this Act, and every person shall, unless the person is unable to do so, do everything that the person is required to do by or under subsection (1) or sections 231.1 to 231.4.

Subsection 238(1) states that anyone who fails to comply with sections 230 to 232 of the Act (among other provisions of the Act) is guilty of an offence that is punishable on summary conviction with a fine of not less than $1,000 and not more than $25,000 or such a fine and imprisonment for a term of not more than 12 months.

The Act, then, grants very broad powers to the CRA to conduct audits, and the courts have tended to interpret the relevant provisions of the Act so as not to circumscribe them. The motto of the CRA, in the civil audit context anyway, is “Hand It Over”, and a taxpayer is usually well-advised to comply. Taking any other approach will generally only lead to headaches (and large legal bills).


Given the courts’ laser-like focus on substance over process in considering appeals from civil assessments, and given the broad powers accorded to the CRA under the Act to conduct audits, a taxpayer is almost always better advised to spend the better part of his or her time marshaling the evidence that will be needed to prove a reassessment wrong rather than focusing on how the CRA arrived at the assessment. This is not to say that a taxpayer is wholly without recourse if, for example, an auditor behaves in a rude, inconsiderate or arrogant manner, which happens sometimes (no doubt all that power can go to one’s head). The rudeness or arrogance mean very little or nothing in the Tax Court or the Federal Court of Appeal, but the “Taxpayer Bill of Rights”# purports to entitle a taxpayer to be treated “professionally, courteously and fairly”. The CRA has a service complaint process,# and part of the remit of the Taxpayers’ Ombudsman# is to investigate complaints about unprofessional behaviour on the part of CRA personnel. These avenues of redress, however, are separate and apart from the tax court appeal process, and they generally have nothing to do with one’s liability for tax under the Act. This is often cold comfort to taxpayers, but a tax adviser who represents the matter in any other way is likely to be giving the taxpayer false hope and wasting his or her time and money.

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