First Reference company logo

Inside Internal Controls

News and discussion on implementing risk management

machine cogs image

CRA provision misuse: The right to remain silent

CRAPractically every tax professional in the country has had to deal with the situation which arises when the Canada Revenue Agency (CRA) bases its reassessing position on the basis of an oral comment to the CRA. The difficulty is that there is no proof the comment was made or it may have been the result of a misunderstanding between the parties. In our practice we had one instance where a comment by an official of a charity to the CRA served as basis for reassessing over a thousand taxpayers. While the official admitted to having made the comment, the fact was that the CRA auditor had misunderstood the context in which it was made. Unfortunately convincing a CRA official that they have misheard or did not hear properly a statement is next to impossible and these types of situations often need to be litigated in order to resolve the situation. It is for this reason that, as a policy, we do not allow our clients to meet with the CRA.

Paragraph 231.1(1)(d) of the Income Tax Act (ITA) allows the CRA to:

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 provision is written in the context of allowing an auditor to inspect the documents located at a specific premises but, in our experience, CRA auditors understand that this provision allows them the power to compel the attendance of the taxpayer to answer questions about their file. While the provision is unclear on whose attendance can be compelled there is no ambiguity that information does not necessarily have to be provided orally.

Of course, inherent in oral interviews is the lack of a documentary record which allows statements to be understood in context. Unfortunately, it seems that the CRA is not only comfortable with the lack of record but has policies in place to ensure it! Speaking anecdotally, we recently softened our standard position and agreed to allow our clients to meet with the CRA on the condition that the conversation be recorded. The CRA’s response was that they could not agree to allow their auditors to be recorded and so we further compromised and suggested that only our client’s responses be recorded. The CRA again demurred and stated that they still could not participate in such a conversation. Nevertheless the auditor insisted that he had the rights to interview the taxpayer. Under the circumstances we agreed only to answer questions in writing.

On the other hand, section 231.4 of the Income Tax Act does allow the CRA to conduct an ‘inquiry’ of any individual. The provision states that where the Minister is administering the Act he or she may apply to the Tax Court of Canada for an order appointing a hearing officer before whom the inquiry may be held. There are specific provisions in the Act which deal with the rights of a witness at an inquiry and the rights of the person whose affairs are being investigated. Perhaps the most salient right under this provision is that the hearing is recorded and a transcript of the evidence given to the individual whose Affairs are being investigated.

One would imagine that the CRA would appreciate the need for a documentary record of statements made in the course of an investigation. Obviously such statements cut both ways and it is unnecessarily frustrating that the CRA would refuse to allow its auditors to be recorded. But if the CRA refuses to be flexible about recording conversations then perhaps greater use of this provision would be warranted.

In a recent dealing with the Montreal Tax Services Office (TSO), the CRA also cited 231.1 as authority for the proposition that the taxpayer must provide the auditor with a place to work. After much back–and–forth discussion with a supervisor at that office, it became clear that the recent cutbacks at the CRA have meant that there simply was no place for the auditor to sit and work at the office and so the CRA was using this provision as a way to support its measures to cut costs. Indeed, the supervisor admitted that they had all the Books and Records they needed for their audit and the auditor simply required a place to sit! Clearly the provision is not intended for taxpayers to subsidize the cost of housing an auditor.

We mention this story in part because it is of interest to the tax professional community at large and it really is rather humorous. However, the lesson to be learned is that the CRA seems to think that the powers contained within section 231.1 are far more vast than what is clearly written in the statute. As can be seen from our interaction with the Montreal TSO, there does not seem to be a logical end to the CRA’s misuse of this provision.

Follow me

Drache Aptowitzer LLP

Tax and Charity Lawyers at Drache Aptowitzer LLP
Drache Aptowitzer LLP is one of Canada’s foremost experts in the law related to charities and non-profit organizations. Their team of bloggers is led by Adam Aptowitzer LLB. He is a lawyer practicing in the areas of charity and tax law. He is a member of both the bars of Alberta and Ontario. He has been speaking and writing on the topic of charity law for several years and been published in numerous publications including the Canadian Taxpayer, the Canadian Fundraiser and the Not-for-Profit News and has been cited as an expert in many publications including the National Post.Read more here
Follow me

Latest posts by Drache Aptowitzer LLP (see all)

, , , , , , , ,

Comments are currently closed.