The Canada Revenue Agency (“CRA”) has broad audit powers, allowing it to request any documents, records, and information from taxpayers and third parties under audit. The 2021 Federal Budget proposed an expansion (!) to these powers – allowing CRA to compel interview and answers from an owner-manager and any other employees of the business. The changes are aimed at making it easier for the CRA to get information and issue assessments, but those in the know predict real problems for unrepresented taxpayers and their employees! The worry is that CRA will have a single mindset heading into these interviews and will use them to simply gain ammunition for an Assessment.
Current Rules
Tax audit powers in the Income Tax Act (“ITA”) and the Excise Tax Act (“ETA”) allow the CRA to demand "all reasonable assistance” from taxpayers, including answers to “all proper questions". What “reasonable assistance” or “proper questions” means is ambiguous and confusing. Recently, the Federal Court of Appeal in Canada v. Cameco Corporation denied CRA the ability to force interviews on a taxpayer's employees, concluding that Parliament did not intend to confer such power upon CRA officials under either ITA 231.1(1) or ETA 288(1).
Proposed New Rules
Under the new rules, CRA will be able to force interviews and compel answers from taxpayers and their employees. This is a dangerous combination for taxpayers for a couple of reasons. First, the individual taxpayers and individual employees of the same taxpayers, usually lack the tax sophistication to understand the questions that CRA is posing, and to respond appropriately. Second, CRA generally goes into an interview looking for one-side of the story and uses employee interviews to corroborate (and not refute) that one-sided story – all in our view! Even the slightest of miscommunications then lead to major audit conclusions, often leading to significant adverse results (higher assessments).
Not all interviews are potentially negative (a knowledgeable and prepared employee can better present a business’s often-misunderstood business affairs). However, it is our experience is that more often than not, the taxpayer resources are not sufficiently devoted to audits, and what ends up happening is haphazard interviews, leading to significant misunderstandings about the business’s tax affairs.
In dealing with requests for interviews during tax audits, it is a bit about an ounce of prevention being worth a pound of the cure. A bad interview usually occurs because the person being interviewed is not well prepared. Bad interviews lead to bad Notices of Assessments, which the CRA can collect on from day one in GST cases. Bad Notices of Assessment can only be undone through costly and lengthy tax appeal processes.
So how to avoid a bad interview? Engage tax counsel early, and have that potential witness fully prepared before that interview! While it is in the interests of the taxpayers to cooperate with CRA, that cooperation should be through a controlled, prepared, and properly conducted interview, providing the relevant information, and answering questions in a clear and succinct manner.
As a final point, it is worth noting that employees themselves likely have their own individual rights and protections under the Federal and Provincial law, including the right in certain circumstances to retain legal counsel, and the right to remain silent in the face of CRA questions.
What can I do?
If you or an employee have been summoned for a CRA interview, you really should be bringing a lawyer with you! When it comes to tax audits and tax litigation, a self-represented taxpayer often has a fool for a client!