Canada’s Expanded CRA Powers Could Reshape the Audit Landscape in 2025

OTTAWA, Canada, December 16, 2024 – ​Canada’s ​2024 ​budget proposed significant changes to the ​Canadian Tax Agency’s (CRA’s) discretion, which could redefine the ​taxpayer audit process from 2025. ​The CRA’s expanded authority is essential for these changes to address non-compliance, to enforce inquiries and to extend audit deadlines in specific circumstances. These reforms are intended to improve the ​efficiency ​of the tax administration, ​but they can ​also encourage taxpayers to reassess how they deal with audits and compliance.

Under ​the proposed measures, the CRA will ​have the capacity to issue a new type of notice called “Notification of Non-Compliance”. This notice applies to ​taxpayers or associated parties who ​do not meet the CRA’s requirements to provide the necessary documents or information. In particular, the CRA may ​extend the reassessment period for taxpayers affected ​by ​this notice by ​stopping the ​clock in the normal audit period until the case is resolved. According to the budget, these changes are intended to address ​delays in audits caused by ​slow or incomplete responses from taxpayers, which may hinder tax ​collection ​efforts.

Penalties ​for non-compliance and extended enforcement

Under the proposed rules, taxpayers issued a notice of non-compliance that ​could be subject to ​$50 per day financial penalties ​during the notification, up to a maximum of $25,000. These penalties do not apply if ​the CRA ​or a court ​determines ​that the taxpayer ​has ​taken reasonable steps to comply or that the notice itself was not warranted. In addition, the new framework allows the ​CRA to request the disclosure of sworn information or documents, highlighting the Agency’s intention to strengthen implementation and accountability during audits.

Budget 2024 also ​includes measures to simplify ​the CRA’s authority to obtain compliance ​orders. If ​a taxpayer does not provide the ​necessary information after receiving a notice of ​non-compliance, the CRA may apply for an enforcement warrant ordered by the court. Failure to comply with this order could result in new financial penalties, creating a more rigorous and binding audit environment for ​taxpayers. ​As noted in the budget document, these changes are intended to ​encourage timely and complete responses to ​CRA requests, ​ensuring more smooth audits and faster collection of taxes.

Implications for Taxpayers ​and the Audit Process

The CRA’s expanded powers are expected to change the way taxpayers ​deal with audits, particularly those involving complex or international financial arrangements. ​Historically, delayed responses to CRA enquiries have contributed to lengthy audits and reassessments. By effectively stopping the re-evaluation ​period during ​periods of non-compliance, the proposed measures ​could ​extend the audit process for non-cooperative contributors, while giving the CRA more time to collect the ​necessary information.

For businesses and individuals subject to audits, the financial and operational risks associated ​with non-compliance are significant. Tax professionals expect taxpayers to adopt more proactive compliance strategies to avoid ​penalties and minimize delays. Companies with complex financial ​records or cross-border activities, ​in ​particular, may need to ensure that their documentation is readily available and respond ​promptly to CRA requests to avoid a notice of non-compliance.

Judicial ​oversight ​and safeguards

Despite ​the CRA’s expanded powers, the proposal includes several levels of oversight to protect taxpayers’ rights. Taxpayers who receive a notice of non-compliance may request the CRA to review it. If the CRA does not leave the notice after this review, taxpayers may refer the matter to the Federal ​Court, ​which will have the authority to confirm, amend or cancel the notice if it is ​deemed unreasonable. This judicial review process seeks to balance the CRA’s enforcement capabilities with taxpayer protections.

The opportunity ​to ​challenge notifications through judicial ​oversight provides taxpayers with a redress mechanism, although it may ​be in ​addition to the time and costs associated with disputes. Legal and ​accounting experts suggest that the CRA’s dual levels of review and judicial review are essential to ensure that ​expanded authorities are not diverted while maintaining impartiality in the audit process.

Future perspectives and compliance considerations

By 2025, the increased powers ​of ​the ​CRA will likely reshape the audit landscape in Canada. Stakeholders, particularly businesses, are advised to prioritize ​timely and comprehensive responses to CRA requests to mitigate the risk of sanctions ​for non-compliance. Businesses may also need to review their record keeping practices to ensure ​that they are able ​to effectively comply with CRA documentation standards.

While these changes are ​expected to improve the effectiveness of the audit and strengthen the ​law enforcement system in ​Canada, they also indicate a shift towards a stronger CRA approach. ​Businesses and individuals should be kept informed and prepared for the ​entry into force of these measures. The introduction of more stringent ​sanctions and the extension of audit deadlines will likely encourage ​taxpayers to take a more cautious and proactive position in managing their tax affairs.

Ultimately, the proposed changes reflect Canada’s broader efforts ​to ​modernize its ​enforcement instruments and reduce compliance gaps. As ​taxpayers comply with this new audit environment, collaboration with tax professionals and legal advisors will be essential to effectively navigate the ​changing regulatory landscape.