Enforcement

Compliance with tax laws

How does the tax authority verify compliance with the tax laws and ensure timely payment of taxes? What is the typical procedure for the tax authority to review a tax return and how long does the review last?

Canada relies on a self-assessment system. The Canada Revenue Agency (the CRA) is required to issue a notice of assessment within a reasonable period of time following the filing of a tax return. These original assessments usually are based on a limited review of the underlying tax returns. 

Tax legislation is mainly enforced through audits, where the CRA examines the books and records, documents, and information of taxpayers to reassess their liability for tax.

Most files are selected for audit based on risk assessment, whereby the CRA attempts to focus its resources on high-risk taxpayers and conduct fewer audits generating additional tax revenues.

After the audit, the CRA will either issue a completion letter, confirming that no adjustments are required, or will most likely issue a proposal letter explaining the reason for the proposed reassessment for additional tax. Taxpayers generally have 30 days to respond. They also have a right to appeal.

The time required to conduct and finalise an audit depends on its scope (with international matters taking generally more time than domestic ones), the state of the taxpayers’ records and the delays in obtaining and communicating those records to the CRA. Often, considerable delays result from internal consultations within the CRA.

In general, an audit for a large corporation will last from more than six months to a few years.

Types of taxpayer

Are different types of taxpayers subject to different reporting requirements? Can they be subjected to different types of review?

The Canadian self-assessment system relies on detailed reporting requirements based on the type of taxpayer or business organisation.

All resident corporations (including non-profit organisations and inactive corporations) must file a corporation income tax return every tax year, even when no tax is payable. The deadline for filing corporation tax return is six months after the end of the taxation year, which is the period for which the accounts of the business are ordinarily prepared. Consolidated tax returns are not permitted.

Generally, a non-resident corporation must also file a T2 if it carried on business in Canada or disposed of Canadian property at any time in the tax year, notwithstanding the application of a tax treaty.

Period installment payments on account of the current year tax liability are generally required. Final tax payments generally are due within two months of year-end.

Individuals must file tax return tax returns every year, except when no tax is payable. The deadline to file and pay the outstanding tax liability is 30 April. Individuals and their spouses that operate a business or profession have their filing deadline extended to 15 June, but the tax liability still is due by 30 April. Family income tax returns are not permitted.

Income tax on salary is withheld at source by employers. Individual taxpayers may have to make installment payments as well.

Trusts must file tax returns each year income from the trust property is subject to tax. Trusts are generally required to use a 31 December tax year-end. The deadline to file and pay the outstanding tax liability is no later than 90 days after the trust’s taxation year-end.

All types of taxpayers can be subject to the same types of review and enforcement actions.

Requesting information

What types of information may the tax authority request from taxpayers? Can the tax authority interview the taxpayer or the taxpayer’s employees? If so, are there any restrictions?

The books and records commonly audited by the CRA include previously filed tax returns; credit history; property registers; business records including ledgers, journals, minute books, invoices, receipts, contracts; rental records; bank and credit card statement; adjustments made by accountants or tax professionals; and publicly available information, from traditional news media and more broadly from the internet.

Taxpayers must keep adequate books and records to determine their tax obligations and entitlements, generally for a period of six years after the end of the relevant period.

In the course of an audit, taxpayers may be asked to provide complete and timely answers to the auditor’s questions. However, the CRA cannot compel oral interviews.

Available agency action

What actions may the agencies take if the taxpayer does not provide the required information?

The legislation grants the CRA a variety of ways to gather information to verify taxpayer compliance.

The CRA can require the production of information or documents for any purpose related to the administration or enforcement of the tax legislation. This general power does not require court authorisation. However, the CRA does need court authorisation to require a person to provide information relating to one or more unnamed third parties.

If a person fails to provide information or documents, the legislation allows the CRA to seek a compliance order from a court. To grant a compliance order, the court must be satisfied that the person was required by law to provide information or documents and did not do so, and that the information or documents are not protected from disclosure by solicitor-client privilege. Failure or refusal to comply with a compliance order may result in a finding of contempt of court and may constitute an offence.

As a general rule, failure to provide information or documents will trigger the issuance of tax reassessments based on negative assumptions drawn from the taxpayers’ refusal to comply.

Collecting overdue payments

How may the tax authority collect overdue tax payments following a tax review?

Answer coming soon.

Penalties

In what circumstances may the tax authority impose penalties?

The legislation authorises the CRA to levy a number of penalties, some automatic, some in connection with false statements made knowingly or under circumstances amounting to gross negligence.

The penalty for failure to file a tax return on time amounts to 5 per cent of the year’s unpaid tax, plus 1 per cent per complete month (up to 12 months) from the due date. The penalty is doubled for a repeated failure to file.

Gross negligence penalties amount to 50 per cent of the understated tax or the overstated credits related to the false statement or omission.

How are penalties calculated?

Penalties are generally calculated as a percentage of the taxes owing. However, in certain circumstances penalties are calculated as fixed amounts, amounts per omission or amounts per units of time. For example, the penalty for not filing the tax return of certain corporations electronically is C$1,000 per return, and the penalty for failure to file a partnership tax return is C$25 per day of default, with a C$1,000 minimum and a C$2,500 maximum.

What defences are available if penalties are imposed?

A defence of due diligence is available against penalties. The CRA’s acceptance of the defence requires evidence that the taxpayer has made a sincere and demonstrable attempt that a reasonably prudent person in similar circumstances would be expected to make to comply with the tax requirement at issue.

Generally, the CRA does not accept a due diligence defence where a person has relied solely on the advice of a third party that turns out to be technically inaccurate.

Criminal consequences

Are there criminal consequences that can arise as a result of a tax review? Are these different for different types of taxpayers?

The CRA’s Criminal Investigations Program investigates alleged cases of tax evasion and, in certain circumstances, transfer cases to Public Prosecution Service of Canada for criminal prosecution.

Tax evasion is the commission or omission of an act, conspiracy to commit such an act, or accommodating someone else to commit such an act, which can result in criminal charges under the tax legislation or the Criminal Code.

Some of the main tools relied upon by the CRA to investigate tax evasion are court-sanctioned searches and seizures (dawn raids) where CRA investigators, assisted by law enforcement, seize books, records, electronic data and computer equipment from business premises and residential properties. The execution of search warrants by the CRA generally receive news coverage.

Tax evasion convictions in Canada regularly lead to fines up to 200 per cent of the taxes evaded, potential jail time and criminal records.

The CRA administers both national and international lead programmes allowing individuals to report perceived instances of tax evasion.

Enforcement record

What is the recent enforcement record of the authorities?

Answer coming soon.