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Commencing disputes

i Income tax returns

Canada has a self-reporting system. Pursuant to Section 150 of the Income Tax Act, a return of income that is in prescribed form and that contains prescribed information shall be filed with the CRA, without notice or demand for the return, for each taxation year of a taxpayer. The filing deadline will vary in accordance with the taxpayer's nature and status, for example, 30 April (individuals), 15 June (individuals carrying on a business), six months after the end of the financial year (corporations) and 90 days from the end of the year (trusts and estates). In accordance with Section 151, the taxpayer required by Section 150 to file a return of income shall, in the return, estimate the amount of tax payable. Pursuant to Section 241, any information disclosed to the CRA in this context is confidential and, except as provided by law, no official or other government representative shall knowingly provide, or knowingly allow to be provided to any person, any taxpayer information. Confidentiality in tax matters is a pillar of Canada's self-reporting system.

Shortly after the return is filed, a first assessment will be issued by the CRA (sometimes referred to as a quick assessment) in accordance with Section 152. There is no mandatory deadline for the first assessment; the CRA must assess with all due dispatch. Typically, the first assessment will be a reproduction of the numbers disclosed in the return and it will not be the result of an audit. The first assessment has, in the legal sense, the same status as an assessment or reassessment issued further to an audit. As such, it is, inter alia, deemed valid and subject to objection and appeal.

ii Audits and access to tax information

Once a return is filed, the CRA has vast audit powers to ensure that it has been truthfully prepared, that income has been fully declared and that taxes have been computed in accordance with the law. Under Section 231.1 of the Income Tax Act, an auditor may at all reasonable times, for any purpose related to the administration of the Act, 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 and records of the taxpayer or to any amount payable by the taxpayer under the Act. In R v. McKinlay Transport Ltd, the Supreme Court of Canada concluded that these powers amounted to a seizure that was acceptable under the Canadian Charter of Rights and Freedoms on the basis that the taxpayer has a very low expectation of privacy in relation to the kind of information contained in its books and records for tax purposes. The Court concluded that the Minister of National Revenue must be capable of exercising his audit powers whether or not he has reasonable grounds for believing that a particular taxpayer has breached the Act. A spot check or a system of random monitoring may be the only way in which the integrity of the system can be maintained.

This is true to the extent that audit powers are used only for the ultimate purpose of issuing a reassessment (taxes, penalties and interest) (i.e., civil matters). These powers cannot be used in the context of a criminal investigation because of the liberty interest that is at stake. In R v. Jarvis, the Supreme Court of Canada stated that there must be some measure of separation between the audit and investigative functions within the CRA. Where the predominant purpose of a particular inquiry is the determination of penal liability (as opposed to tax liability) CRA officials must relinquish the authority to use the audit powers under Section 231.1. In such a case, evidence must be gathered in accordance with the rules applicable in criminal matters and comply with the Canadian Charters of Rights of Freedoms (including the right to remain silent, presumption of innocence and proof of culpability beyond reasonable doubt).

A notable exception to the general rule that the CRA has access to any document and information relevant to a purpose of the Act in the course of a tax audit is if the document is protected by solicitor–client privilege. In Descoteaux v. Mierzwinski, the Supreme Court of Canada established the substantive conditions precedent to the existence of the right of the lawyer's client to confidentiality: where legal advice of any kind is sought from a professional legal adviser in his or her capacity as such, the communications relating to that purpose, made in confidence by the client, are permanently protected from disclosure by him or her or by the legal adviser, except the protection be waived. Not all communications are privileged; the communication must be made to the lawyer in his or her professional capacity to obtain legal advice. Of course, communications made to facilitate the commission of a crime or fraud will not be confidential.

In Canada, the practice of taxation is shared among two major professional bodies: lawyers and chartered professional accountants (CPA). (See the recent Supreme Court case of Barreau du Quebec, 2017 SCC 56, Cote J, dissenting). Although both professions have substantially the same rights in terms of the professional acts they can make, communications between a taxpayer and a CPA are currently not protected by solicitor–client privilege. Therefore, arguably, the CRA could use its powers under Sections 231.1 et seq. to access an accountant's file, but certainly not in a routine, uncontrolled manner. A recent example is the case of BP Canada Energy Company, 2017 FCA 61, in which the Federal Court of Appeal denied the CRA's application pursuant to Section 231.7 to get a copy of the tax accrual working papers prepared for the purpose of consolidated financial statements, which contain a list of uncertain tax positions (the issues list), on the basis that financial reporting rules protect the inherent confidentiality of the process through which CPAs obtain and analyse tax information in order to opine on the reliability of financial information disclosed to the public. (Also see Atlas Tube Canada ULC, 2018 FC 1086.)

iii Normal reassessment period

The period of time within which the CRA is expected to carry out its tax audit and issue a reassessment is the normal reassessment period defined under Sections 152(3.1) and 152(4) of the Income Tax Act. The normal reassessment period starts with the issuance of the first assessment. Depending upon the taxpayer's status and the nature of the transactions under review, the normal reassessment period ends three (for an individual or private corporation), four (for a public corporation) or seven (for transactions involving a non-resident) years later. Within the normal reassessment period, the CRA can issue as many reassessments as it sees fit, and the subsequent reassessment cancels the previous one unless it is an additional assessment.

Pursuant to Sections 152(4) and (4.01), the CRA can issue a reassessment beyond the normal reassessment period only if the reassessment can reasonably be regarded as relating to either misrepresentation in the taxpayer's return attributable to neglect, carelessness or wilful default, or fraud. The CRA must prove misrepresentation on the balance of probabilities, and misrepresentation must take place when filing the return, not at another time. The standard of care is that of a reasonably prudent taxpayer. In other words, the CRA must prove simple negligence of the taxpayer when filing his or her income tax return. According to the Federal Court of Appeal in The Queen v. Johnson, when it is said that the standard of care is that of a wise and prudent person, it must be understood that wisdom is not infallibility and prudence is not perfection.