Published: March 10, 2020
Last Updated: October 21, 2022
Difference between CRA Tax Audits & Tax Investigations – Calgary Tax Lawyer Analysis
Income Tax Audits in Canada
The CRA is responsible for making sure that Canadian taxpayers are properly and accurately reporting their income and paying the income tax that is required under the Canadian Income Tax Act. Canada’s income tax system works through self-reporting – this means that each taxpayer is responsible for filing their own Canadian tax returns both on-time and correctly. However, to make sure that Taxpayers are not abusing the self-reporting system, the Canadian Income Tax Act gives the CRA significant powers to conduct tax audits which includes, amongst other things, the right to examine and inspect the books, records, documents and even physical locations of businesses and homes. Additionally, where the CRA auditor finds problems with the returns of taxpayers, the CRA have the power to conduct a tax investigation, reassess returns, and levy fines, penalties, interest and can even prosecute taxpayers for tax evasion or tax fraud, resulting in a maximum of 5 years in jail in addition to monetary tax penalties. The difference between the possible consequence of tax fines, tax penalties and interest, which are only monetary, and the possibility of up to 5 years of jail time and tax evasion penalties, is legally significant and, as a result, the Courts, based on the Canadian Charter of Rights, have decided that they cannot be treated in the same way. This is essentially the difference between tax Audits and the tax Criminal Investigations Program. Tax audits are really focused around determining the accuracy of a Taxpayer’s income tax returns, while tax Investigations are focused on the finding of significant tax fraud wrong doing and punishing that tax evasion. However, no matter whether it is a tax Audit or tax Investigation, the consequences can be severe and it is important to consult our expert Calgary tax Lawyers if CRA has contacted you.
Under subsection231.1(1) of the Income Tax Act, the CRA has the power to inspect and examine any records, accounts and documents that they want, both personal and business records, of the Taxpayer, in other words to carry out a tax audit. They can also contact and obtain records from third parties, which can mean your family members, spouse, co-workers, or even your neighbours. CRA tax auditors can examine a taxpayer’s premises or place of business and look at the taxpayer’s property, be it inventory or anything else if they think it will help them in determining the accuracy of the taxpayer’s returns or records. Additionally, a tax auditor can even interview or require the assistance of anyone on the premises or in the place of business. The exception is that the CRA cannot examine the dwelling house of a Taxpayer unless they have the taxpayer’s consent or prior authorization from the Courts, in other words a search warrant. In the course of a tax Audit, the CRA can also require any person to provide any information or document as long as it is for any purpose relating to the administration or enforcement the Income Tax Act. They can also require any resident of Canada and any Non-Resident who is carrying on business in Canada to provide any foreign-based information or document under tax act section231.6, though they are obligated to give them a reasonable amount of time of at least 90 days. Essentially, Canadian taxpayers are statutorily bound to cooperate with tax auditors in many ways and are not granted extra constitutional or charter protections. Being forced to help a tax Auditor who can levy significant monetary penalties can be overwhelming, but our Top Edmonton Tax Lawyers can help you navigate the process and exercise all of your tax related legal rights to come to the most favourable possible tax result.
Different from tax Audits, tax Investigations focus on tax evasion – including cases with an international element – as well as cases of fraud and promoters of tax schemes aiming at defrauding the government. The consequences of being convicted of tax evasion can mean fines ranging from 50% to 200% of the evaded taxes as well as up to 2 years imprisonment under s.239 of the Income Tax Act and fines of 100% to 200% of the evaded tax and up to 5 years imprisonment under s.327 of the Excise Tax Act. Since the penalties that come out of Investigations can be so harsh and include jail imprisonment, Canadian taxpayers do benefit from constitutional and charter protections. In particular, the Investigations process is seen as more traditionally adversarial, like a standard Criminal Case, unlike tax Audits where there is a component of cooperation. As such, the CRA when operating as tax Investigators, have to acquire warrants in order to access a Taxpayer’s records, search the Taxpayer’s premises or places of business. Tax Investigators cannot require the Taxpayer to do anything without a warrant due to the Taxpayer’s constitutional right against self-incrimination. And like a Criminal Case, you will want to be represented by experienced and competent tax Lawyers from our Top Calgary Tax Firm to make sure all your tax Rights are being protected.
When does a Tax Audit become a Tax Investigation?
The tax Criminal Investigations Program operates separately from CRA tax Audits, but generally they only begin when a tax Auditor or something else indicates that tax investigators should get involved. Generally the tax auditor will make a referral to tax investigations. As such, many Taxpayers who are involved with tax Investigations find that they were first subject to a CRA audit, then at some point during the tax Audit, tax Investigations became involved. The main concern with this, is that in a tax Audit, the Taxpayer must cooperate and the CRA can wield significant powers of examination and requirement, but many of these powers disappear and the relationship changes once it becomes a tax Investigation. But, the CRA does not always tell you when this shift occurs. Additionally, information which the CRA has obtained during the tax Audit before Criminal tax Investigations begin can be used by tax Investigations, but not information which a tax Auditor obtains after the tax Investigations have begun. As such, it is of vital importance to determine when a tax Investigation begins. The Supreme Court of Canada in the case of R. v Jarvis,  3 SCR 757 has listed 6 factors to help draw the line.
- Did the authorities have reasonable ground to lay charges?
- Was the general conduct of the authorities such that it was consistent with the pursuit of an investigation?
- Had the tax auditor transferred his file and materials to the tax investigators?
- Was the conduct of the tax auditor such that he was effectively acting as an agent in the collection of evidence?
- Is the evidence sought relevant to the taxpayer’s tax liability generally? Or was the evidence as to the taxpayer’s mens rea which is only relevant for penal liability
- Are there any other circumstances or factors that can lead the judge to the conclusions that the compliance tax audit had in reality become a tax investigation?
However, even with a list of factors, it can still be difficult to tell which side of the line you stand on; but our top Canadian Tax Lawyers can help you from beginning to end of the tax audit or tax investigation.
"This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer."