Tax Survival for Canadians. Dale Barrett
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taxpayers’ books and records. Information is not limited to access of information merely within the taxpayers’ possession; so long as it is within the course of conducting the audit or inspection, it is possible that the CRA may seek relevant information in the possession of others.
To that end, the CRA has been provided by law with substantial authority to access all types of documents. This broad authority includes access to documents of third parties, auditors’, and accountants’ papers that may be relevant to the taxpayer’s books and records, or to the enforcement or administration of relevant tax legislation. It is important to note that although this authority is broad, it is still subject to important exceptions, such as the solicitor-client privilege or relevant litigation privilege.
According to the CRA’s policy statement (available on the CRA website), the collection of information by officials is done in the least intrusive and most direct manner, but in practice this is not always the case. Oftentimes auditors will attempt to collect information from the source that is most likely to provide it to them the fastest — regardless of any inconvenience, cost, or embarrassment to the taxpayer.
Typically, officials narrow their requests to documents that are within the scope of review, and will generally communicate directly with the taxpayer to retrieve relevant documents or records. Such information is often only sought from third parties when the taxpayer is not or has not been cooperative in providing the information.
2.3 Information from other countries
Canada has agreements with numerous other countries, which prevent the double taxation of income otherwise subject to tax in both countries. These agreements (i.e., tax treaties) contain elaborate rules to determine which country gets to tax the income, and what part of the income the country may tax.
Besides preventing double taxation and establishing a country’s turf in terms of ability to tax a given taxpayer, these tax treaties also provide for the exchange of information between treaty partners. At the time of writing, in Canada there are currently 89 tax treaties in force, 10 more which have been signed but are not yet in force, and 2 more under negotiation. What this means for a taxpayer, is that there are potentially 101 countries which can be called upon by the CRA to provide any information it has on the taxpayer’s dealings in that country. This includes any financial transactions and records, income, pension earnings, and any other relevant information necessary for the CRA to enforce domestic taxation laws. Any income that one has earned or stashed in these countries is subject to being divulged to the CRA voluntarily, or as a result of a request. Further, some of the treaty countries will even cooperate with the CRA’s requests to obtain payment owed by a taxpayer and may seize assets and bank accounts held abroad by the taxpayer.
2.4 Information from financial institutions
To the extent possible, financial information is collected directly from the taxpayer, but in cases where such information is not made available by the taxpayer, rest assured the CRA will obtain it directly from a financial institution. Canadians should take notice that any and all information about a taxpayer that is being held by a financial institution is subject to being obtained by the CRA.
There are absolutely no privacy rights between the taxpayers and their financial institutions. It is of relative ease for the CRA to obtain any financial information it requires from a financial institution.
2.5 Information from tax returns of third parties
The CRA obtains information about taxpayers from information returns filed by third parties with respect to specific transactions. It then compares and verifies the information received by the third parties to ensure the taxpayers have accurately reported on their tax returns. This system of match and detect is frequently used to detect any non-filing of returns. Information returns predominantly deal with —
• partnerships carrying on business in Canada;
• employee paid remuneration;
• corporate security transactions if the corporation deals or trades in securities;
• financial institutions payment of accrued bond interest;
• offshore investments, including foreign affiliates, non-resident trust distributions or transfers, and designated foreign property (e.g., estate, portfolio investments, bank accounts) of Canadians if the total property value exceeds $100,000; and
• interest, dividends, or royalty payments to Canadian residents, and other payments to non-residents of Canada.
2.6 Information gathered from third parties about unnamed taxpayers
Sometimes the CRA launches an investigation into a group of people it doesn’t even know the names of yet. It used to be a well-established law that if the CRA wanted information about known taxpayers, it could simply issue a requirement to produce such information and serve it upon those third parties it believed would have the information. However, until recently, the CRA was not investigating groups of unknown people so the law on the matter had not yet developed.
One case that was the focus of a lot of public attention involved the CRA’s demands for eBay Canada to produce records and documents relating to Canadian “Power Sellers.” The CRA wanted to verify whether these Power Sellers, who have notoriety on eBay for high sales volumes, had reported all of their eBay income on their returns. Based on the decision in a similar case where the CRA had obtained a court order requiring the Greater Montreal Real Estate Board to provide information regarding real estate agent members, eBay ended up providing the information requested.
In the Greater Montreal Real Estate Board case, the CRA initially obtained a court order for a list of the names of all the agent members including a list of properties sold by each. The CRA was investigating what it believed was widespread failure of real estate agents to report all their commissions. Rejecting the challenge mounted by the Real Estate Board, the Federal Court of Appeal noted that section 231.2 of the Income Tax Act permitted the CRA to conduct “fishing expeditions” as long as the necessary court orders or warrants were obtained.
2.7 Information gathered from the taxpayer
Information is gathered from the taxpayers at the time of filing, and at the time of any subsequent review of their returns.
Taxpayers are required to file a return if they owe any taxes to the CRA for the relevant reporting period, or if they have been requested to file by the CRA. There are also various other reasons why a taxpayer may be required to file a return, which are discussed in Chapter 3.
If there is no tax payable, and if a taxpayer is not caught by one of these reasons, then no return needs to be filed, and thus the CRA will not gather any information from the taxpayer for that given year — that is unless the CRA performs an audit for that year.
According to section 150(1) of the Income Tax Act> (ITA), annual tax returns must be filed by taxpayers in the prescribed form, which means providing the CRA with certain data points (i.e., each figure in a tax return is a data point, such as CPP contributions and taxes deducted at source). Filed returns should include documentation to support relevant income and expenses; however, detailed books and records themselves are not to be included with the filing. Section 230 of the ITA explains that although not all information is required to be filed, it is essential that the taxpayer maintain these books and records of accounts in case of later review.
Once the returns have been provided by the taxpayer, and either before or after issuance of the initial Notice of Assessment, the CRA may seek further information regarding the taxpayer’s tax obligations. The CRA may simply request additional information or may audit the taxpayer on either a narrow or broad basis. Depending on the type of audit, the auditor may focus narrowly on specific issues, or investigate on more of a large-scale review, auditing all aspects of the taxpayer’s finances, including personal and business finances.
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