The Canada Revenue Agency (CRA) has the power to conduct audits, investigate potential tax fraud and collect taxes owed from taxpayers. However, these powers are not unlimited. If the CRA oversteps its powers, taxpayers have options to push back. Experienced Canadian tax lawyers like Jeremy Scott may be able to help with defending the mistreatment of taxpayers by the CRA. Learn more about your rights and what you should do if the CRA has started an audit of your tax records by calling (902) 403-7201.
The CRA’s Audit and Investigation Authority
The CRA has extremely broad powers when it comes to audits and investigations. Revenue Canada auditors are allowed to make broad-based assumptions about tax liabilities with little or no documentary evidence in many cases. They can also levy significant monetary penalties based on these assumptions, which can exceed the actual amount of tax owed.
The CRA can also put liens on residences, garnish bank accounts, and more—all with very little or no notice to a taxpayer. Ultimately, all of this can cause serious harm to Canada’s taxpayers. Taxpayers are not always aware of the recourse or ability to fight back against the CRA’s collection tactics.
The CRA and Legal Liability
A landmark tax case occurred in 2018. In a prior case, Leroux v. Canada Revenue Agency, the Quebec Superior Court determined that the CRA could be held liable for CRA overstepping its powers based on a theory of negligence. Specifically, the Court can hold the CRA responsible for mistreatment of taxpayers by the CRA where its actions cause measurable harm to taxpayers, and the CRA’s actions are an abuse of its power under the tax audit mandate.
In July 2018, the CRA had to pay $4.8 million in damages to the taxpayer, Ludmer, because of an abusive tax audit. These damages were the result of an extensive tax investigation that occurred over six years. According to the CRA, the total assessed taxes were over $25 million, including interest and penalties. The taxpayers immediately paid the assessed tax to stop interest from accruing and then objected to the assessment.
As part of the Quebec Superior Court’s decision, the Court found that the CRA could only be immune from liability if it were acting under its true core policy, which is the calculation and collection of taxes. In certain cicrumstances, the CRA could be liable for its own negligence.
Specifically, the Court concluded:
- The CRA must act reasonably when performing an audit by adhering to the Taxpayer Bill of Rights, a listing of rights set forth by the Government of Canada
- The CRA only had to act negligently, rather than maliciously, to impose legal liability
- The CRA can be wrong about its assessment without being negligent; its liability for negligence only arises when it acts unreasonably
The Court determined that the CRA was negligent because it did not disclose information under the Access to Information Directorate, made a request to the Bermuda taxing authorities based on investigating a “criminal tax matter,” and failed to abandon clearly unreasonable tax reassessment positions.
Recent Litigation Involving the CRA
In 2022, the Tax Court released an opinion in the case of Choptiany v. HMTK. In that decision, the court cited a wide variety of questionable tactics in which the CRA engaged to investigate and collect tax payments from taxpayers. The Tax Court had some extremely harsh words for the CRA, including its attorney and investigators.
Specifically, the Court determined that the CRA deliberately restricted the search for certain documents that were ordered to be produced and intentionally did not disclose an investigation by the CRA Criminal Investigations into one of the taxpayers involved. CRA’s failure to comply with the Court’s orders and mislead both the Court and the taxpayers was called “outrageously misleading” and “contemptuous.”
Although the Tax Court did not impose liability immediately in that case, it is apparent that the CRA was engaging in behavior that was appalling to the Tax Court. Instead of granting any monetary appeal, the Tax Court permitted an appeal without a full trial, something that generally does not happen at that level.
Litigating a Complaint Against the CRA
Most taxpayers receive notice of a tax bill through a Tax Assessment. To dispute an assessment, the taxpayer must file a Notice of Objection with the CRA. The time to dispute a charge is relatively short, so taxpayers must take quick action if they want to dispute an assessment.
Appealing a Tax Assessment
Once taxpayers file their Notice of Objection, they can proceed through the CRA’s administrative tax dispute process. Alternatively, they can skip the administrative process and appeal directly to the Tax Court of Canada in certain instances.
Raising Negligence Concerns
Tax Assessments and actions before the Tax Court generally focus on just the amount of taxes imposed and collected. However, based on recent case law, taxpayers might also be able to assert a claim for the wrongful actions of the CRA through the investigation and audit process.
Taxpayers have raised these claims at various levels in the appeal process with varying levels of success.
Get Help with a Tax Audit or Claim Against the CRA
Facing the CRA in an audit or investigation can be extremely daunting. It is time-consuming, cumbersome, and often overwhelming. Having an experienced lawyer working with you through this process can be invaluable. Consider obtaining legal assistance. The dedicated and compassionate team at Jeremy Scott Law may be able to help. Contact our office for more information about legal tax services or to schedule an appointment. Remember, you may only have 90 days to object to a Tax Assessment, so you may need to take action quickly. Call (902) 403-7201 today.