Female tax inspector looking at corporate financial documents with magnifying glass

The Canada Revenue Agency’s expanded powers to compel taxpayers to provide oral testimony as part of an audit will raise the risk level for taxpayers, according to a tax lawyer speaking at the virtual 2021 STEP Canada national conference on Monday.

“We may see tax lawyers and accountants be more involved in the audit process, being involved in these enquiries,” said Paul Gibney, a partner with Thorsteinssons LLP in Toronto. “Certainly, [tax advisors] would want to make sure that [client responses] aren’t taken out of context. This is going to be a big change.”

In the 2021 federal budget, the government proposed amendments to the Income Tax Act and other statutes confirming that CRA auditors would have authority to require individuals to answer questions or provide assistance as part of an audit, and that auditors would have the authority to require individuals to respond to questions orally or in writing in the form specified by the auditor.

The measures would come into force once enacted.

In the budget, the government indicated that it was proposing the change in response to the Federal Court of Appeal decision in Cameco (2019), where the authority of the CRA to require individuals to answer questions orally was called into question.

Gibney said the issue of how clients should respond to CRA requests for interviews has been an ongoing one for tax lawyers and clients. His advice to clients has been “put it in writing.”

“We don’t want any misunderstanding as to what happened,” Gibney said. “This is an ongoing issue because we’ve had circumstances in the past where the taxpayer said something [that] was taken out of context by the auditor, and then it’s led [the auditor] off in a completely wrong direction.”

In a tax bulletin about the proposed change published in April, Michael Friedman, partner with McMillan LLP in Toronto, wrote that taxpayers in an audit should limit their answers to only the question being asked, to provide information only if they are confident of its accuracy, and to request clarification if a question is unclear.

Gibney also said that the federal government’s proposal in Budget 2021 to provide an additional $304 million in funding to the CRA over five years for new and existing audit programs would likely result in increased enforcement efforts.

“We’ve already seen a big increase in audit activity over the last two or three years,” Gibney said. “We’ll certainly see more of that.”