Tax practitioners say they’re regularly filing objections or appeals to questionable tax assessments, with fallout for themselves, taxpayers and the Canada Revenue Agency (CRA).
“We’re getting much more … unproductive client work to do,” said Peter Weissman, a partner with Cadesky Tax in Toronto. “Having to file an appeal on something that’s pretty straightforward is a waste.”
Taxpayers can file an objection to a tax assessment or reassessment (for simplicity, only “assessment” will be used in this story) with the CRA’s appeals branch. If the taxpayer isn’t satisfied with the branch’s decision, they can file an appeal with the Tax Court.
In fiscal 2024–25, the CRA received 128,386 objections, the agency said in an email, up 47% from 87,543 objections the previous year, and up 98% from 64,712 objections in 2022–23. This data include objections deemed invalid — for example, because of a nil assessment or statute of limitations. “[V]arious factors such as the introduction of new programs and new benefits, as well as the rise in population, could help explain the increase,” the email said. Recent tax years introduced expanded trust reporting and underused housing tax.
Clients who have to begin the objections process “wonder what we [tax return preparers] are doing wrong,” Weissman said.
Chances are they’re not doing anything wrong. A 2016 auditor general report said that, of 174,518 resolved tax objections (personal and corporate) in the five-year period ending March 31, 2016, 65% resulted in decisions that favoured taxpayers in full or in part, with billions of dollars returned to them. (The report didn’t look at appeals to the courts.)
Two years later, an auditor general report on tax compliance said that for the five years ending March 31, 2018, 60% of objections to assessments (audit-related) were similarly decided in favour of taxpayers.
More recently, in 2024–25, 62% of objections across the CRA’s entire objections program (including income tax and GST/HST) were vacated (i.e., the assessment under the objection was reversed) or allowed in part, the CRA said in an email. In 2023–24, that figure was 48%.
“There are a lot of assessments now that are technically very weak,” said Fred O’Riordan, EY Canada’s national leader of tax policy in Ottawa. O’Riordan was previously employed with the CRA as director general of international and large business, responsible for audits in those areas, and subsequently as assistant commissioner of appeals.
Too much growth
Part of the problem is the CRA’s growth, O’Riordan said. Between 2014 and 2024, head count grew nearly 47% to about 59,000, including staff increases during the pandemic. Since the end of 2024, a few hundred staff — mostly term employees — have been cut.
“If you increase the population of auditors very quickly, and they’re not sufficiently trained or experienced, then the unintended effect is going to be higher volumes of objections,” O’Riordan said.
Expertise is required, he noted, to audit large international businesses and high-wealth individuals — tax compliance areas to which the government has allocated resources over the years. “The more weak assessments you get, the more likely they’re going to be overturned [through] either objections [to the CRA] or appeals in the court. That means there’s a lot of time and money wasted by both sides.”
Baby boomer retirements add to the challenge. “Not only is the audit function weaker, the pool from which you can draw experienced tax auditors is smaller,” O’Riordan said. Further, “Many of us [with EY] wonder whether there’s sufficient oversight [by senior CRA staff] on some initial assessments.” The CRA confirmed that T1 returns “may be reviewed by CRA supervisors.”
Judith Charbonneau Kaplan, vice-president of advanced wealth planning strategy and services with Wellington-Altus Private Wealth Inc. in Kelowna, B.C., said, “CRA will typically choose to take a firm line in terms of a position, even though we know that law is open to interpretation and nuance.”
Given the pressure on the CRA to generate revenue and because auditors — who generally have no legal training — tend to rely on the CRA audit manual, tax interpretations and tax folios, “there’s less openness to have those kinds of discussions at the audit level,” she said.
Michael Lubetsky, partner, tax and litigation, with McMillan LLP in Toronto, described the weak assessments he sees: “The auditor or the person at the CRA doing the review has misunderstood the law or the applicable legal test.” In other instances, “they’re not evaluating the facts in a reasonable manner, or — even worse — they’re trying to cherry-pick facts to support a certain result and disregarding facts that support the opposite conclusion.”
Even when legal interpretation isn’t required, assessments can be “flat-out wrong,” Charbonneau Kaplan said, citing the reporting of beneficial ownership information for trusts. “Trusts are getting assessed interest and late-filing penalties for Schedule 15 of the T3,” she said, despite the schedule being seemingly complete, correct and on time. Or desk auditors request additional information — related to foreign tax credits, for example — and the returns get moved too quickly to the appeals branch, she said.
The 2016 auditor general report found that 8% of overturned assessments involved improperly applied law, facts or CRA policies. Most (60%) were overturned because of “new facts” either not requested during the assessment, or provided but not obvious to the assessor. Another 24% involved new facts previously requested. In the report, the CRA said it remained committed to analyzing why assessments are overturned so it could improve service.
The impact of contested assessments is three-fold, Charbonneau Kaplan said: taxpayers and tax practitioners lose time and money and incur stress; the CRA incurs increased costs; and the government incurs an opportunity cost when resources are allocated to tax disputes.
Frequent targets
Lubetsky said intercompany transactions are regularly targeted by the CRA. For example, the agency may not allow a business to deduct an expense, saying it was incurred for a subsidiary’s benefit, but “this is not a proper reason [under the Income Tax Act] to disallow the deduction,” he said.
Similarly, disputes may arise over whether an expense was reasonable under the circumstances. “The case law has repeatedly held that it’s not the role of CRA auditors to be … sitting in judgment of bona fide business decisions,” Lubetsky said.
Lubetsky also increasingly sees CRA auditors assessing gross negligence penalties “with respect to any significant adjustment,” he said, “even if it relates to a matter of characterization,” such as capital versus income, or to a question of valuation. These are “places where there is genuinely room for subjectivity and a good faith difference of opinion with the CRA.”
Gross negligence penalties apply when a taxpayer knowingly, or, per case law, in a manner “tantamount to intentional acting,” makes a false statement or omission in their tax return, adding 50% to the amount of tax owing. Further, if such a case escalates to the courts, “it goes into the public record that the taxpayer has been accused by the government of dishonesty or indifference as to whether the law was complied with,” Lubetsky said.
Pay now, get a refund later
The objection and appeals process, which can take years, “ties up working capital,” O’Riordan said. For example, under the Income Tax Act, 50% of a large corporation’s disputed amount is immediately collectible, he said. That can be tens of millions of dollars.
For disputed amounts not immediately collectible, Lubetsky generally advises clients to “pay what the CRA is claiming to the extent that your finances allow, because … if you’re successful, you will get it back with interest.”
The interest rate on non-corporate taxpayer overpayments is currently 4%, in the second quarter of 2025. The interest is taxable to the taxpayer.
If the client doesn’t win, “the rate of interest on unpaid tax amounts is punitive,” Lubetsky said. That rate is currently 8%, and the interest isn’t deductible. Generally, the taxpayer should pay the tax to stop interest from accruing, Charbonneau Kaplan said. “With the length of time it takes to resolve some of these disputes, [interest] can exceed the original tax bill,” she said.
Tackling tax assessments
Lubetsky said the root cause of weak assessments is the complexity of the Income Tax Act. CRA auditors generally aren’t lawyers by training, “yet they’re called upon to administer and enforce the most complex statute enacted by Parliament,” he said.
“If legislation were clearer, with more bright lines, then tax assessments would be a lot more straightforward,” O’Riordan said.
Many groups continue to call for tax reform, including addressing the tax system’s complexity. The new Liberal government has said it will review the corporate tax system.
The complexity of the act also makes it difficult for accountants who prepare tax returns to keep taxpayers in compliance, Lubetsky said. “Accountants are extremely overworked.” And, while the CRA inquiries line could be better resourced to resolve issues early, “the complexity of the act impedes that,” he said.
The dispute resolution process could also be simplified, Lubetsky said, noting that separate CRA processes can be required, or more than one court can be involved.
Charbonneau Kaplan suggested that expanding automatic tax-filing initiatives could reduce audit reviews and reassessments.
O’Riordan noted that audits are at the CRA’s discretion whereas the appeals branch has “mandatory workload,” because “taxpayers have the right in law to have their assessment reviewed in appeals by filing a notice of objection.” With an increase in the CRA’s audit resources over the years, more assessments are to be expected, he said, so more resources should be allocated to the appeals branch.
At the same time, any unnecessary work for that branch is inefficient and requires quality control. He suggested CRA supervisors conduct more effective quality assurance reviews of assessments. (According to the 2016 auditor general report, quality assurance focuses on CRA policies and procedures.)
When weak assessments give rise to objections, “it wastes everybody’s time and resources, including the agency,” O’Riordan said.
This article appears in the June issue of Investment Executive. Subscribe to the print edition, read the digital edition or read the articles online. This online version has been updated to include additional information provided by the Canada Revenue Agency after press time.