Income Tax Law in Canada

Natalie Fraser for The Lawyers Weekly


In Canada, taxpayers self-assess their income tax by filing an annual return with the Canada Revenue Agency (CRA). The CRA has district offices throughout the country. Each district office "audits" a small percentage of income tax returns every year. This involves a detailed review of the return through an inspection of the books and records of the Canadian taxpayer who prepared the return.

Audits are most often aimed at taxpayers in Canada whose income may be more easily under-reported. People who receive a salary or wages generally have taxes deducted from their pay by their employers, who then forward the funds to the Canadian government. Wage earners' income can easily be confirmed by the CRA by comparing it with information filed by their employers. But Canadian taxpayers whose income comes from sources other than wages, such as corporations or the self-employed, cannot have their income confirmed as easily. These taxpayers are more likely to be chosen for auditing.

Auditors in Canada may inspect the books and records at a taxpayer's place of business without a search warrant. The business owner in Canada must provide reasonable assistance and answer proper questions. The auditor may also search a taxpayer's home for relevant documents, but requires a search warrant to do so.

Audits in Canada often lead to a reassessment of the taxpayer's liability, resulting in the taxpayer owing more money to the Canadian government. Taxpayers who disagree with their assessment should contact their CRA district office and attempt to informally resolve the problem. If the dispute cannot be resolved, the taxpayer may formally appeal the assessment by serving a Notice of Objection on the Minister of National Revenue through the CRA office.

The deadline for serving the Notice is the later of 90 days from the date of mailing of the assessment or one year after the filing due-date of the relevant return. These deadlines are generally adhered to, so taxpayers in Canada must act diligently or lose their opportunity to appeal. Taxpayers must state the reasons for their objection to the assessment, as well as all relevant facts, in the Notice.

Once the Notice has been received, taxpayers in Canada will be contacted by the CRA office, and given an opportunity to present their case regarding their objections to the assessment. The Minister will then make a decision as to whether to uphold, change or cancel the assessment, and advise the taxpayer of this decision.

If taxpayers disagree with the Minister's decision, they may appeal to the Tax Court of Canada. The appeal must be made within 90 days of the date of the Minister's decision. Taxpayers can choose to appeal through an "informal" procedure if the amount of outstanding tax in dispute is less than $12,000.00. The informal procedure allows for the representation of taxpayers by non-lawyers, flexibility on the technical rules of evidence, and requires that judgment be rendered within 60 days. However, taxpayers in Canada have no further right of appeal from the decision of this court.

When the amount of outstanding tax in dispute is greater than $12,000.00, the appeal follows a more formal "general" procedure. The general procedure doesn't allow non- tax lawyer representation, has formal pleadings, requires that the rules of evidence be met and has no time limit regarding judgments. However, Canadian taxpayers who have pursued the general procedure and disagree with the Tax Court's decision may appeal to the Federal Court of Appeal in Canada, and from there, with leave, to the Supreme Court of Canada.

Civil and Criminal Charges in Canada

Canada's income tax system requires taxpayers to self-assess their taxes. In order to enforce this system, many acts or omissions by the taxpayer result in civil penalties such as fines or interest charges under the Income Tax Act (the 'Act'). Examples include the late filing of an income tax return, the failure to file a return, the failure to report an item of income on a return, and the making of a false statement or an omission on a return.

Some of these acts or omissions can trigger criminal charges in Canada in addition to the civil penalties. This occurs when the CRA, in consultation with the Department of Justice, concludes that the taxpayer's delinquent activity requires punishment beyond the civil penalties. Canadian criminal charges will generally result if a taxpayer has made a serious attempt to evade taxes.

Each district office of the CRA has a special investigations division set up to investigate potential cases of tax evasion. Investigators may search for evidence at the taxpayer's business premises without a search warrant. Investigators must obtain a search warrant should they wish to search any other place, such as the taxpayer's home or their tax lawyer's office, for documents relating to the taxpayer's evasion of taxes.

Taxpayers in Canada should consider the reasonableness of such a search made under a warrant, since the Canadian Charter of Rights and Freedoms provides protection from unreasonable searches. CRA investigators must satisfy the Canadian judge who issues the warrant that reasonable grounds exist to believe that the taxpayer has evaded taxes. As well, investigators must have reasonable grounds to believe that the documents seized under the warrant show that the taxpayer has committed the offence. If Canadian taxpayers can show these grounds to be false, they can argue that the search was unreasonable and commence an action to exclude the evidence obtained under the unreasonable search.

CRA investigators may attempt to seize documents in the possession of the taxpayer's tax lawyer as evidence that the taxpayer has evaded taxes. Taxpayers in Canada can generally claim solicitor-client privilege in respect of these documents. This privilege protects communications between clients and their tax lawyers from disclosure to outside parties. Therefore, taxpayers can claim solicitor-client privilege regarding the use of their Canadian tax lawyers' documentation as evidence in circumstances such as alleged tax evasion.

CRA investigators have substantial powers to demand documents or information from any person in Canada as evidence that a taxpayer has evaded taxes. The CRA may also hold an inquiry at which witnesses can be compelled to give testimony, in order to find evidence of a taxpayer's evasion.

If these methods provide the CRA with enough evidence to justify charging the Canadian taxpayer with a criminal offence, the Department of Justice prosecutes the case. Hearings are held in the provincial court system and follow the procedure set out in the Criminal Code.

Natalie Fraser was a lawyer in Whitby, Ontario for seventeen years and is now a freelance legal writer. She often writes for The Lawyers Weekly.

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