Tax Lawyers and CRA Disputes: Representation During Audits, Objections and Appeals

Most disagreements with the CRA are resolved without going to court. The outcome often turns on what happens early: how the audit is handled, what is said in response to a proposal, and whether an objection is filed correctly and on time. This guide explains where a lawyer fits, what solicitor-client privilege does and does not protect, and the steps and deadlines from a proposal letter to the Tax Court of Canada.

It covers income tax and GST/HST disputes for individuals and businesses. Where the two regimes differ, the differences are noted.

What a tax lawyer does in a CRA matter

• Assesses exposure: the tax, interest and penalties at stake, and whether anything in the facts points toward an offence rather than an ordinary disagreement.
• Manages communications with the auditor or appeals officer, including the scope of what is being requested and what must be produced.
• Gives legal advice through channels where solicitor-client privilege is available.
• Prepares written submissions: responses to proposal letters, notices of objection and voluntary disclosure applications.
• Negotiates with the CRA on the legal and factual issues, working from the records and computations your accountant prepares.
• Handles procedure: deadlines, waivers, extensions and, where needed, the move from objection to appeal.

When legal advice is particularly worth considering

Many audits and reassessments are handled entirely by accountants, and handled well. Legal advice adds the most where the issue is legal rather than arithmetical, or where the consequences go beyond tax and interest:

Lawyers and accountants: how the work divides

An accountant knows the books, reconciles the numbers and can rebuild missing records. In most disputes that work is essential, and a lawyer will rely on it. A lawyer brings legal interpretation, procedure, privilege, and judgment about penalty and offence exposure.

The two usually work best together. One difference to keep in mind: communications with an accountant are generally not protected by privilege. Canadian courts have declined to recognize an accountant-client privilege for tax advice (Tower v. M.N.R., 2003 FCA 307). That does not make an accountant less valuable; it affects how sensitive analysis should be organized.

Solicitor-client privilege and its limits

What it protects. For the purposes of section 232 of the Income Tax Act, solicitor-client privilege is the right a person has, in a superior court of the province where the matter arises, to refuse to disclose a communication between the person and their lawyer made in professional confidence (Income Tax Act, s. 232(1)). The Supreme Court of Canada has described the privilege as "as close to absolute as possible". In 2016 it declared the CRA's requirement and compliance-order provisions (ss. 231.2(1) and 231.7) unconstitutional and of no force or effect as applied to lawyers and notaries acting as legal advisers. It also struck down the part of the s. 232(1) definition that deemed a lawyer's accounting records not to be privileged, so whether such a record is privileged now depends on what it reveals (Canada (Attorney General) v. Chambre des notaires du Québec, 2016 SCC 20).

What it does not protect.

• Facts. Privilege protects communications, not the underlying facts. If you earned income, that fact is not hidden because you told your lawyer about it.
• Existing business records. Invoices, bank statements, ledgers and contracts do not become privileged because they are given to a lawyer.
• Communications with accountants and other advisers, as a general rule (see above).
• Advice that has been shared. Privilege can be lost by waiver, for example by forwarding a lawyer's advice to people outside the relationship.

Practical steps. Keep legal advice separate from ordinary business correspondence, and do not forward it. If your accountant's input is needed for the legal advice, discuss with your lawyer at the outset how that work should be arranged. Whether any protection extends to it depends on the facts and is not automatic.

Responding to a proposal letter

When an auditor intends to make changes, the CRA's practice is to explain them and give you an opportunity to respond. The CRA encourages taxpayers who disagree to say so at this stage, and the auditor is expected to consider the explanations given (CRA, What you should know about audits).

This is often the best opportunity to resolve an issue before a reassessment. A useful response:

• addresses each proposed adjustment separately, accepting those that are correct
• corrects factual errors, with documents
• explains the legal basis for your position where the disagreement is about how the law applies
• responds specifically to any proposed penalty
• is sent by the date in the letter, or after asking in writing for more time before that date passes

Reassessments

A notice of reassessment is the CRA's formal decision changing your tax. It starts the clock on your objection deadline, and interest continues to accrue on unpaid amounts. The CRA suggests contacting it for an explanation of a notice before objecting (CRA, P148). That can be useful, but the objection deadline continues to run while you do.

Objections: deadlines and process

What an objection must contain. An income tax objection must be in writing and set out the reasons for the objection and all relevant facts (Income Tax Act, s. 165(1)). Large corporations must also describe each issue, specify the relief sought for each, and give the facts and reasons relied on. Issues they do not set out properly can limit what they may later appeal (s. 165(1.11); s. 169(2.1)).

How it is filed. Objections can be filed online through the CRA's formal dispute service or on Form T400A (CRA, Resolving disputes).

Who reviews it. Filing an objection starts a formal and impartial review of the assessment by the CRA (CRA, File an objection).

What cannot be objected to. An assessment made under the CRA's discretionary power to cancel or waive penalties and interest cannot be objected to (Income Tax Act, s. 165(1.2)), and there is no right of objection to a Voluntary Disclosures Program decision (CRA, IC00-1R7). Those decisions are reviewed through a second administrative review and, if necessary, judicial review in the Federal Court.

Collection while you dispute

For most income tax assessments, the CRA cannot take its main collection actions on an assessed amount until 90 days after the notice of assessment is sent. If you object, that restriction continues for the amount in dispute until 90 days after the CRA notifies you that it has confirmed or varied the assessment, and, if you appeal to the Tax Court, until the court's decision is sent (Income Tax Act, s. 225.1).

There are important exceptions:

• Source deductions and withholdings that were required to be deducted and remitted are not protected (s. 225.1(6)).
• Large corporations can be required to pay half of the disputed amount while the dispute continues (s. 225.1(7)).
• Amounts in jeopardy. The CRA can ask a court for authorization to collect immediately where delay would jeopardize collection (Income Tax Act, s. 225.2).
• GST/HST amounts are generally not protected from collection during an objection or appeal (CRA, File an appeal to the Court).

Interest continues to accrue throughout. Once the objection or appeal is settled, normal interest charges apply to any tax, interest or penalties still outstanding (CRA, Resolving disputes). That is one reason some taxpayers choose to pay disputed amounts while they object.

Appeals to the Tax Court of Canada

If the objection does not resolve the dispute, you can appeal to the Tax Court of Canada within 90 days after the CRA sends notice that it has confirmed the assessment or reassessed. You can also appeal if the CRA has not decided the objection within 90 days of filing it for income tax, or 180 days for GST/HST (CRA, File an appeal to the Court; Income Tax Act, s. 169(1); Excise Tax Act, s. 306). If the 90-day appeal period is missed, an application to extend time can be made within one year and 90 days of the CRA's decision, and must meet the statutory conditions (CRA, File an appeal to the Court; Income Tax Act, s. 167; Excise Tax Act, s. 305).

Gross negligence penalties

A gross negligence penalty can apply where a person knowingly, or in circumstances amounting to gross negligence, makes or participates in a false statement or omission in a return. For income tax, the penalty is the greater of $100 and 50% of the tax attributable to the understatement (Income Tax Act, s. 163(2)). For GST/HST, it is the greater of $250 and 25% of the related amount (Excise Tax Act, s. 285).

Whether conduct meets the gross negligence standard is fact-specific, and in an income tax appeal the CRA bears the burden of establishing the facts that justify the penalty (Income Tax Act, s. 163(3)). Penalties can be challenged at each stage: in response to the proposal, by objection, and on appeal. Where a voluntary disclosure is accepted, gross negligence penalties do not apply to the information disclosed (CRA, IC00-1R7).

Audit or criminal investigation?

Audits and criminal investigations serve different purposes and are governed by different rules. In R. v. Jarvis, the Supreme Court of Canada held that once the predominant purpose of an inquiry is to determine penal liability, the CRA cannot use its compulsory audit powers to obtain information for that investigation, and Charter protections apply (R. v. Jarvis, 2002 SCC 73).

Signs that a matter may have moved beyond an ordinary audit include contact from the CRA's criminal investigations area, a search warrant, or questioning focused on what you knew or intended. If that happens, speak with a lawyer before answering questions from investigators.

Fees and choosing representation

Fees for CRA matters vary widely with the stage of the dispute, the number of years and issues, the volume of records, how much accounting work is required and whether the matter proceeds to court. Any meaningful estimate depends on your facts. Questions worth asking any lawyer you consider:

• Who will do the work day to day?
• What is included at each stage, and what is not?
• How are fees structured: hourly, by stage, or by retainer?
• Do you act in the Tax Court of Canada, or refer appeals to other counsel?
• How will you work with my accountant?
• How will privilege be handled for sensitive analysis?
• How will I be told about deadlines and decisions?

Return to the Taxpayer Resource Centre, or read about CRA audits and voluntary disclosure.

Disagree with the CRA?

Beganyi Professional Corporation acts for individuals and owner-managed businesses in Ontario on CRA audits, voluntary disclosures and notices of objection. Where a dispute proceeds to the Tax Court of Canada, we refer the appeal to litigation counsel. See our Tax Defence services or request a confidential consultation.