Expanded CRA audit powers, stiff penalties moving ahead

If your client fails to respond when the Canada Revenue Agency (CRA) asks for information during an audit — or your client disputes a demand for information — they could soon face new penalties and an extended reassessment period. That’s because previously proposed enhanced audit powers for the CRA are moving ahead.

Bill C-31, which recently passed first reading in the House of Commons, includes proposed legislation that expands CRA’s powers to obtain information from taxpayers, including by issuing notices of non-compliance accompanied by stiff penalties.

The CRA currently “has the power to go to court to get a compliance order, but going through that process takes a lot of time, and it’s costly,” Gergely Hegedus, a partner in Dentons’ tax group in Edmonton, said. The proposed new audit powers will “make it easier for the CRA to essentially get [the information and documents] it wants by imposing severe penalties on taxpayers who don’t comply with requests.”

With the changes, “large corporations and multinational enterprises will likely feel the impact most acutely because they are more frequently subject to extensive audit activity, and because they will be disproportionately impacted by some of the proposed rules,” Pooja Mihailovich, a partner with Blake, Cassels & Graydon LLP in Toronto, said in an email. “That said, the CRA’s audit powers are drafted broadly and are not limited to large taxpayers. As a result, the practical reach will extend well beyond multinationals.”

The proposed legislation doesn’t target “any specific kind of taxpayer” or sector, Hegedus said. “It could be a corporation or an individual or a charity. It’s any taxpayer that’s not complying” with a demand for information or documents.

A controversial part of the proposal as previously drafted has been dropped: Providing the CRA with the power to compel taxpayers to answer questions under oath or affirmation, or by affidavit.

Compelled testimony “was one of the most contentious features of the original proposal,” Mihailovich and Erich Schultze, an associate with Blake, Cassels & Graydon, write in a recent blog post. Its exclusion from the proposed legislation is “a welcome development.”

If compelled testimony had been retained, taxpayers would probably “lawyer up,” and subsequently, “information would take longer” for the CRA to obtain, Ryan Minor, tax director with CPA Canada in Sudbury, Ont., said. That would counter the government’s aim of making audits more efficient and tax collection more timely. Plus, taxpayers would have incurred legal costs.

Otherwise, the overall proposal as presented in the bill largely aligns with previous versions of draft legislation and will “significantly enhance the CRA’s audit toolkit,” Mihailovich and Schultze write in their blog post.

‘A pretty big stick’

Under the proposed legislation, when a taxpayer doesn’t comply with a demand for information during an audit, the CRA can issue a notice of non-compliance that triggers penalties and extends the normal reassessment period.

“Once the legislation is enacted, it would create a new intermediate enforcement tool that the CRA does not currently have,” Mihailovich said via email. The CRA could “impose immediate procedural and financial consequences without first obtaining a court order.”

The penalty for an outstanding notice of non-compliance would be $50 for each day the notice is outstanding, to a maximum of $25,000. “It’s a pretty big stick,” Minor said.

If the CRA obtains a compliance order against a taxpayer for not providing information, another new penalty may apply: 10% of taxes owed for each tax year to which the order relates, applicable if more than $50,000 in taxes were owed in one of the years. (Previous draft legislation had said “up to” 10% of taxes owed per tax year.)

Neither the compliance order penalty nor the daily penalty would apply if the taxpayer didn’t comply with the CRA’s demand for information because they reasonably believed the information was protected from disclosure by solicitor-client privilege (in line with draft legislation from August 2025).

Under the proposed legislation in Bill C-31, when the CRA seeks information from a third party (potentially banks, tax return preparers, financial advisors and others) about an unrelated taxpayer, the agency would be required to get a compliance order before issuing a notice of non-compliance to the third party.

When a dispute over the CRA’s demand for information is ongoing — related to an outstanding notice of non-compliance, a judicial review of a demand for information or a contested compliance order — the clock stops on the taxpayer’s reassessment period.

“Where audit demands are challenged, the normal reassessment limitation period will be suspended in various circumstances,” Mihailovich said. “As such, taxpayers will need to carefully consider the implications of commencing litigation and whether alternatives are available that will suit their needs in any particular audit situation.”

The new rules could “materially change the strategic dynamics of audits,” she said. “Decisions that were previously viewed as procedural — for example, disagreements over document production — may now carry larger legal and financial consequences.”

Relief at minister’s discretion

Taxpayers wouldn’t be able to rely on the taxpayer relief provisions to request that a compliance order penalty (and interest) be waived or cancelled.

Instead, the proposed legislation provides that if the minister of finance determines that the compliance order penalty is disproportionate or unfair, the minister will waive or cancel all or part of it. No details have been provided yet about what would be considered a disproportionate or unfair penalty.

“This is the first kind of penalty that can’t be waived by the minister under the taxpayer relief provisions,” Hegedus said. A taxpayer could challenge a decision at the minister’s discretion, but “you’d have to file an application for judicial review with the Federal Court to say that the decision was not reasonable,” which would be a high bar to clear, he said. “It would be a challenge for taxpayers, in most cases.”

Mihailovich suggested that a taxpayer may be best served by proactively requesting relief from the CRA, either before or after a compliance order penalty was assessed, and providing reasons why relief should be granted. Those reasons could involve “demonstrating reasonable efforts to comply, practical impossibility, misunderstanding, details on why the amount of the penalty would be disproportionate or other mitigating circumstances,” she said.

Takeaways for advisors

Minor said CPA Canada will be asking the CRA for details on how the agency will use its new powers, which will depend on forthcoming policies after Bill C-31 receives royal assent.

For financial advisors and other professionals, Mihailovich said that “the key point of focus” regarding the CRA’s enhanced audit powers is “the increasing importance of information governance and audit readiness. Advisors may want to ensure that client records, communications and document retention practices are carefully managed, particularly given the potentially broader consequences associated with disputes over information requests.”

Hegedus said, “It’s always best to have [comprehensive] books and records that support [tax-]filing positions. That’s always important, not just in this situation.”

He also suggested that clients make sure their contact information with the CRA is up to date so that they receive all CRA communications. Some taxpayers tend to “stick their head in the sand when CRA approaches them,” he said, but they should address CRA communications and make “all reasonable efforts to comply with requests for information and documents.”

Also, if taxpayers want their tax-related advice protected by privilege, “then it’s best to hire a lawyer,” Hegedus said. “There’s no accountant-client privilege.”

Mihailovich said the proposal “reinforces the importance of obtaining legal advice early where there are concerns about privilege, scope or the appropriateness of CRA demands.”