When it comes to audits from the CRA: what are the ground rules for the Agency and your client?

Is your client being audited by the CRA? What does the Income Tax Act (ITA) stipulate as to what the CRA can and cannot do during an audit? Let’s find out…

When it comes to audits from the CRA, sections 231.1 to 231.6 of the ITA lays out what the ground rules are for the CRA and the person being audited.

Paragraph 231.1(1) stipulates the basic rights the CRA has during an inspection, which are:
(a) inspect, audit or examine the books and records of a taxpayer and any document of the taxpayer or of any other person that relates or may relate to the information that is or should be in the books or records of the taxpayer or to any amount payable by the taxpayer under this Act, and

(b) examine property in an inventory of a taxpayer and any property or process of, or matter relating to, the taxpayer or any other person, an examination of which may assist the authorized person in determining the accuracy of the inventory of the taxpayer or in ascertaining the information that is or should be in the books or records of the taxpayer or any amount payable by the taxpayer under this Act, and for those purposes the authorized person may

(c) subject to subsection 231.1(2), enter into any premises or place where any business is carried on, any property is kept, anything is done in connection with any business or any books or records are or should be kept, and

(d) require the owner or manager of the property or business and any other person on the premises or place to give the authorized person all reasonable assistance and to answer all proper questions relating to the administration or enforcement of this Act and, for that purpose, require the owner or manager to attend at the premises or place with the authorized person.

I have underlined subsection 231.1(2) above to emphasize that according to this subsection, if the inspection is performed at the personal residence of the taxpayer (dwelling-house as per the ITA definition), consent has to be given by the occupant ahead of time. The only override to this rule is through a legal warrant obtained by the CRA {ITA 231.1(3)}.

(Protocol) and specific dates/times when the inspections take place.

If the CRA needs information from individuals who are not directly linked to the parties being audited, or from third parties, they must get judicial authorization in advance {ITA 231.2(2)}. If any information required by the CRA is located outside of Canada, the CRA can, by a notice served personally or by registered mail, require the taxpayer to provide any relevant information to them {ITA 231.6(2)}.

Failure to comply with the CRA on any of their requests for information allowed by the ITA listed above can result in a compliance order emitted by a judge to comply {ITA 231.7(1)}. Failure to comply after that order will result in penalties ranging from $1,000 to $25,000, or the fines mentioned before and imprisonment {ITA 238(1)}.