International Tax Enforcement in Canada

• Author: David Kerzner, David W. Chodikoff
• Pages: 93-134

93

chapter four

INTERNATIONAL TAX ENFORCEMENT IN

CANADA

A INTRODUCTION

Tax collection in Canada relies upon taxpayer self-assessment and self-re-

porting.1 Section 150(1) of the Income Tax Act requires taxpayers to f‌ile a return

of income.2 Once the return is received by CRA, the Minister of National

1 In the Supreme Court of Canada case R v McKinlay Transport Ltd, [1990] 1 SCR 627 [McKin-

lay], Wilson J stated that s 150(1) of the Income Tax Act, RSC 1985, c 1 (5th Supp) [Act], is

based on the principle of self-reporting and self-assessment. This case had many important

elements. For example, the Court held that the requirement to produce documents does

not violate an individual’s rights, as an unreasonable search and seizure, as protected by the

Canadian Charter of Rights and Freedoms, Part I of the Constitution Act, 1982, being Schedule

B to the Canada Act 1982 (UK), 1982, c 11 [Charter]. Moreover, Wilson J, McKinlay, ibid at 649,

indicated that “a taxpayer may have little expectation of privacy in relation to his business

records relevant to the determination of his tax liability.”

2 Act, above note 1. A non-resident person or corporation that has a taxable capital gain, sells

taxable Canadian property, or is subject to tax under Part I on taxable income earned in

Canada must f‌ile a tax return similarly to a resident. Section 150(2) is directed at preventing

abuse and states:

Every person, whether or not the person is liable to pay tax under this Part for a taxation

year and whether or not a return has been f‌iled under subsection (1) or (3), shall, on

demand sent by the Minister, f‌ile, within such reasonable time stipulated in the demand,

with the Minister in prescribed form and containing prescribed information a return of

the income for the taxation year designated in the demand.

Failure to comply with a demand can have serious consequences. Section 238(1) states:

Every person who has failed to f‌ile or make a return as and when required by or under

this Act or a regulation . . . is guilty of an of‌fence and, in addition to any penalty other-

wise provided, is liable on summary conviction to (a) a f‌ine of not less than $1,000 and

not more than $25,000; or (b) [such a f‌ine] . . . and imprisonment for a term not exceed-

ing 12 months.

94 • InternatIonal tax evasIon In the Global InformatIon aGe

Revenue (Minister) is obligated by statute to conduct, “with all due dispatch,”

a review of the tax return.3 The Minister will then issue a Notice of Assess-

ment.4 Section 152(4) of the Act provides that the Minister may subsequently

reassess the taxpayer’s tax liability.5

The success of administering this system of taxation is dependent on

two key factors: taxpayer honesty and information. As Cory J of the Supreme

Court of Canada in Knox Contracting Ltd v Canada stated, “[t]he entire sys-

tem of levying and collecting income tax is dependent upon the integrity of

the taxpayer in reporting and assessing income. If the system is to work, the

returns must be honestly completed.”6 Information is therefore a central ele-

ment leading either to conf‌irmation of a taxpayer’s f‌iling position or to the

basis from which the Minister develops certain assumptions and challenges

a taxpayer’s tax reporting position. When a taxpayer’s position is challenged

by the government, we know that the f‌irst step is an audit and the eventu-

al issuance by the Minister of an audit proposal letter leaving the taxpayer

two choices: either accept the Minister’s proposed assessing or reassessing

position or challenge it. In many instances, a taxpayer will provide suf‌f‌icient

documentation and oral evidence to convince the Minister’s auditor to either

modify or reverse in its entirety the proposed audit position. However, there

are also many other instances where even when the taxpayer responds, the

There is also the possibility that a taxpayer could be charged with the of‌fence of willful tax

evasion under s 239(1)(d) of the Act. Section 239(1) states:

Every person who has . . . (d) wilfully, in any manner, evaded or attempted to evade com-

pliance with this Act or payment of taxes imposed by this Act . . . is guilty of an of‌fence

and, in addition to any penalty otherwise provided, is liable on summary conviction to (f)

a f‌ine of not less than 50%, and not more than 200%, of the amount of the tax that was

sought to be evaded, or (g) both the f‌ine described in paragraph 239(1)(f) and imprison-

ment for a term not exceeding 2 years.

Furthermore, s 239(2) states:

Every person who is charged with an of‌fence described in subsection 239(1) . . . may, at

the election of the Attorney General of Canada, be prosecuted on indictment and, if

convicted, is, in addition to any penalty otherwise provided, liable to (a) a f‌ine of not less

than 100% and not more than 200% of . . . the amount of the tax that was sought to be

evaded, and . . . (b) imprisonment for a term not exceeding 5 years.

The dif‌ferences between ss 238(1) and 239(1)(d) are signif‌icant, and CRA typically does not

pursue a conviction under s 239(1)(d) unless there are facts that would likely result in a convic-

tion: see Sturgess v R (1983), (1984) 83 DTC 5434 (CA), correcting the record, 84 DTC 6525 (TD).

3 Act, above note 1, s 152(1).

4 Ibid. For CRA policy regarding the tax audit, see CRA, Information Circular 71-14R3, “The Tax

Audit” (18 June 1984).

5 Act, above note 1.

6 [1990] 2 SCR 338 at 350.

International Tax Enforcement in Canada • 95

Minister refuses to accept the taxpayer’s submissions and where CRA con-

sequently issues an assessment or reassessment in accordance with the in-

itial audit proposal letter.

The question that we attempt to resolve in this chapter is twofold.

First, how does the Minister access taxpayer information, particularly for-

eign-based taxpayer information? Second, what statutory provisions and

rights are engaged to protect a taxpayer’s information, especially in relation

to the right of privacy? Essentially, we examine the powers and tools that

CRA can use to obtain taxpayer information for an audit, whether for civil

purposes or a criminal investigation, particularly in non-voluntary situations.

B THE TAXPAYER’S OBLIGATIONS IT STARTS WITH BOOKS AND

RECORDS

The Act contains many provisions that are intended to encourage and ensure

compliance. For example, taxpayers are required to maintain books and re-

cords for various specif‌ied periods of time at their place of business or resi-

dence in Canada.7 The Act requires that taxpayers maintain these documents

“in such form and containing such information as will enable the taxes pay-

able under this Act or the taxes or other amounts that should have been de-

ducted, withheld or collected to be determined.”8 As noted by the Supreme

Court of Canada in R v McKinlay Transport Ltd, the Act contains provisions

that are intended to limit the possibility that a taxpayer may attempt “to take

advantage of the self-reporting system in order to avoid paying his or her full

share of the tax burden by violating the rules set forth in the Act.”9 In fact,

section 238(2) of the Act makes it a criminal of‌fence for a taxpayer to fail to

meet the record-keeping obligations of section 230(1) of the Act.10

7 Act, above note 1, s 230(1). For CRA policy regarding the retention and destruction of books

and records, see CRA, Information Circular 78-10R5, “Books and Records Retention/De-

struction” (June 2010). For a historical review, see also Michael G Quigley, “Controlling Tax

Information: Limits to Record-Keeping and Disclosure Obligations” (1999) 47 Canadian Tax

Journal 1.

8 Act, above note 1, s 230(1). For a case dealing with judicial review of a requirement to keep

adequate books and records of a business, see Merchant (2000) Ltd v Canada (AG), 2000

CanLII 15779 (FC).

9 McKinlay, above note 1 at 641.

10 Act, above note 1, s 238(2). See, for example, Sidhu v MNR (1993), 93 DTC 5453 (FCA).