Non-Compliance with CRA’s Demand for Information Could Mean More Penalty
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Have you undergone a Canada Revenue Agency (CRA) audit, or do you know someone who has? These audits are stressful as the auditor demands a lot of information to prove tax deductions, source of income or income exclusion. If the taxpayer fails to respond to the request or gives an unsatisfactory response, the CRA could give a court-issued compliance order that could lead to contempt proceedings, such as fines or even imprisonment. However, these enforcement tools were not tough enough, as some taxpayers still did not comply and kept information related to trusts, corporations and partnerships away from the CRA’s hands. This is because non-compliance did not have a significant financial impact.
The Cost of Not Complying with the CRA
The Federal Budget 2024 has given new powers to the CRA that will make non-compliance with CRA’s information requests expensive. Even if the reassessment confirms that no taxes are due, you will still face a penalty for failing to furnish the information requested. That will encourage timely compliance with CRA’s requests and improve the efficiency and effectiveness of tax audits.
The CRA can act against the non-compliant taxpayer at three levels:
- Level 1: Notice of non-compliance that could trigger a penalty of up to $25,000.
- Level 2: Compliance Order from the Federal Court that could trigger a penalty of 10% of the taxpayer’s federal tax payable for the year under audit.
- Level 3: Sworn statements under oath or affirmation in the Federal Court. Any lies under oath constitute perjury.
In this article, we will discuss each of these levels in length.
Level 1: CRA Can Issue a Notice of Non-Compliance
The CRA generally begins with an inquiry followed by an audit, which asks for specific information and documents. If the taxpayer still does not comply with the demand for information, Budget 2024 has given the CRA the power to issue a “Notice of Non- Non-Compliance.” This notice will impact taxpayers in two ways:
Penalty: Anyone who receives this notice will have to pay a penalty of $50 per day, a maximum of $25,000 (after 500 days). Even if they furbish all the documents on the next day of the Notice, they must pay the penalty. However, no penalty will apply if the CRA determines that the taxpayer had reasonably complied with the initial requirement and the notice was unreasonably issued.
Extension of Reassessment: Once the Notice is issued, the reassessment period for that tax year will be extended to the time notice of non-compliance is outstanding. Your reassessment period could be suspended even if the notice is sent to a person you do not deal with at arm’s length.
Should taxpayers be concerned? Whether or not a taxpayer has complied with the information request is subjective to what the CRA considers a satisfactory response. Even if the taxpayer furnished all the information through the best of their efforts, the CRA may find the response unsatisfactory and issue a Notice of Non-Compliance.
It is advised to seek the assistance of a professional tax consultant who is well-versed in CRA audits and what they consider satisfactory.
Level 2: CRA’s Compliance Order Gets Expensive
If the taxpayer does not comply with the information request despite the Notice of Non-Compliance, the CRA can go to the Federal Court and get a “compliance order” for the taxpayer. The compliance order is issued even today but has no financial implications.
Budget 2024 will make the order expensive by triggering a 10% penalty on the taxpayer’s overall federal tax payable for each year under audit, not just the tax in controversy. This penalty would apply if the tax owed even in one of the tax years (under compliance order) exceeds $50,000. This penalty is payable even if the taxpayer complies immediately with the compliance order.
What does this mean? For instance, Jake was selected for the CRA tax audit for the year 2021 when he paid $80,000 in taxes. He was issued a compliance order for not disclosing his income, which resulted in an additional tax of $20,000. The tax in controversy is $20,000. However, Jake will have to pay a 10% penalty on the entire tax obligation of $100,000 ($80,000 + $20,000).
Jake will have to pay a $10,000 penalty + $20,000 additional tax.
A taxpayer complied with the CRA’s requests and provided information. However, if the CRA is unsatisfied and issues a compliance order, the taxpayer must pay the penalty.
Level 3: CRA’s New Administrative Powers
The Budget has also given the CRA administrative powers, including the ability to ask for information (oral or written) “under oath or affirmation.” If the taxpayer lies under oath, it constitutes perjury, a criminal offence under the Criminal Code.
The above penalties have made CRA audits even more costly. The worst part is that these fines and penalties are not tax-deductible. You must include and pay tax on the penalty in your taxable income.
Contact Hagar Liao CPA Professional Corporation in Mississauga and Oakville for Better Tax Planning and Compliance
A skilled tax advisor can help you comply with all tax laws and safely keep documentary proof and information deemed satisfactory by the CRA. It is better to be prepared for an audit beforehand and comply with all CRA requests before the matter escalates. To learn more about how Hagar Liao CPA Professional Corporation can provide you with tax planning and compliance, contact us online or by telephone at 289-803-1818.