New CRA penalties and compelled statements raise the stakes, say tax lawyers
The Canada Revenue Agency’s expanded audit powers are reshaping the risk landscape for Canadian businesses, pushing routine tax audits into adversarial territory from the outset. That shift, driven by new legislative tools and a more aggressive approach, is forcing companies and their legal advisors to rethink how they respond when the CRA comes knocking.
“You’re really seeing the government giving the CRA more extensive powers to compel information and to make audits more adversarial. …It used to be audits were more about education and basic compliance,” says Natalie Worsfold, a tax litigator at Counter Tax Litigators. “The shift that we’re seeing is [that] this is turning into a conflict from day one.”
The legislative changes, introduced in the government’s 2024 budget and refined in August 2025, give the CRA the ability to impose compliance-order penalties up to 10 percent of tax payable, issue notices of non-compliance with penalties up to $25,000, and compel interviews under oath or written statements. These measures are designed to lock in facts on the CRA’s terms, often before a company’s leadership even realizes what’s at stake.
Worsfold warns that if audit information isn’t escalated quickly enough, “then you’re into a situation where the board doesn’t know that this is happening. And by the time that it’s getting up to the board environment, … you’re further into a dispute. The narrative’s already been locked in. Answers have been given under oath,” she says.
Under s. 231.41 of the Income Tax Act, auditors now have the authority to require oral answers under oath, affirmation, or affidavit. Josiah Davis, counsel at Beitel Tax Law, says these powers can be hazardous for taxpayers. “This affidavit can be introduced into evidence at a hearing… There’s no real restrictions on how the affidavit is used,” he says.
The absence of procedural safeguards is glaring. “A lot of our clients, when they are notified about an interview, haven’t retained counsel yet. And the provision doesn’t provide any requirements that a taxpayer be notified of their rights to counsel,” Davis says. “It puts taxpayers in a precarious situation because they often don’t know how an affidavit could be used, the consequences of swearing an oath, how that could affect them legally … down the road in a couple of years,” he says.
Davis also points out that a false statement by the taxpayer may constitute perjury under s. 131 of the Criminal Code. The lack of procedural protections stands in contrast to those in s. 231.4 of the Income Tax Act, which entitles a person to representation by counsel, a presiding Tax Court judge for the hearing, and access to transcripts during an inquiry. None of these safeguards is available under the new powers, he says.
Auditors are taking a more forceful approach from the outset, Davis observes. “I think auditors are being more aggressive in visiting the premises where business is carried on,” he says. Many taxpayers, he adds, “are not aware of the stakes of just providing simple answers to questions where the information that the CRA has is very robust at this stage already.”
Worsfold draws a sharp analogy: “You’d never go to the police station and give a bunch of information without your lawyer being present ... So I think it shifts your conversations with the CRA into that sort of mindset earlier,” she says.
The penalties for non-compliance are not theoretical. A taxpayer is liable for a penalty of $50 for each day that a notice of non-compliance is outstanding, to a maximum penalty of $25,000. “And then if it’s a notice ordered through the Federal Court, there can be a 10 percent penalty of the tax payable per year,” Worsfold says. Davis adds, “There’s a new penalty if the CRA gets a court order to compel a taxpayer to provide answers to questions. Just the fact that the CRA had to get that order now makes a taxpayer liable to a penalty as well,” he says.
Worsfold sees the real risk as companies shifting their approach too late. “The risk to me is the missed opportunity to control this from the beginning,” she says. “If the audits are continued to be treated in the same way internally, as if they’re just routine compliance, but … because of these extra powers, they’ve actually escalated.”
With these financial and procedural risks in play, both lawyers emphasize the importance of early legal involvement. “At the beginning of an audit, the first thing I would recommend to a taxpayer, either individual or corporation, is to seek counsel at the very beginning, when the request for information or a requirement for information is issued. [They should] contact counsel immediately to discuss, on a privileged basis, … what documents are available in the period that’s being audited, and just to get a lay of the land to assess,” Davis says.
Worsfold presses for companies to have audit playbooks and clear escalation protocols. “If an audit happens, here’s who’s going to be notified and who’s going to handle it, who’s going to review submissions and things like that. I think it’s important to have that line of communication set up so that the awareness can flow to the ears that need it,” she says. “Recognizing it early is important. …You’re seeing the CRA lock in that narrative much earlier, and they will use that against you at every step in the dispute,” she says.
The broader context is unmistakable. “The CRA is charged with securing tax revenue, and that’s the best way to look at the CRA,” Worsfold says. “So what you’re seeing is auditors coming in, they have quotas. They need to find a certain amount of tax revenue when they do these audits,” she says. Davis sees the same trend: “The CRA is being more aggressive….We’ve seen some of these steps being taken in terms of oral interviews at the beginning, where the CRA has a record of those conversations. And this is another step in that direction to create a record early on in the proceedings that could potentially be used in a hearing,” he says.
The lack of safeguards for taxpayers is a recurring concern. “There are enumerated protections for taxpayers … where there is an inquiry. I think that those enumerated protections should be part of an amended provision to [s.] 231.41,” Davis says. “The ramifications are so large that I think there should be disclosure in the Income Tax Act about the rights that taxpayers have, whether it’s to a transcript or to counsel or to object to questions,” he says.
For taxpayers across Canada, the message is clear. The audit process is no longer a back-office compliance exercise. Lawyers who are not tax specialists advising companies should keep that in mind. “If you’re helping a company and they’re in an audit of any description, I do think it’s very important to get specialized help,” Worsfold says. For example, during “M&A transactions, you want to make sure that what you’re documenting could be reviewed by the CRA one day,” she says.
Davis leaves no doubt about the stakes: “There are a lot more penalties that taxpayers might not be aware of that are in the new legislation. And that’s always something to be aware of because the monetary consequences of engaging or being audited have now increased,” he says.
