The Fine Line between a CRA Tax Audit and a Criminal Tax Investigation
The Canadian income tax system operates through self-reporting, which means that each individual taxpayer is required to file his or her own Canadian tax returns. The CRA is responsible for ensuring that taxpayers are not abusing the self-reporting system and are accurately reporting their income as well associated tax payable.
The Income Tax Act confers a lot of power to the CRA to investigate tax non-compliance, ensuring that taxpayers are filing their taxes correctly and on time. The CRA is able to conduct tax audits, which gives them the far reaching power to examine and inspect the books, records, documents, and even physical locations of businesses and homes. In cases where the CRA auditor finds issues with a taxpayer’s returns, the CRA has the power to proceed with a tax investigation, reassess returns, issue fines, penalties, interest, and even criminally prosecute taxpayers. A taxpayer who is suspected of tax evasion or fraud could be facing up to five years in prison, so criminal tax investigations should be taken seriously.
The main difference between a tax audit and a criminal tax investigation is that a tax audit focuses on determining the accuracy of a taxpayer’s income tax returns, while criminal tax investigations focus on the finding of significant tax fraud and tax evasion. So, when does a tax audit turn into a criminal tax investigation?
The CRA’s power to conduct tax audits is derived from subsection 231.1(1) of the Income Tax Act. During a tax audit, the CRA is able to inspect and examine any records, accounts, and documents, both personal and business records, of the taxpayer. The CRA has wide discretion over how to conduct the audit, meaning that they can even reach out to family members or neighbours to retrieve documents.
The tax audit may even involve a CRA tax auditor visiting the taxpayer’s place of business to examine the property, review inventory, or any other documents and items that they believe will assist them in determining the accuracy of the taxpayer’s returns or records.
Essentially, the CRA is able to require a person to provide any information or document they need if it is used or required for the purpose of relating to the administration or enforcement of the Income Tax Act. This power does not only apply to residents of Canada, but also non-resident taxpayers who are carrying on business in Canada. However, there are some limits to the CRA’s power. For example, a tax auditor cannot examine a taxpayer’s home without the taxpayer’s consent or the authorization from the Courts.
In a way, there is a statutory requirement for Canadian taxpayers to cooperate with tax auditors, with no guaranteed extra constitution or charter protections. In summary, CRA tax auditors have wide discretion and power over how to conduct and proceed with a tax audit, and taxpayers are required to cooperate with the investigation, despite the financial and emotional strains it may pose.
Criminal Tax Investigations
In contrast, there are more restrictions on the CRA’s power when it comes to criminal tax investigations. The CRA tax investigator does not have the same level of discretion and freedom over how to conduct the investigation as they do over an audit. If you are the target of a criminal tax investigation, the consequence of being convicted could mean not only fines but also imprisonment under s. 239 of the Income Tax Act and under s.327 of the Excise Tax Act.
The Canadian Charter of Rights and Freedoms guarantees a number of criminal procedural rights for the criminally accused. Given the potential for imprisonment and the loss of liberty involved in a criminal tax investigation, the Charter guarantees certain protections for the taxpayer. Opposed to a tax audit, when the CRA conducts a criminal tax investigation, it is constitutionally required to respect the taxpayer’s criminal procedural rights.
For instance, the CRA can require individuals to release certain documents and records during a non-criminal tax audit. During a criminal tax investigation, however, the taxpayer has the constitutionally protected right to not self-incriminate. As such, the CRA is not able to freely access the taxpayer’s information, but requires a warrant to have the taxpayer to release information.
Given the sensitivity of a criminal tax investigation, the CRA has a specific department dedicated to handling these types of investigation called the Criminal Investigations Program.
When does a Tax Audit become a Tax Investigation?
The tax Criminal Investigations Program usually gets involved when there is something in the investigation that indicates that there is a criminal element involved. As such, many tax evasion investigations begin first as a tax audit, and then develop into a criminal tax evasion investigation.
However, there is a concern that the CRA might not always tell the taxpayer when the tax audit has changed into a criminal tax investigation. So the CRA can use their significant powers of examination and requirement to further build their criminal tax investigation without the taxpayer even knowing that they may be prosecuted.
The information the CRA obtains from the taxpayer during the tax audit can be used by tax investigators, but they are not allowed to use information which was obtained after the tax investigation begins. In reality, there might not always be a clear line of when the tax audit ends and the tax investigation begins.
As such, it is important to determine when a tax investigation begins. The Supreme Court of Canada in the case of R. v Jarvis,  3 SCR 757 listed 6 factors to help draw the line:
- Did the authorities have reasonable ground to lay charges?
- Was the general conduct of the authorities such that it was consistent with the pursuit of an investigation?
- Had the tax auditor transferred his file and materials to the tax investigators?
- Was the conduct of the tax auditor such that he was effectively acting as an agent in the collection of evidence?
- Is the evidence sought relevant to the taxpayer’s tax liability generally? Or was the evidence as to the taxpayer’s mens rea which is only relevant for penal liability
- Are there any other circumstances or factors that can lead the judge to the conclusions that the compliance tax audit had in reality become a tax investigation?
Although these factors do offer some clarity, it may still be difficult to tell which side of the line you stand on. No matter whether it is a tax audit or investigation, the consequences can be severe. Our top Canadian Tax Lawyers at Rosen Kirshen Tax Law are here to help. Call us today to learn more!
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.