Obtaining Information for Audit Purposes

Number: AD-19-02R

Date: 2019-06-03

Issued by:  Policy and Technical Working Group – International, Large Business and Investigations Branch (ILBIB) and Domestic Compliance Programs Branch (DCPB)

Sections affected:  International and Large Business Directorate, Small and Medium Enterprises Directorate, GST/HST Directorate, Scientific Research and Experimental Development Directorate, and High Net Worth Compliance DirectorateFootnote 1

Subject: Obtaining Information for Audit Purposes

This communiqué replaces AD-19-02, dated 2019-03-21 and supersedes AD-15-05, Requesting Information from taxpayers, registrants, claimants and third parties and AD-10-01, Acquiring Information from Taxpayers, Registrants and Third Parties, and provides further clarification in obtaining information for audit purposes from taxpayers, registrants, claimants and third parties.

Purpose

The purpose of this communiqué is to provide guidance on the Canada Revenue Agency’s (CRA) policy regarding obtaining information from taxpayers, registrants, claimants and third parties for the purposes of administering and enforcing the Income Tax Act (ITA), Excise Tax Act (ETA) and any other applicable legislation for audit purposes.

The communiqué provides information for auditors and examiners following the Federal Court of Appeal (FCA) decision in BP Canada Energy Company v. Canada (National Revenue), 2017 FCA 61, and the Federal Court of Appeal decision in Canada (National Revenue) v. Cameco Corporation, 2019 FCA 67.

The decision in BP Canada Energy Company deals with access to tax accrual working papers and whether the request for access was consistent with the CRA’s policy [AD-10-01]. The tax accrual working papers contained the taxpayer’s calculations of reserves for contingent liabilities related to the taxpayer’s tax positions (“tax reserves”). The working papers also included a list of what the taxpayer had determined were its uncertain tax positions. The FCA concluded that tax accrual working papers were not “compellable ‘without restriction’”; that the CRA’s broad power to access information should be used with restraint when seeking access to a taxpayer’s tax accrual working papers; and that by seeking disclosure of the taxpayer’s list of uncertain tax positions in this case, the CRA failed to follow the CRA’s policy in effect at that time.Footnote 2

This communiqué outlines the circumstances where CRA officialsFootnote 3 can request production of tax accrual working papers, including the taxpayer’s list of uncertain tax positions.

The decision in Cameco Corporation deals with whether the CRA can compel an individual to be orally interviewed. The FCA concluded that the CRA does not have the statutory power to compel the employees requested by CRA to attend interviews and answer oral questions under a general audit and inspection rule of the ITA. The FCA stated that all taxpayers should fully cooperate with reasonable requests arising in the course of an audit. The FCA decision does not diminish the responsibilities of owners, managers and other persons on the premises of a business to cooperate and answer questions during the course of an audit. Therefore, CRA officials should continue to request oral discussions and interviews with taxpayers to expedite the audit process. If a taxpayer refuses to be interviewed, the FCA stated that the CRA is free to make inferences and assumptions and to assess on that basis.Footnote 4 The Department of Justice should be consulted in these types of situations.

This communiqué applies to CRA officials who have the authority to examine the records of and obtain information from taxpayers that may be relevant in the administration or enforcement of the ITA, the ETA and other applicable legislation for audit purposes. It applies to the administration of civil matters only.

For the purposes of this communiqué, if not otherwise specifically mentioned, taxpayer includes registrants and claimants and the terms audit, inspect, examination and review are used interchangeably.

Background

The CRA carries out a range of service, education, audit and enforcement activities to ensure compliance with tax laws and to maintain the integrity of Canada’s self-assessment tax system. Verification of information relating to a taxpayer’s liabilities or claims under the legislation that the CRA administers is a critical element of ensuring compliance. The CRA expects taxpayers to have a legally defensible tax filing position. As such, transparent communication of that position will assist both the CRA and taxpayers in obtaining tax certainty and compliance with the tax laws. Disputes regarding the interpretation of the tax rules can accordingly be targeted and more swiftly resolved. It is in a taxpayer’s interests to cooperate with the CRA in the course of an examination as cooperation may expedite the audit and lessen the compliance burden.

Verification often requires obtaining information from taxpayers. The CRA’s objective in conducting an examination of information is to ensure compliance with tax laws. The applicable tax legislation provides CRA officials with the legal authority to obtain the information needed to carry out these activities in a timely manner. The CRA will communicate its requests transparently with respect to the scope and relevancy of the request as outlined below.

CRA officials have the legal authority to request the information at any time during an examination for any purpose relating to the administration or enforcement of the ITA, ETA or other applicable legislation, subject to solicitor-client or litigation privilege.Footnote 5 The term “any purpose” includes obtaining information for the purpose of substantiating the taxpayer’s position on a specific issue, and in certain circumstances identifying audit issues and concerns with regards to the tax-at-risk. CRA officials are authorized to examine:

  • the books and records of a taxpayer;
  • any document of the taxpayer that relates or may relate to the information that is or should be in a taxpayer’s books and records; and
  • any information or document of any other personFootnote 6 that relates or may relate to the information that is or should be in a taxpayer’s books and records.

The examination can be conducted in a variety of ways, including asking questions in writing or orally.

When doing an on-site examination at the taxpayer’s place of business, CRA officials can also require the owner or manager of the property or business under review and any other person at the taxpayer’s place of business to answer all proper questions.

CRA officials can require a third party to provide information and documents that the CRA official determines are needed for purposes of the examination.

Subject to solicitor-client privilege, CRA officials can require a taxpayer, or a person engaged by the taxpayer, to produce working papers that relate to a taxpayer’s books and records that may be relevant for any purpose related to the administration or enforcement of the tax laws. This includes tax accrual working papers that are addressed below.

Annex A outlines the legislative authorities that CRA officials may rely upon in obtaining information and documentation from taxpayers. Annex B provides the key concepts from relevant jurisprudence.

Obtaining Information

As noted above and in Annex A, the legislation provides CRA officials with broad powers to obtain information for purposes of an examination and for any other purpose relating to the administration and enforcement of the legislation. Notwithstanding the breadth of the authority, CRA officials shall exercise judgment and take reasonable steps to limit the compliance burden on the taxpayer based on the facts and circumstances of the case.

As taxpayers have access to information pertaining to their tax obligations and entitlements, they are expected to cooperate with CRA officials and to respond to reasonable requests for information and to provide further explanation. CRA officials will examine the books and records of the taxpayer and rely predominantly upon original source information and contemporaneous documentation to ensure that the overall risk of non-compliance is low. A taxpayer with large unexplained tax reserves may be considered to be at a higher risk of non-compliance.

To the extent that the taxpayer does not maintain proper books and records, or is resistant to providing information and responding to specific questions, the CRA’s ability to determine the risk of non-compliance is limited by the taxpayer. In such situations, CRA officials will take additional steps pursuant to the information gathering provisions of the relevant legislation to obtain the necessary information from the taxpayer or from a third party. This could include initiating court proceedings to obtain a compliance order or issuing a requirement to third parties, and this may result in an additional compliance burden to the taxpayer.

In many situations, especially those involving more complex tax arrangements or in relation to purpose-based tax provisions such as anti-avoidance rules, CRA officials will be required to examine the purpose or purposes of a transaction or series of transactions. To the extent this is evident in the books and records of the taxpayer, if the arrangement is considered acceptable tax planning and the risk of non-compliance is considered to be low, CRA officials will be able to finalize their compliance activity in a timely manner thus providing the taxpayer with earlier tax certainty.

Where the purpose or purposes of the transaction or series of transactions is not clear and the relevant facts are not self-evident and/or verifiable from the documents and information provided by the taxpayer, or where the taxpayer is not fully cooperative and attempts to limit the CRA’s review in any manner, the CRA may then seek additional information from the taxpayer and/or a third party. Wherever possible, CRA officials will seek the necessary information directly from the source records first before seeking additional information through less direct means. Where a taxpayer fails to provide information regarding the purpose of a transaction or series of transactions, the CRA may take the position that the primary purpose of the transaction or series of transactions was to obtain a tax benefit.

CRA officials will use the means necessary, as provided under the relevant legislation, to determine a taxpayer’s risk of non-compliance, and to properly assess taxes owing, taking into consideration the facts and circumstances of the case, including the scope of the compliance activity. This may include issuing a requirement to a third party and/or seeking a compliance order from the courts. CRA officials will exercise judgment, ensuring that the request or requirement for information is reasonable in the circumstances. CRA officials may consult internally with specialty areas, including regional and national advisors for abusive tax avoidance, technical or industry specialists for domestic and international tax, and the Department of Justice with respect to complex and contentious issues.

Where possible, CRA officials should avoid requesting voluminous, duplicative material where a smaller subset of the information could serve to explain the taxpayer’s filing position. While CRA officials will provide a reasonable time to comply with an information request, and will attempt to accommodate reasonable requests for extensions, CRA officials must also consider the reassessment periods and treaty time limits to ensure that compliance activities are completed on a timely basis.

Taxpayers should be encouraged by CRA officials to provide complete responses to information requests in order to avoid the necessity of follow-up queries or requests. Taxpayers should be encouraged to maintain openness, transparency and cooperation with CRA officials, and thus clearly demonstrate, based on sufficient appropriate information, that their overall risk of non-compliance is in fact low. Voluntary disclosure of aggressive or uncertain tax positions by a taxpayer accompanied by complete and substantive information in support will lead to a more efficient audit, and provide the taxpayer with earlier tax certainty.    

Tax Accrual Working Papers

CRA officials can seek production of tax accrual working papers provided that the request for such records is undertaken in accordance with this communiqué.

Certain taxpayers are required to report tax reserves for financial reporting purposes. Tax accrual working papers are the documents maintained by a taxpayer or by the taxpayer’s external representative that show the calculations for the tax reserves reported on its financial statements.

Tax accrual working papers can be requested where they are relevant to a specific item under audit.

Tax accrual working papers, particularly the list of uncertain tax positions, can also be requested to identify audit issues in the context of an ongoing audit. This can be done in circumstances where CRA officials determine there is a higher risk of non-compliance. Factors that may be considered include the taxpayer’s past level of compliance, the existence of large unexplained tax reserves, and the potential tax-at-risk.

In recognizing and measuring the effect of tax uncertainties for financial reporting purposes, there is a fundamental assumption that the tax authority will examine the tax treatment of these uncertainties, and have full knowledge of the related information when making those examinations. Hence access to tax accrual working papers may be necessary in certain cases in determining whether these positions as reported in the taxpayer’s tax return are in fact allowable under the ITA.

A taxpayer may claim that the tax accrual working papers include information subject to solicitor-client privilege. The CRA cannot compel production of privileged communications. Communications between the taxpayer and its lawyer seeking or providing legal advice on whether or not the taxpayer is required to claim a reserve would typically be privileged. Whether or not a taxpayer receives legal advice concerning its tax reserve, a taxpayer reporting a tax reserve will make a determination as to which uncertain tax positions to include in the reserve. The taxpayer’s list of uncertain tax positions that relates to the tax reserve in their financial statements is not a privileged document. A taxpayer also has the right to waive privilege over privileged communications.

CRA officials must be objective when reviewing any information or documentation obtained during an examination. It is important not to be influenced by any subjective analyses, comments or opinions contained in the information or documentation reviewed. While CRA officials may, in certain circumstances, request a list of what the taxpayer has determined to be its uncertain tax positions, in considering the structures and transactions outlined, CRA officials should perform their own research and analysis in forming the basis of any reassessment. Provided all the relevant facts of the transactions are disclosed, including the taxpayer's purpose or purposes in undertaking a transaction or series of transactions, exclusions of their advisors’ analysis of the legal and tax effects of the transactions may be accommodated.

The CRA’s position is that taxpayers are required to disclose sufficient detail regarding their business and tax transactions for the CRA to fulfill its mandate of assessing taxes owing. Where the criteria outlined in the communiqué are met, the CRA considers that it retains the right to request tax accrual working papers, including a list of uncertain tax positions. A request for the taxpayer’s list of uncertain tax positions in these circumstances is not a request that the taxpayer self-audit. The CRA may audit transactions underlying these positions and will make its own determination as to the tax effects of the transactions. Overall, the onus remains with the taxpayer to report and pay the correct amount of tax pursuant to the ITA or ETA under Canada’s self-assessment system.

In order to develop a consistent practice across the country, for a one-year period from the date of the issuance of this communiqué, prior to requesting tax accrual working papers, the Taxation Services Offices are required to refer the case to the applicable HQ audit function using the existing National Early Warning System (NEWS) for requests of these working papers.

Key Considerations

CRA officials must take into account the legislative authorities and jurisprudence (as outlined in the Annexes) as well as three key considerations when evaluating the need to request information from a taxpayer or a third party: Audit Scope; Relevancy and Reasonableness; and Transparency.

(a) Audit Scope

The scope of an audit or review influences the type and volume of records required and may expand or contract depending on what facts are determined and what information is provided during the process. More specifically, during an audit, the CRA officials may begin by carrying out a restricted or limited scope audit but may in the course of that audit determine that it is to be expanded to include additional issues or that a full compliance audit is necessary. A limited scope audit will entail less extensive review of documentation than a full scope audit. When compliance activities are modified or expanded from the original scope, officials must clearly communicate the modified or expanded audit focus to the taxpayer.

(b) Relevancy and Reasonableness

The Minister of National Revenue has a statutory duty to verify whether taxpayers’ self-assessments of tax payable are accurate. Acquiring relevant and complete information is critical to any review or audit. The determination of what may be relevant is based on the scope of the review being conducted. Parliament has provided the Minister with broad information gathering powers The Supreme Court of Canada has confirmed that these include the power to “inspect, audit or examine a wide array of documents, reaching beyond those that the Income Tax Act otherwise requires the taxpayer to prepare and maintain”.Footnote 7 This would also apply to the ETA. Section 231.2 of the ITA, and subsection 289(1) of the ETA allow the Minister to require from any person “any information” or “any document” for any purpose related to the administration or enforcement of these Acts. These are very broad provisions. These powers must be exercised in a reasonable and supportable manner. The Supreme Court of Canada has also held that it is the prerogative of the Minister to decide whether to conduct an audit and the form that the audit will take.

Every effort should be made to properly focus information requests to avoid burdening taxpayers and third parties with voluminous and expansive requests in situations where it is highly unlikely that such information will prove relevant to validating or establishing tax liability. Furthermore, CRA officials must be prepared to review the documentation that has been requested or required in a manner commensurate with the complexity, volumes, tax risks, etc. involved.

The CRA’s right to obtain information is well supported by case law. The Courts have recognized that the relevance of documents requested by CRA officials can often be difficult to determine until the official has had an opportunity to examine them. As stated in McKinlay Transport LtdFootnote 8:

[T]he Minister of National Revenue must be given broad powers in supervising this regulatory scheme to audit taxpayers’ returns and inspect all records which may be relevant in the preparation of these returns. The Minister must be capable of exercising these powers whether or not he has reasonable grounds for believing that a particular taxpayer has breached the Act. Often it will be impossible to determine from the face of the return whether any impropriety has occurred in its preparation. A spot check or a system of random monitoring may be the only way in which the integrity of the system can be maintained. (Emphasis added.)

However, CRA officials should be able to explain, in general terms, why they are requesting particular information.

(c) Transparency
The administration of any tax program relies upon its ability to obtain verifiable assurances that the information and returns filed by taxpayers are both accurate and complete. Transparency and cooperation by CRA officials and by taxpayers will facilitate the efficiency and effectiveness of a review or audit. Where possible, CRA officials will clearly identify the transaction, claim or issue they are reviewing as early as possible to the taxpayer whose affairs are under review. This will provide transparency to the process and enable the timely production of relevant information and documents. Taxpayers who attempt to limit access to the details of their tax plans and strategies can expect the CRA to take all reasonable steps to obtain the information needed to ensure compliance.

Addressing Material Differences

The determination of what may be relevant to an audit is the prerogative of the CRA official. In some cases, taxpayers may not be in agreement with CRA’s position and will discuss material differences of opinion regarding the relevancy of information being requested with the official requesting that information. Where the CRA and the taxpayer or the third party are unable to resolve the dispute, the CRA may pursue legal recourse in the form of a compliance order or requirement to compel production of the information or documents sought.

Conclusion

Please direct any questions relating to this communiqué to your functional program contact within Headquarters.

Original signed by

Ted Gallivan
Assistant Commissioner
International, Large Business and Investigations Branch; and
Domestic Compliance Programs Branch

Circulate to:

  • Assistant Directors of Audit
  • Regional Directors of Programs
  • Regional Program Advisors
  • Directors General, International and Large Business Directorate, Small and Medium Enterprises Directorate, GST/HST Directorate, High Net Worth Compliance Directorate, Scientific Research and Experimental Development Directorate, Criminal Investigations Directorate, Compliance Infrastructure and Branch Services Directorate

Annex A

Legislative Authority

Books and Records

Taxpayers are required to keep books and records of account as described in subsection 230(1) of the ITA, subsection 286(1) of the ETA, and in other applicable legislation. The books and records must be adequate for the purpose of the pertinent legislation. Every person who carries on a business and every person who is required to file a return, claims a refund or rebate, or is required to pay or collect tax or other amounts, must keep records that enable the determination of the person’s liabilities, obligations and entitlements. A record is defined in subsection 248(1) of the ITA and in subsection 123(1) of the ETA. Documents include all records in electronic or computerized format, paper records, images and computer programs or files. Corporate taxpayers must also keep records pertaining to their foreign affiliates.

Charities and certain other organizations have further record keeping requirements. Subsection 230(2) of the ITA requires registered charitable, athletic organizations and other qualified donees which may issue donation receipts, to keep records in order that the claims of donors and their eligibility for tax credits may be verified.

Taxpayer records must show an audit trail from the source documents to the financial accounts whether the transactions are documented on paper or electronically.

Examinations

CRA officials are entitled to request taxpayer information pursuant to the examination powers found in section 231.1 of the ITA, in section 288 of the ETA and in other applicable legislation. Any such request is based on the scope and purpose of the review.

CRA officials have the authority to examine the books and records, discussed above, of a taxpayer for any purpose relating to the administration or enforcement of the ITA, Part IX of the ETA and other relevant legislation. This authority includes the power to examine not only the records and documents of the taxpayer under review, but also the records and documents of any other person that relate to the tax liability of the person under review, unless the documentation is subject to solicitor-client or litigation privilege.

As part of the inspection process, officials are permitted to ask questions and to issue queries. These must fall within the scope of the review. Requests for information made verbally that are unanswered should be followed-up with a request in writing and followed up by a second request, if necessary.

Questions and queries should be addressed to the person(s) who would be in the best position to have direct knowledge of the matter under review. As well, under paragraph 231.1(1)(d) of the ITA and paragraph 288(1)(b) of the ETA, an owner or manager or any other employee at a business premises can be asked to give all reasonable assistance and to answer all proper questions under the general inspection provisions. When a request made under section 231.1 of the ITA, section 288 of the ETA or other relevant legislation is not complied with, a compliance order may be sought.Footnote 9

Requirements

A requirement is a legal document that requires a person to provide information and/or documentation as set out in section 231.2 of the ITA, section 289 of the ETA and in other applicable legislation.

Non-compliance with a requirement may lead to sanctions. A requirement is a legal demand and, similar to a request under section 231.1 of the ITA or 288 of the ETA, is enforceable in court by way of a compliance order.

Before issuing a requirement, CRA officials must consider the intention to compel compliance, as normally a requirement will not be issued if there is no intention to enforce the requirement in the event of non-compliance.

When issuing a requirement, CRA officials must be able to demonstrate that the information required is, or appears to be, relevant and is sought in relation to the administration or enforcement of tax laws. It should be stated in the requirement whether the information is required for the audit of a specific taxpayer or for the collection of a debt due by a specific taxpayer. See below (Third Party Requirements Regarding Unnamed Persons) concerning seeking information for purposes of auditing a taxpayer whose identity is unknown.

Requirements can include questions. For example, CRA officials may question the purpose of transactions where that purpose is relevant in determining compliance under the ITA, the ETA or other applicable legislation.

There is no time limit for issuing requirements. CRA officials can issue a requirement at any time where the information or documents are sought for purposes of the administration or enforcement of the applicable legislation.

In addition to the power to require information and documents under section 231.2 of the ITA or section 289 of the ETA, requirements under other provisions can be used to demand non-filers to file returns, or to require a person to keep records or books of account:

  • In the case of the ITA and the ETA, the authority to demand a return is found in subsection 150(2) of the ITA and section 282 of the ETA. A requirement to file a return should only be issued after a demand to file the return has been issued in order for the penalty for a repeated failure to file under subsection 162(2) of the ITA and section 283 of the ETA to be applied where appropriate.
  • The Minister may require a person to keep adequate books and records of account if an examination of existing records establishes that books and records of a taxpayer/registrant are inadequate in determining their liability or entitlements under the ITA or ETA. This authority is found under subsections 230(3) of the ITA and 286(2) of the ETA.

Requirements can also be used to acquire information regarding unnamed persons and foreign-based information, as discussed below.

Third Party Requirements Regarding Unnamed Persons

Judicial authorization to issue a requirement must be obtained in accordance with subsection 231.2(2) of the ITA, subsection 289(2) of the ETA, or other applicable legislation where the information sought in the requirement is for purposes of verifying compliance by a taxpayer whose identity is unknown to the CRA. In particular:

  • A requirement under subsection 231.2(1) of the ITA must be used, and judicial authorization as required under subsection 231.2(2) of the ITA must be obtained, where information on unnamed persons is sought from a third party who is not under audit and the information is sought to verify the compliance of the unnamed persons with the ITA, ETA or applicable legislation.
  • There is no need to issue a requirement under subsection 231.2(1) of the ITA, or to obtain judicial authorization under subsection 231.2(2) of the ITA, where the information sought is for the purpose of the audit of a taxpayer whose identity is known to the CRA, even if the information sought may include the identity of unnamed persons. This information can be requested under the inspection powers of section 231.1 of the ITA, even if unnamed persons may become subject to a review as a result of the audit of the taxpayer whose identity is known to the CRA.

Compliance

Subsection 231.5(2) of the ITA and subsection 291(2) of the ETA require that persons comply with a request under section 231.1 of the ITA or section 288 of the ETA, or a requirement under section 231.2 of the ITA or section 289 of the ETA, unless the person is unable to do so.

The Minister may seek a compliance order under section 231.7 of the ITA or section 289.1 of the ETA with respect to a failure to comply with either a request under section 231.1 of the ITA or section 288 of the ETA, or a requirement under section 231.2 of the ITA or section 289 of the ETA. A judge hearing a compliance application can order a person to provide any access, assistance, information or document sought by the Minister. CRA officials will enlist the Department of Justice to seek a compliance order where the information requested is not being provided. The judge must be satisfied that the person was required under the applicable sections of the legislation to provide what was sought and be assured that it is not subject to solicitor-client or litigation privilege.

Failure or refusal to comply with a compliance order could result in the person being found in contempt of court, and thus subject to the appropriate consequences to be decided by the Court.

Foreign-Based Information

Foreign-based information is information or documents located outside of Canada which may be relevant to the administration or enforcement of the ITA and/or the ETA. Foreign-based information that is available to a person resident in Canada or a non-resident person carrying on business in Canada should be sought from the taxpayer or third party pursuant to sections 231.1 or 231.2 of the ITA or sections 288 or 289 of the ETA.

If a person resident in Canada, or a non-resident person carrying on business in Canada, is unable or unwilling to provide foreign-based information or documents, for instance, if the information is in the possession of a related non-resident person that is unwilling to provide it to a Canadian taxpayer, a foreign-based requirement can be issued pursuant to subsection 231.6(2) of the ITA or subsection 292(2) of the ETA.

Subsections 231.6(8) of the ITA, 292(8) of the ETA and sections in other applicable legislation provide a sanction whereby a person who substantially fails to comply with a foreign-based information requirement (e.g. withholds any information or document covered by the requirement), may subsequently be unable to introduce the information or documents, on motion to a Court by the Crown. In effect, a person cannot selectively provide only information or documents which are advantageous to them, while refusing to provide the information or documents which could assist the Minister in arriving at a proper assessment.

Note that the Minister cannot seek a compliance order under section 231.7 of the ITA or section 289.1 of the ETA:

  • to compel compliance with a requirement for foreign-based information issued under subsection 231.6(2) of the ITA or subsection 292(2) of the ETA; or
  • to compel compliance with a request under section 231.1 of the ITA or section 288 of the ETA, or a requirement under section 231.2 of the ITA or section 289 of the ETA, issued to a person outside of Canada unless the person is in Canada.

For further information, see communiqué ILBD-07-04, Accessing Foreign-Based Information and Documentation. [Internal link only]

Information may also be available through Exchange of Information (EOI) Services which is part of the Competent Authority Services Division in the International and Large Business Directorate. The mandate of EOI is to co-ordinate exchanges of information and other related activities with treaty partners in accordance with a tax treaty's Exchange of Information Article, a Tax Information Exchange Agreement (TIEA) or the Convention on Mutual Administrative Assistance in Tax Matters (MAC).

For further information see Exchange of Information Services - Reference Guide [Internal link only]

International Transfer Pricing Documentation

International transfer prices are the prices at which services, tangible property, and intangible property are traded across international borders between related parties. Transfer pricing per section 247 of the ITA specifically relates to transactions or arrangements between a taxpayer and a non-resident person with whom the taxpayer does not deal at arm's length. Where the terms or conditions of controlled transactions differ from those that would have been made between persons dealing at arm's length, adjustments may be made.

Subsection 247(4) of the ITA requires a taxpayer or partnership to keep contemporaneous documentation that provides a description of the items listed in subparagraphs 247(4)(a)(i) through (vi) of the ITA. This documentation is to be complete and accurate in all material respects. The taxpayer or partnership is required to provide this information to CRA officials within three months of a written request per paragraph 247(4)(c) of the ITA.

Taxpayers who do not satisfy the contemporaneous documentation requirements of subsection 247(4) of the ITA are deemed not to have made reasonable efforts to determine and use arm’s length transfer prices or arm’s length allocations. Subsection 247(3) of the ITA imposes a penalty where the net amount of adjustments is larger than the threshold, which is the lesser of $5,000,000 or 10% of the taxpayer’s gross revenue. If no adjustments are made then no penalty is possible. Transfer pricing penalties are calculated at 10% of the net result of certain adjustments made under subsection 247(2) of the ITA.

This penalty is intended to be a compliance penalty focusing on the effort that a taxpayer makes to determine an arm’s length transfer price and not solely on the ultimate accuracy of the transfer price. Provided that a taxpayer makes reasonable efforts to determine and use arm’s length prices or allocations, a transfer-pricing penalty would not apply. The reasonable efforts determination can only be made based on information provided to CRA officials.

Where a taxpayer or partnership has not provided the contemporaneous documentation upon request, CRA officials will consider using other information-gathering powers including third party and foreign-based requirements. If the request for documentation was issued pursuant to section 231.1 of the ITA and the taxpayer has not provided the requested information, an application for a compliance order may be sought.

Annex B

Jurisprudence

Inspections, Audits and Examinations – Section 231.1

R v McKinlay Transport Ltd, [1990] 1 SCR 627.

[Para 36] “Accordingly, the Minister of National Revenue must be given broad powers in supervising this regulatory scheme to audit taxpayers' returns and inspect all records which may be relevant to the preparation of these returns. The Minister must be capable of exercising these powers whether or not he has reasonable grounds for believing that a particular taxpayer has breached the Act. Often it will be impossible to determine from the face of the return whether any impropriety has occurred in its preparation. A spot check or a system of random monitoring may be the only way in which the integrity of the tax system can be maintained […]”

R v Jarvis, 2002 SCC 73, [2002] 3 SCR 757.

[Para 53] “The provisions that are central to the instant appeal vest the Minister with extensive powers that may be used ‘for any purpose related to the administration or enforcement’ of the ITA. Section 231.1(1)(a) […]  Paragraph (a) allows a person authorized by the Minister to “inspect, audit or examine” a wide array of documents, reaching beyond those that the ITA otherwise requires the taxpayer to prepare and maintain […]”

Redeemer Foundation v Canada (National Revenue), 2008 SCC 46, [2008] 2 SCR 643.    

[Para 12] “[…] The main section at issue is s. 231.1(1) which gives the Minister a broad power to inspect, audit and examine taxpayers’ records […]”

[Para 25] “It is true that the broad wording of s. 231.1(1) provides a powerful tool that may reveal a great deal of information about transactions between the taxpayer under audit and third parties. However, this is business information. Taxpayers have a very low expectation of privacy in their business records relevant to the determination of their tax liability: R. v. McKinlay Transport Ltd., [1990] 1 S.C.R. 627.”

Western Minerals Ltd v Minister of National Revenue [1962] SCR 592 citing Western Leaseholds Ltd, [1958] Ex. C.R. 277 at para 87 citing Provincial Paper, Ltd, [1955] Ex. C.R. 33.

[Page 596] “[…] that it is not for the Court or anyone else to prescribe what the intensity of the examination of a taxpayer’s return in any given case should be.  That is exclusively a matter for the Minister, acting through his appropriate officers, to decide.”

BP Canada Energy Company v Canada (National Revenue), 2017 FCA 61.

[Para 67] “The issue in this case is not whether the information revealed by BP Canada's Tax Reserve Papers could be accessible under the Act. After all, everyone is agreed that it is, if required, in order to respond to a specific inquiry made in the context of an audit. The disclosure of the redacted version of BP Canada's Tax Reserve Papers in response to the query made about the accounting entries attests to this (see paragraphs 11 and 12 above). The real issue is whether subsection 231.1(1) allows general and unrestricted access to this information, if this is indeed what was sought and authorized in this case.”

[Para 80] “In my view, subsection 231.1(1), properly interpreted, does not make papers such as these compellable “without restriction”. When one examines the context and purpose of subsection 231.1(1), it is clear that Parliament intended that the broad power set out in subsection 231.1(1) be used with restraint when dealing with TAWPs. It follows that the decision of the Federal Court judge must be set aside.”

Requirements - Section 231.2

Canada (National Revenue) v Tower 2003 FCA 307, [2004] 1 FCR 183.

[Para 20] “Paragraph 231.2(1)(a), when properly interpreted, empowers the Minister to compel a taxpayer to provide “information”, meaning knowledge or facts. In order to exercise this power, the Minister must be able to ask questions to elicit the knowledge, facts or figures. The words “return of income or supplementary return” in paragraph (a) does not detract from this interpretation as the preceding word “including” means that the phrase is not exhaustive of the meaning of “information.” These words enable the Minister not only to get the information regarding a taxpayer's income, but also to specify the form in which this information must be provided, i.e. a tax return containing prescribed information rather than in a letter. In my view, the Minister is therefore able to compel production of documents and records under paragraph 231.2(1)(b) and ask questions to elicit knowledge or facts under paragraph 231.2(1)(a).”

[Para 29] “A number of cases have dealt with the scope of subsection 231.2(1) (see R. v. McKinlay Transport Ltd., supra; James Richardson & Sons Ltd. v. Minister of National Revenue, supra; AGT Ltd. v. Canada (Attorney General), supra and R. v. Jarvis, 2002 D.T.C. 7547 (S.C.C.) at paragraph 51). The relevant principles from these authorities establish that the determination of a taxpayer's tax liability is a purpose related to the administration and enforcement of the Act. A requirement is valid if the requested information may be relevant in the determination of the tax liability of the named taxpayer. This is a low threshold. Subsection 231.2(1) gives the Minister a broader authority to obtain information than would be the case if, for example, the Minister were conducting pre-trial examinations for discovery in the context of an income tax appeal.”

[Para 30] “In my view, the information which the Taxpayers object to producing may be relevant to determining their tax liability under the Act. As Desjardins J.A. stated at paragraph 23 for a unanimous panel of this Court in AGT Ltd. v. Canada (Attorney General), supra:

Because of the nature of the conduct regulated by the Income Tax Act, there are, in many cases, no ways of determining whether prescribed conduct has been engaged in, short of studying the process by which a suspected corporation or business has made and implemented its decision.”

[Para 31] “First of all, tax planning information can shed light on intention and therefore may be important in interpreting contracts or determining whether persons are acting at arm’s length. Further, it may be relevant in determining the residency of the Taxpayers, which is an issue in the present case, since a relevant factor is whether they intended to sever their ties to Canada permanently or only temporarily. Finally, the subjective intention of the Taxpayers may be relevant in determining interest deductibility or the applicability of the general anti-avoidance provision. The purpose test may be an objective one, but a taxpayer's intention is certainly a relevant consideration (see Ludmer c. Ministre du Revenu national, [2001] 2 S.C.R. 1082 (S.C.C.) at paragraphs 54-55; and Fraser Milner Casgrain LLP v. Minister of National Revenue, 2002 D.T.C. 7310, [2002] 4 C.T.C. 210 (Fed. T.D.)).”

AGT Limited v Canada (Attorney General), [1997] 2 FC 878 (CA).

[Para 24] “While an individual or a corporation's interest in having business strategies kept in confidence is recognized, the balancing no doubt favours the state. Wilson J. in McKinlay recognizes that the “Minister has no way of knowing whether certain records are relevant until he has had an opportunity to examine them”. There is an ultimate safeguard. Not all of those documents are necessarily admissible against the taxpayer in a court of law or in another proceeding. Only those in accord with the rules of evidence shall be admissible”.

Fraser Milner Casgrain LLP, 2002 DTC 7310, [2002] 4 CTC 210.

[Para 27] “I accept that from this jurisprudence the following principles emerge:

  1. The determination of a taxpayer's tax liability is a purpose related to the administration and enforcement of the Act.
  2. In order for a requirement to produce records to be valid, the Minister need not show the records will be relevant, he need merely show the records requested may be relevant.
  3. Relevance is tested by determining whether the particular record requested may be relevant in the determination of a taxpayer's tax liability and not whether the particular record requested is relevant with respect to a particular issue under audit.”

[Para 28] “It follows, in my view that even if the sole purpose of the Requirements was to determine whether there was an avoidance transaction, this does not impair the validity of the Requirements. Relevance to a particular issue is not a prerequisite, it is sufficient that the material may be relevant to the determination of a taxpayers' tax liability.”

[Para 29] “Here, the Tax Planning Requirements were served upon a director, officer or agent for the audit subjects, and the tax planning documents sought pertain to their tax liability.”

[Para 30] “Moreover, while without doubt the purpose test found in subsection 245(3) of the Act is objective that does not necessarily make irrelevant the factual matrix which led to the transactions at issue, or preclude evidence as to what motivated certain actions. In applying the purpose test, the Court will look to all of the relevant facts and circumstances, determining intent at the time the transactions in question were carried out. Looking to what a party expected to receive from a transaction may be relevant, and a comparison of the amount of the estimated tax benefit to the estimated business earnings may be helpful. See, for example, the comments of the Federal Court of Appeal in OSFC Holdings, supra, at paragraph 58.”

[Para 31] “By way of further example, in Duncan v. Canada [appeal by Water's Edge Village Estates (Phase II) Limited] 2002 FCA 291, when considering whether the impugned transactions reasonably could be considered to have been undertaken primarily for a purpose other than to obtain a tax benefit, the Federal Court of Appeal had regard to the taxpayers’ evidence as to their motivations and to the findings of fact made below with respect to that evidence. This evidence of motive was not excluded or considered irrelevant or inadmissible.”

[Para 32] “Therefore, I am not satisfied that tax planning information is per se irrelevant to a proper subsection 245(3) analysis. In any event, even if such information is in the end found not to be relevant, as Justice Desjardins noted for the Federal Court of Appeal in AGT Ltd., supra, the ultimate safeguard is that the documents are not necessarily admissible against the taxpayers in another proceeding.”

Artistic Ideas Inc v Canada (Customs and Revenue Agency), 2004 FC 573.

[Para 17] “The Applicant submits that the unredacted records are irrelevant to its audit. However, there is no need for me to make a final determination of relevance. It is sufficient that the documents may be relevant to the genuine and serious inquiry into the liability of the Applicant R. v. McKinlay Transport Ltd., [1990] 1 SCR 627 at 650; AGT Ltd. v. Canada
( Attorney General), [1996] 3 FC505 (T.D.), aff'd [1997] 2 FC878 at 889 (C.A.), leave to appeal dismissed, [1997] S.C.C.A. No. 314 (QL); Fraser Milner Casgrain LLP v. Minister of National Revenue, 2002 DTC 7310 at 7314 (F.C.T.D.)). The same test applies to the names of the Donors and Charities; it is sufficient that the names may be relevant to the inquiry into the tax liability of the Applicant.”

Foreign-Based Information Requirements – section 231.6

Saipem Luxembourg SA v Canada (Customs and Revenue Agency), 2005 FCA 218.

[Para 35] “The question therefore is whether the Agency’s intention to conduct an audit of Saipem supports the need for a notice of requirement in respect of the whole of Saipem’s corporate records. A “somewhat probing examination” leads to an inquiry as to whether one can truly conduct an audit solely on the basis of material provided by the person being audited, without the possibility of verification that no further records exist. In practice, the issue seldom arises as I have no doubt that most businesses confronted with a notice of requirement of the sort in issue here, accept the Agency’s offer to treat their consent to an on-site audit as sufficient compliance with the notice of requirement. But the reasonableness of the notice of requirement is to be assessed according to its terms, not according to some alternate method of compliance”.

[Para 36] “It is the Agency’s prerogative as to whether it will conduct an audit, and what form that audit will take. Given that the records in question are, by definition, maintained outside Canada, the Agency can do little more to gain access to the records than issue the notice of requirement which it issued here. If the result is an audit which does not meet the Agency’s usual standards, it is nonetheless the best audit the Agency can conduct in the circumstances. As a result, I conclude that the Agency’s determination to conduct an audit supports the scope of the notice of requirement served upon Saipem by the Minister”.

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