The Federal Court of Appeal recently drew clear boundaries around the CRA's audit powers, holding that the Agency cannot not compel employees of a taxpayer to attend interviews to answer oral questions as part of an audit. In Canada v. Cameco Corporation, 2019 FCA 67, the CRA sought a compliance order under subsection 231.7(1) of the Income Tax Act to required employees of Cameco to attend oral interviews. Cameco refused, but was willing to answer questions in writing, in response to requests to named employees.

There is no argument about the CRA power to "inspect, audit or examine" the books and records of a taxpayer (paragraph 231.1(1)(a), Income Tax Act). The CRA argued that this provision grants the Agency the power during an audit to require taxpayers, or employees of taxpayers, to be interviewed orally.  This presumably would also mean that those individuals would be forced to answer the questions put to them at these interviews or risk being in breach of their obligations under the Act. Fortunately for all taxpayers, both the Federal Court and the Federal Court of Appeal rejected the CRA's attempt on summary application to compel the employees of Cameco to attend oral interviews. In a recently released statement regarding the Cameco decision, the CRA confirmed that it will not seek leave to appeal the decision to the Supreme Court of Canada. As a result, this decision is binding on the CRA and will remain as the current state of the law, barring any future legislative changes expanding the scope of the CRA's audit powers.

However, the CRA is not finished. The CRA went on to state that it would continue to seek oral interviews of "taxpayers, their employees, representatives, related parties and any other person it deems necessary in carrying out its audit functions". Further, if the taxpayer rejects such attempts, or if the CRA feels that a taxpayer is not providing adequate information, then it will likely assess the taxpayer based on assumptions that may be incorrect. This is an astonishing threat that all taxpayers facing an audit should be aware of. It is essential for taxpayers and their representatives to understand the scope of CRA's audit powers in determining how to provide information to the CRA. It is also important to have a clear audit plan and an assessment of risk when dealing with inquiries from the CRA.

Communications between accountants and their clients facing these sorts of audits are not covered by solicitor-client privilege, and in any event, these are critical issues of taxpayer rights and Constitutional proscriptions of government audit power.  When facing these sorts of issues, it is important to be proactive and not just react to the CRA positions in the audit.  Taxpayers should retain the services of lawyer when facing demands and threats from the CRA.

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