Dean Blachford, Tax Litigation Lawyer and Valentine Gurfinkel, Articling Student

Being audited by the CRA can be a confusing and overwhelming process for a taxpayer. What are your rights? Are there any limits as to what CRA can ask you for? In this article we will look at where CRA’s audit powers come from and where some of the limits lie.

The Source and Scope of CRA’s Audit Powers

CRA’s audit powers come from sections 231.1 and 231.2 of the Income Tax Act (ITA) and 288 and 289 of the Excise Tax Act (ETA). These sections in effect give CRA the power to demand any documents from a taxpayer so long as they are relevant to an investigation.

The Acts’ powers aren’t only limited to the taxpayer. They extend to any third parties that may have information “related to the administration or enforcement” of the Acts. Third-parties can include customers, banks, telephone companies and professional service providers, such as accountants.

Disturbingly, in the recent Atlas Tube [1] case, the Federal Court upheld the CRA’s demand for the taxpayer to turn over due diligence reports it had received from its accountant, Ernst and Young. These reports spelled out the tax risks associated with the transaction under audit and guided the CRA right to the parts of the transaction that were most controversial from a tax perspective.

Limitations on CRA’s Audit Powers

While the Acts appear to give CRA broad authority to investigate whoever and however it likes, the Courts have repeatedly imposed limitations on the Agency’s audit powers.

  • The Predominant Purpose Must be Civil Tax Compliance – In Stankovic, [2] the Federal Court of Appeal reaffirmed that the above powers can only be exercised where the “predominant purpose” of the investigation is civil tax compliance. For criminal investigations, the CRA is limited by the protections guaranteed to all by Canada’s Charter of Rights and Freedoms. The Court also clarified that the “predominant purpose” is not determined by how CRA describes the investigation, but by the “totality of the circumstances.”
  • No Fishing Expeditions – In Hydro Quebec, [3] the Court denied CRA access to Hydro Quebec’s list of business customers because it considered CRA’s demands for documents to be a baseless “fishing expedition” to identify people to audit.
  • No Vexatious Audits – CRA cannot demand documents in support of a bad-faith, vexatious audit for capricious reasons. [4]
  • Solicitor-Client Protection– In Chambre des notaires du Quebec, [5]  the Supreme Court of Canada affirmed the continued protection of solicitor-client privilege and denied CRA’s attempt to compel lawyers and notaries in Quebec to hand over potentially prejudicial information about their clients. Nonetheless, in Atlas Tube the Federal Court concluded that only accounting opinions prepared for the purpose of “obtaining legal advice” can rely upon solicitor-client privilege.

CRA’s audit powers may be vast, but they are not unlimited. Taxpayers dealing with the CRA must remember that there are restrictions on the documents that the CRA can demand.


At HazloLaw – Business Lawyers, we have extensive experience representing taxpayers involved in CRA income tax and GST/HST compliance investigations.

If you are facing a significant audit by the CRA, contact Dean Blachford to discuss your options.

[1] Canada (National Revenue) v Atlas Tube Canada ULC, 2018 FC 1086.

[2] Minister of National Revenue v Stankovic, 2018 FCA 462, 2018 CF 462.

[3] Minister of National Revenue v Hydro-Quebec, 2018 FC 622, 2018 DTC 5096.

[4] Duval v Canada, 2012 FC 480, 2012 CF 480.

[5] Canada (Procureur general) v Chambre des notaires du Quebec, 2016 CSC 20, [2016] 1 SCR 336.

This article is for informational purposes only and does not constitute legal advice. If you wish to discuss your issue with a lawyer, contact Dean Blachford today.  613-747-2459 ext.310,