In Budget 2021, the federal government proposes to provide the Canada Revenue Agency (the “CRA”) with $230 million over five years as part of an ongoing focus on enforcing civil liabilities arising under the Income Tax Act (Canada) (the “Act”) and prosecuting criminal tax evasion. This blog provides an overview of two income tax proposals in Budget 2021 which would significantly expand the breadth of information taxpayers may be required to disclose to government officials.
The proposals discussed below are particularly concerning, and potentially constitutionally problematic as information compelled by government officials during administrative procedures can be used to investigate and prosecute criminal tax offenses.
For a comprehensive overview of other income tax measures included in Budget 2021, see our blog post here, and for a detailed blog of the proposed digital services tax in Budget 2021, see our blog post here.
Creation of a Corporate Beneficial Ownership Registry
The federal government proposes to commit $2.1 million to support development of a publicly accessible corporate beneficial ownership registry. Funding will be provided to implement the registry by 2025.
Budget 2021 does not provide guidance on precisely what information would be included in the registry and as such made publicly available. We can expect that corporations would be required to disclose comprehensive details on previously private ownership structures. The stated objective of the registry is unambiguous. It is to “catch those who attempt to launder money, evade taxes, or commit other complex financial crimes”. The registry will no doubt be eagerly utilized by law enforcement and tax authorities to expand the government’s ability to prosecute tax evasion.
The British Columbia government has taken similarly expansive steps to promote corporate transparency. This is shown by amendments to the Business Corporations Act which compel the creation and maintenance of a “transparency register” on significant individuals, as well as the Land Ownership Transparency Registry which is slated to become publicly available by April 30, 2021 (read our detailed blog on that registry here).
The proposed corporate beneficial ownership registry is also in keeping with similar initiatives in other jurisdictions. For example, the United States Congress recently passed the Corporate Transparency Act, The purpose of that Act is to “prevent wrongdoers from exploiting United States Corporations and limited liability companies for criminal gain, [and] to assist law enforcement in detecting, preventing, and punishing terrorism, money laundering and other misconduct involving United States Corporations and limited liability companies”. Notably, under this law reports will be made to FinCEN (Financial Crimes Enforcement Network) and the reported information may be provided to US law enforcement agencies and law enforcement agencies of other countries through a request made under an international treaty, agreement or convention.
Expansion of Audit Powers to Compel Answers to Questions
Section 231.1 of the Act currently provides the CRA with broad authority to inspect taxpayer records and property during an audit. The proposed changes would override the Federal Court of Appeal’s decision in Cameco (2019 FCA 67) which questioned– in the specific circumstances under review – the CRA’s authority to compel taxpayers to answer questions by posed by auditors. This type of legislative response to a court decision is perhaps what is sometimes described as a “dialogue” between courts and government.
Budget 2021 proposes to amend section 231.1 of the Act to provide CRA officials with wider latitude to determine the scope of questions and the form in which taxpayers must answer. In particular, the CRA officials would be given the authority to require taxpayers to answer all “proper” questions relating to enforcement of the Act “orally or in writing, in any form the auditor specifies”. This measure would come into force on Royal Assent.
It doesn’t take great imagination to foresee how this expanded power could be used. Depending on the meaning of “proper”, an auditor could draft a series of questions that drill into details which are not revealed from documents alone. It is clear how this would be useful to the CRA. It is equally clear how this power can increase risk to certain taxpayers that, through their own compelled statements, they would be exposed to penalties and criminal prosecution.
These proposals are not surprising. The government’s focus on tax enforcement is longstanding and these are simply new tools that would enhance the CRA’s ability to access information and conduct enforcement, including criminal enforcement action.
Professional advisors will have to guide clients through what information may need to be disclosed to comply with the corporate beneficial ownership registry. And, in what is potentially much more complicated advice, professional advisors will have to guide clients as to what constitutes a “proper” question from an auditor, whether a question must be answered, whether there are steps in law that can be taken to prevent answers from being compelled, and whether it is lawful for compelled answers to be used against a client in a prosecution for tax evasion.
Finally, compelling answers to questions when those answers might be referred by an auditor to the Criminal Investigation Division of the CRA, and where those answers might form the basis for prosecution, presents complicated constitutional dimensions. The “dialogue” between courts and government, referred to above, is generally used to refer to the process where government responds after legislation has been declared unconstitutional by a court. It might be that the use of statutory powers to compel answers from taxpayers will give rise to constitutional arguments in the courts, and through that, the government can welcome further dialogue.