Bill C-31: Expanded CRA audit powers on the horizon

The federal government initially proposed significant changes to the Canada Revenue Agency’s (the “CRA”) audit powers under the Income Tax Act (the “Act”) in Budget 2024 (see Proposed legislation expanding the CRA’s audit powers: pitfalls and takeaways and 2024 Federal Budget – Major Income Tax Changes Announced). Those proposed amendments were not implemented, and a revised version of the provisions was published in August 2025 (the “2025 proposals”). Again, those amendments were not implemented.

In May 2026, the Minister of Finance and National Revenue published a Notice of Ways and Means Motion to introduce a bill to implement certain provisions of the November 2025 budget. This bill is now making its way through Parliament as Bill C-31, and it contains the latest draft of the new audit powers (the “2026 proposals”). Explanatory notes for the 2026 proposals were also released.

This post provides an overview of the most significant changes to the CRA’s audit powers under the 2026 proposals. Where applicable, significant differences between the 2025 proposals and the 2026 proposals are discussed.

The 2026 proposals, if enacted, will provide the CRA with significant new and expanded audit powers, including new enforcement mechanisms for taxpayer non-compliance. Taxpayers and practitioners need to be aware of these changes, particularly those that impose harsh or disproportionate results for taxpayers.

 Section 231.41: Power to compel answers under oath

Under the 2025 proposals, section 231.41 would have provided the CRA with the power to require answers to questions, or information or documents sought by the CRA, to be given orally under oath or affirmation, or in writing by way of affidavit. Section 231.41 has been removed entirely from the 2026 proposals. This is a welcome change, as the provision was one of the most troubling changes to the CRA’s audit powers, given that it would allow the CRA to obtain sworn statements from taxpayers unrepresented by counsel that could potentially be relied on subsequently in Tax Court, or even in a criminal investigation and prosecution.

Section 231.6(5): Limiting judicial variation of foreign-based information requirements

Pursuant to section 231.6, the CRA can require that a person provide information or documents that are located or available outside Canada. If a person is served with a notice of requirement under this provision, they may apply to a judge for a review of the requirement. Currently, on hearing such application, a judge may: (a) confirm the requirement, (b) vary the requirement as the judge considers appropriate in the circumstances, or (c) set aside the requirement if the judge is satisfied that the requirement is unreasonable.

Under the 2026 proposals, a judge would no longer be able to vary the requirement “as the judge considers appropriate in the circumstances”. A judge would only be able to vary the requirement if satisfied that it is unreasonable. This proposed change raises the threshold for judicial intervention, rendering it more difficult for taxpayers to have notices of requirement for foreign-based information varied.

Section 231.7: Expansion of compliance orders and new penalty

Pursuant to section 231.7, the CRA can apply to the Federal Court for a compliance order if a person has been required to provide access, assistance, information, or documents and has not done so. If a person does not comply with a compliance order, they may be held in contempt of court.

Currently, section 231.7 does not allow the CRA to obtain a compliance order in respect of foreign-based information or documents sought pursuant to section 231.6. Under the 2026 proposals, the CRA would be able to obtain compliance orders relating to foreign-based information.

Further, the proposed amendments introduce subsection 231.7(6), which would impose a penalty on taxpayers if a compliance order is issued due to their failure to comply with a requirement. The penalty would not apply to the failure to comply with a third-party requirement (i.e. if a person does not comply with a requirement related to another taxpayer). The amount of the penalty would be “equal to 10% of the aggregate amount of tax payable by the taxpayer … for each taxation year of the taxpayer to which the order relates”. Under proposed subsection 231.7(7), there is an exception to the penalty where the taxpayer reasonably believed that the information, documents, or answers sought were protected by solicitor-client privilege, or if the amount of tax payable under the Act for each taxation year to which the order relates is less than $50,000.

Under the 2025 proposals, the amount of the penalty was up to 10%. The 2026 proposals have changed the penalty to be equal to 10%. Thus, the CRA would not have discretion with respect to the amount of the penalty to be imposed. This would be an especially harsh result if proposed subsection 231.7(6) were to be interpreted as applying to all tax payable for the taxation year (including amounts already reported and paid), and not just the amounts reassessed following the audit. Under the former interpretation, a taxpayer with $1 million in tax payable for the year would be liable for a penalty of $100,000 even if the audit ultimately finds that the taxpayer’s income was reported correctly and no adjustments are required.

The CRA’s power to grant relief in relation to this new penalty is found in proposed subsection 231.7(10). Under the 2025 proposals, the CRA could only grant relief if a taxpayer objected to the penalty. The requirement for an objection has been removed from the 2026 proposals. The provision has also been changed to clarify that the CRA can also cancel related interest, and that any assessment to implement relief under this provision may be issued beyond the normal reassessment period. Further, under the 2026 proposals, subsection 220(3.1) (which is the general provision granting the CRA authority to cancel or waive penalties and interest) would be amended to specifically exclude from that provision the granting of relief relating to subsection 231.7(6) penalties.

Section 231.9: Notice of non-compliance

Proposed section 231.9 introduces a new power for the CRA: the ability to issue notices of non-compliance (“NoNC”) where the CRA alleges non-compliance with a requirement issued under sections 231.1, 231.2, or 231.6. There would be a penalty of $50 for each day that a NoNC is outstanding, to a maximum of $25,000 (unless the person reasonably believed that the information was protected by solicitor-client privilege). Further, as discussed in more detail below, a taxpayer’s normal reassessment period can be extended through the issuance of a NoNC.

Taxpayers would be able to challenge NoNCs by requesting that the CRA conduct a review. The CRA must vacate the NoNC if it determines that it was unreasonable to issue the NoNC, or if the person had done everything reasonably necessary to comply with the requirement. If a taxpayer requests a review of the NoNC, and the CRA does not notify the taxpayer of its decision within 180 days, the NoNC would be deemed to be vacated.

If the CRA does not vacate the NoNC, the taxpayer would have the right to apply to the Federal Court for judicial review of the CRA’s decision. A judge can confirm the CRA’s decision to issue the NoNC, or vary or vacate the NoNC if the judge determines that the CRA’s decision was unreasonable.

When a NoNC is vacated (either by the CRA or the Federal Court, or because the CRA did not make a timely decision), the NoNC would be deemed to have never been sent or served. Therefore, no penalty under proposed s. 231.9 would apply and the limitation period for assessments would not be affected (except that the period during which the NoNC is under review by the Federal Court would not be counted, discussed below).

New in the 2026 proposals is subsection 231.9(2), which provides that the CRA must obtain a compliance order from the Federal Court before issuing a NoNC in certain circumstances. If a requirement is issued that requires a third party to provide information or documents regarding persons that are not related to the third party, or if a requirement is an unnamed persons requirement, a NoNC cannot be issued until a compliance order is obtained.

Section 231.8: Suspension of the normal reassessment period

Usually, the CRA has the burden to justify a reassessment issued beyond a taxpayer’s normal reassessment period pursuant to subsection 152(4) of the Act. Current section 231.8 excludes certain time periods for the purposes of computing the normal reassessment period. Specifically, the time spent on either a judicial review application by the taxpayer in relation to a requirement or an application for a compliance order by the CRA is not counted.

Under the 2026 proposals, section 231.8 would be expanded. A taxpayer’s normal reassessment period would be suspended for the period of time that a NoNC is outstanding. Significantly, the normal reassessment period would even be suspended for a taxpayer if a non-arm’s length person has a NoNC outstanding for a requirement to provide information in relation to the taxpayer. This creates unfairness because a taxpayer might have no control over whether the non-arm’s length person complies with the requirement, but the taxpayer could nevertheless suffer serious consequences by having their normal reassessment period extended.

If a taxpayer (or non-arm’s length person) applies to the Federal Court for judicial review and a judge vacates the NoNC, the period of time between the day of filing of the application for judicial review and the day it is disposed of would still count toward the extension of the taxpayer’s normal reassessment period. This result is concerning. If a judge has vacated a NoNC, that means that the judge found the CRA’s decision to issue the NoNC to be unreasonable. Yet, the taxpayer’s normal reassessment period would still be extended for the period of time it took to challenge that unreasonable NoNC in court.

Key takeaways

While the 2026 proposals remove one of the most controversial aspects of the previous draft legislation (the ability of the CRA to compel answers under oath or affirmation), they would still represent a significant expansion of the CRA’s audit powers. The penalty in proposed subsection 231.7(6) has the potential to be excessively punitive, with relief only available at the CRA’s discretion. The new NoNC regime contains harsh consequences for alleged non-compliance, particularly the extension of the normal reassessment period. If enacted, the 2026 proposals may make the audit process more complex and costly for taxpayers, especially because they seem likely to create new areas of dispute.

As of the time of writing, Bill C-31 remains before Parliament (having completed its second reading in the House of Commons). It is hoped that continued consideration of these provisions will result in further amendments to the proposals to avoid disproportionately harsh or unfair impacts on taxpayers.