Privilege and File Management When Dealing with CRA Audits

Privilege and File Management When
Dealing with CRA Audits
LSUC CLE – Taxation Issues for General Practitioners
September 22, 2014

Leigh Somerville Taylor                     Mark Tonkovich
Leigh Somerville Taylor PC                  Baker & McKenzie LLP

Adrienne Woodyard (Moderator)
Davis LLP

1) What is the scope and what are the limits of the CRA’s
audit powers?

 Broad inspection and investigatory powers:

   – Audit and inspection (s. 231.1)
     - “books and records” of “any person” “for any purpose related to
       the administration or enforcement of the Act”
     - Limitations: “dwelling house,” “unable to do so,” “genuine and
       serious inquiry,” protection of privileged documents, unnamed
       persons
                                                                     2

1) What is the scope and what are the limits of the CRA’s
audit powers? (continued)

   – Requirement to provide information (s. 231.2)
    - “record,” “document,” “return”
    - foreign-based information (s. 231.6)
    - Limitations: purpose of requirement, reasonable time for
      production, protection of privileged documents, unnamed
      persons

   – Search warrant (s. 231.3)
                                                                 3

1) What is the scope and what are the limits of the CRA’s
audit powers? (continued)

   – Inquiry (s. 231.4)

 Compelling compliance:

   – Compliance order (s. 231.7)

   – Summary conviction (s. 238)

                                                            4

2) What are the bounds of solicitor-client privilege, and
how does it interact with the CRA’s audit?
- fundamental civil right integral to Canadian legal system
- protects confidential information passing between clients and
  their lawyers, when done for the purpose of seeking or
  obtaining legal advice
- ITA carves solicitor-client privileged information out of the
  reach of CRA’s audit powers, but see “accounting records”
- other forms of privilege also limit audit powers
- narrower than duty of confidentiality (LSUC r. 3.3)
                                                                  5

3) What steps should you and your clients take to protect
privilege when facing a potential audit?
- read all the documents relating to the issue
- consider relevance and privilege
- consider who may have an interest in the documents aside
  from your client that should be protected
 - who is your client? (partner / partnership, corporation / shareholder)
 - unnamed parties, third parties
 - redaction
- consider how information is created, stored and circulated
 - s. 230(1), Rules, “privileged and confidential”
                                                                            6

4) Can you protect solicitor-client privilege when a third
party has to be involved in the file?

- disclosure generally constitutes waiver
- further exception: where disclosure is essential or ‘functionally-
  necessary’ for carrying out legal retainer (e.g. translator)
- calls for a fact-intensive analysis
- best practices if engaging third party (outside litigation):
   1. careful retainer              3. path of communication
   2. documentation                 4. vigilance
                                                                   7

5) Auditors on ‘fishing expeditions’: what are best practices
for handling document disclosure requests that are overly
broad or onerous?

- have a frank conversation with the auditor: gather information,
  identify areas of focus, items under scrutiny
- aim to limit scope, number of issues
- identify duplication in auditor’s request; suggest alternatives,
  “shortcuts”

                                                                     8

5) Auditors on ‘fishing expeditions’: what are best practices
for handling document disclosure requests that are overly
broad or onerous? (continued)

- samples vs. complete records; general ledgers / accounting
  summaries vs. supporting documents
- keep written records of items requested and produced
- net worth audits - increased focus on owner managers

                                                               9

[Polling question]

A. Your client anticipates a CRA audit and would like to
purge some of its tax records. What factors / risks should
they keep in mind?
- client bears onus in most cases
- records must be kept in a form and manner sufficient to
  enable the CRA to determine tax liability
- legible and complete; electronic form
- records may include receipts, invoices, bank documents,
  corporate minutes

                                                             11

A. Your client anticipates a CRA audit and would like to
purge some of its tax records. What factors / risks should
they keep in mind? (continued)

- must be readily accessible (30 day deadline)
- general rule: 6 years after end of last taxation year
- longer retention may be necessary if records are relevant to
  tax liability in later years
- try to develop a document retention policy beforehand

                                                                 12

B. Your client has received a formal requirement from the
CRA's Aggressive Tax Planning unit. What are their
options?

- Essentially: comply or resist? Items to consider:
  1. significance to client
  2. legal validity of requirement
  3. can your client comply?
  4. methods and potential risks of resisting – challenging the
     requirement vs. waiting for CRA enforcement
                                                                  13

C. Your client calls you at 8 AM, panicking: a team from the
CRA has arrived to search and seize all books and
records. What are your first steps?

- consider authorizing provisions (ITA, s. 231.3(1); CCC s. 487)
    - offence alleged?
    - nexus to document or thing and place to be searched?
- advise client respecting extent of obligation to provide
  information or assistance
- identify and contact the lead officer(s)
                                                                   14

C. Your client calls you at 8 AM, panicking: a team from the
CRA has arrived to search and seize all books and
records. What are your first steps? (continued)

- review the warrant (specificity, “reasonable grounds,”
  documents “in plain sight”)
- assert privilege where available (scope, procedure)
- obtain and review information sworn by CRA officer
- consider “predominant purpose,” potential use of seized
  documents

                                                            15

D. The CRA demands that you disclose documents about
one of your clients in the course of a tax audit. What do
you do?
– Best practice: advise client if request pertains to them, unless
  prohibited by law from doing so

– Is the information privileged?
        If clearly not privileged: comply, but disclose no more
        than necessary
                  (LSUC r. 2.03(2), r. 3.3-1.1)
                                                                  16

D. The CRA demands that you disclose documents about
one of your clients in the course of a tax audit. What do
you do? (continued)
– Is the information privileged?
        If arguably privileged:
             1. seek instructions
             2. communicate to CRA
             3. if in court proceeding, file documents under seal

– Keep an eye on: Thompson; Chambre des notaires                    17

Leigh Somerville Taylor
             Leigh Somerville Taylor PC
             (416) 590 2671
             leigh@lstlaw.ca
Questions?   Mark Tonkovich
             Baker & McKenzie LLP
             (416) 865 6984
Thank you.   mark.tonkovich@bakermckenzie.com

             Adrienne Woodyard
             Davis LLP
             (416) 365 3414
             awoodyard@davis.ca