Tax Audits: Best Practices for Recipients of Third-Party RFIs

Requests and requirements for information (RFIs) are among the Canada Revenue Agency’s (CRA) most powerful audit tools. Recent legislative proposals would introduce new administrative penalties for non-compliance with RFIs, increasing the consequences for recipients.

A recent decision of the Federal Court of Appeal in Canada (National Revenue) v. Zeifmans LLP provides helpful guidance for recipients of third-party RFIs in assessing their obligations.

Here are five best practices in the current environment:

1. Assess whose information is being requested. If the CRA is seeking information relating to persons explicitly named in the RFI (named persons), production of the information is likely required to the extent it is within the power, possession or control of the recipient, subject to privilege and other applicable protections. If the CRA seeks information related to persons that are not explicitly named (unnamed persons), further analysis is required.
2. Assess the purpose of the RFI. Where an RFI references unnamed persons, the key question is whether “a purpose” of the RFI is to verify those persons’ compliance with the Income Tax Act. If so, prior judicial authorization is required. Verifying the unnamed persons’ compliance need not be the sole or predominant purpose of the RFI. Even if the RFI is directed at auditing named persons, authorization may still be required if it is also aimed at verifying the compliance of unnamed persons. When determining whose compliance is in focus, relevant considerations include the nature of the information requested, explicit or implicit statements of purpose by the CRA in the RFI or other communications, and any ongoing audits or investigations involving the unnamed persons.
3. Consider the potential use of disclosed information. Information obtained through a validly issued RFI may later be used by the CRA in an audit of a taxpayer, even if verifying compliance of that specific taxpayer was not an original purpose of the RFI. Recipients should consider the potential implications of disclosure for current or future audits or investigations involving unnamed persons.
4. Consider the available avenues for challenge. Challenging an RFI by way of a judicial review and subsequently in compliance order proceedings may raise concerns relating to re-litigation. Recipients should carefully consider the advantages and disadvantages of each avenue. For example, a compliance order proceeding may involve a more favourable standard of review than a judicial review.
5. Preserve and assert privilege. Although not at issue in Ziefmans, privilege remains a powerful defence against disclosure of protected information in the audit context. In some circumstances, privilege can extend to information that has been disclosed to third parties. A thorough privilege review should therefore be conducted before responding to an RFI.

Have more than five minutes? Contact the authors or any other member of our Tax Controversy & Litigation group for further information, and see our previous Five Under 5s outlining the CRA’s expanded powers and key measures that taxpayers should consider in response.