When a Canada Revenue Agency (the “CRA”) audit concludes and a Proposed Assessment issued, it is presented in a “Statement of Proposed Audit Adjustment”.  This document outlines the CRA’s Assessment of the additional taxes owed.  At this stage, significant work needs to take place to try and understand the basis for the Proposed Assessment and attempt to rebut the CRA’s Assessment position. 

Because CRA is the “elephant in the room” (and typically does what it wants to do), where an Assessment is finalized and raised, it is a very signification matter, for the following reasons.

Debt Due and Owing

A finalized CRA Assessment is usually deemed a debt owing to His Majesty, which means that CRA Collections can immediately seek payment:  in the Vaping Duty context, see for example Excise Act, 2001 (“EA 2001”) 188(1) and 284(1.1).   

Fortunately, the EA 2001 has special rules that will effectively delay CRA’s collections efforts on some Assessments, while the matter is being objected to, or before the Courts: see EA 2001 286.  However, there is an important exception: where the amount assessed and unpaid is over $1,000,000, the CRA is permitted to immediately collect up to 50% of the outstanding amount:  see EA 2001 286(8).

Director Personal Liability for Unpaid Amounts

Perhaps even more problematically for a corporate taxpayer’s directors, EA 2001 295 contains special directors’ liability provisions that allow the CRA to pursue any of the corporate tax debtor’s directors personally if the tax debt remains unpaid by the corporation. 

Recent case law has clarified that liability applies to directors who were in office at the time that the tax default underlying the Assessment first occurred.  Consequently, resigning in the face of an audit or Proposed Assessment is not an effective option for dealing with this potential liability.

Dealing with Proposed Audit Adjustment

Typically, as part of the audit process, the CRA allows taxpayers to respond to a Statement of Proposed Audit Adjustment.  In their response, taxpayers can provide additional information and documentation, such as accounting records of vaping products and vaping substances, to address or rebut CRA’s Assessment position.  However, persuading the auditor to change their position at this stage can be difficult, as the same person who proposed the adjustment is responsible for reviewing the additional submissions. In many cases, filing a Notice of Objection is required.  Objection involves the CRA’s Appeals Division, an independent body that reviews and re-evaluates the issue with fresh perspective.

Takeaways

When faced with a Proposed Assessment, tax debtors in these situations are generally required to go “all in” on the assessment.  Disputing the Assessment and pursuing Objections and Appeals, as the case may be, requires careful planning and resources.  The Objection and Appeal processes are often complex, requiring a detailed understanding of both the CRA’s position and the underlying legal framework.

In an upcoming blog, we will review the EA 2001’s Notice of Objection procedures, and share some tips and common pitfalls for the unwary.

Want a PDF copy of this blog?