Tax Controversy 2024 Comparisons

Tax controversies in Canada most often arise in the context of an audit, which generally involves a Canadian taxation authority examining the books and records of a taxpayer to confirm that tax liability has been correctly reported. In most cases, the taxation authority conducting the audit is the Canada Revenue Agency (CRA), which is responsible for administering Canada’s federal income tax, most of Canada’s provincial income taxes, and Canada’s value-added tax (known as the Goods and Services Tax/Harmonized Sales tax (GST/HST)) in all provinces other than Québec.

Alberta administers its own provincial corporate income tax, and Québec administers its own provincial income tax system as well as its equivalent of the GST/HST (known as Québec Sales Tax or QST). British Columbia, Manitoba and Saskatchewan administer their own provincial sales taxes, which are traditional retail sales and use taxes (not value-added taxes).

Most Canadian tax controversies arise in the income tax context, and disputes in this area also tend to be the largest in terms of the amounts at issue. A wide range of issues has resulted in tax litigation, including:

• computation of profit;
• interest deductibility;
• corporate reorganisations and corporate control;
• capital versus income;
• transfer pricing;
• entitlement to benefits under Canada’s tax treaties;
• the General Anti-Avoidance Rule (GAAR) and other anti-avoidance rules;
• administrative penalties; and
• entitlement to tax credits, including for scientific research and experimental development (SR&ED).

A significant number of disputes also arise in relation to the GST/HST. While tax controversies do occur in other contexts (eg, provincial sales tax, customs duties, etc), those account for a relatively small portion of total controversies, both in number and in value.

In addition to tax controversies regarding tax liability, disputes also arise in relation to discretionary or other administrative action taken by Canada’s taxation authorities. Such disputes can involve a variety of matters, including:

• the scope of the CRA’s audit powers;
• discretionary relief from interest and penalties; and
• the administration of special programmes, such as the CRA’s tax amnesty programme (known as the Voluntary Disclosures Program).

The potential for tax controversy in Canada can be reduced by meeting applicable compliance obligations, and by reporting taxable income in a manner that is consistent with the applicable tax laws and the administrative positions taken by the Canadian tax authorities.

In recent years, Canadian tax authorities have been particularly focused on combating tax evasion and “aggressive tax avoidance”, and recent legislative amendments will broaden the scope of Canada’s GAAR. 

Legislative proposals have also been introduced to target cross-border tax-planning strategies, such as hybrid mismatch arrangements, where transactions give rise to a deduction in one jurisdiction without a corresponding income inclusion in the other. In general, transactions designed to minimise Canadian tax through creative structures that test the limits of the law are almost certain to attract greater scrutiny on audit. 

Tax controversies in Canada also frequently arise due to incomplete or inaccurate books and records, and as a result of miscommunication with the tax authorities. 

Persons carrying on a business or engaged in a commercial activity in Canada are generally required to maintain books and records containing sufficient information to allow the determination of their tax liabilities and obligations. Taxpayers should therefore maintain a robust record-keeping system and, when undertaking significant transactions, should take steps to ensure that all relevant documentation is preserved.

To reduce the risk of miscommunication with the tax authorities, it is advisable to retain qualified Canadian tax counsel at the outset of an audit.

Canada has adopted or has announced its intention to adopt a number of measures stemming from the OECD’s Inclusive Framework initiative, including:

• country-by-country reporting rules;
• the OECD’s Multilateral Convention (MLI) implementing tax treaty-related measures to prevent base erosion and profit shifting (BEPS);
• legislative proposals to address hybrid mismatch arrangements;
• legislative proposals to limit the deduction of excessive interest and financing expenses;
• legislative proposals to enact a digital services tax, effective 1 January 2024 (in the event that a multilateral treaty implementing the Pillar One tax regime has not come into force); and
• legislative proposals to enact the Pillar Two global minimum tax by way of a domestic minimum top-up tax and an undertaxed profits rule. 

In addition, recent legislative amendments expanded the scope of the existing mandatory reporting/reportable transactions regime, introduced new requirements to report “notifiable transactions” as well as uncertain tax treatments and positions, and broadened the scope of Canada’s GAAR (as discussed in the Trends and Developments article).

While it is too early to assess the extent to which these legislative developments will contribute to an increase or reduction in tax controversy in Canada overall, disputes are expected to arise regarding the interpretation of the new rules themselves.

Where an assessment of Canadian federal or provincial tax has been made by the tax authorities, taxpayers should consider:

• their obligation to pay any outstanding tax, interest or penalties; and
• their right to contest the assessment.

In Canada, these matters are generally distinct – there is no concept of “pay to play”, where payment must be made in order to pursue an objection or appeal.

Any balance owed as a result of a notice of assessment or reassessment issued under either the federal Income Tax Act (ITA) or Part IX of the federal Excise Tax Act (ETA), which governs the GST/HST, is payable forthwith. However, various rules may limit the powers of the Canadian tax authorities to collect, depending on the type of taxpayer and the nature of the balance. For example, collection powers are generally suspended if the taxpayer contests the assessment by filing a notice of objection (see 3. Administrative Litigation). However, if the taxpayer is a “large corporation” (where the “taxable capital employed in Canada” of the corporation and all related corporations is greater than CAD10 million), special rules permit the collection of 50% of the amount in controversy. Certain types of balances, including amounts withheld from employee payroll, GST/HST and non-resident withholding taxes, are collectible without restriction.

Canadian tax authorities generally have the discretion to accept security for payment, and may also agree to payment arrangements or defer collection action entirely in appropriate cases. Where security is proposed, the CRA will normally request a letter of guarantee or standby letter of credit issued by a Canadian bank or a subsidiary of a foreign bank operating in Canada. Acceptability of other forms of security is determined on a case-by-case basis, and can be the subject of negotiations with the tax authorities.

Where a balance resulting from an assessment has not been paid, arrears interest will continue to accrue. Canadian tax laws do not generally provide for the imposition of additional penalties for the failure to pay an outstanding balance. However, in the absence of a payment arrangement or the provision of acceptable security, the CRA may take various actions to collect amounts owed, including garnishing income or bank accounts, asset liens, seizures and third-party assessments.

The CRA generally employs risk-assessment systems to identify tax returns for audit. The risk assessment can take various factors into account, such as past compliance history, business complexity and information obtained from auditing or investigating other taxpayers. Taxpayers may also be selected for audit randomly.

It is understood that the CRA is increasingly developing and relying on advanced analytics and predictive models in the identification of non-compliance. The CRA has stated that these models use machine-learning techniques to identify potential areas of non-compliance by discovering unseen patterns in data. One example of this is the CRA’s Integrated Risk Assessment System (IRAS), which analyses taxpayer information from CRA databases and applies sophisticated algorithms to assess the risk of tax non-compliance of large businesses. The CRA has also stated that it is implementing “social network analysis” to automate the identification of links between individuals and businesses.

The CRA may initiate an audit at any time, and there is no limit on how long an audit may last. However, the duration of an audit is often limited in practice by an applicable limitation period for reassessment. 

Under the ITA, the statutory limitation period for reassessments (referred to as the “normal reassessment period”) begins when the initial “notice of assessment” for a particular taxation year is issued and runs for the following three or four years, depending on the type of taxpayer. This period may be extended by an additional three years in certain circumstances, such as where an assessment relates to a transaction with a non-arm’s length, non-resident person.

However, there is no limitation period for certain types of assessments (eg, non-resident withholding tax), and reassessments can be made after the expiry of the normal reassessment period where there has been a misrepresentation attributable to neglect, carelessness or wilful default. A taxpayer may also voluntarily waive the normal reassessment period. Similar rules apply to GST/HST assessments made under Part IX of the ETA.

Audits are generally commenced by the CRA’s Compliance Programs Branch (“CRA Audit”) sending a letter informing the taxpayer that particular taxation years have been selected for audit, and requesting the production of relevant information and documents. Prior to the COVID-19 pandemic, it was more common for CRA auditors to visit taxpayers’ premises and spend significant time there reviewing records. In recent years, most CRA auditors have conducted their reviews remotely. However, the CRA has recently announced plans to reinstate audits on-site.

Taxpayers are generally permitted to provide information and documents in print or electronic form. However, some CRA auditors will require that taxpayers provide documents in a particular form, and the CRA is increasingly encouraging taxpayers to provide information and documents digitally.

The CRA has extremely broad audit powers, and may require production of any non-privileged domestic or foreign-based information and documents within the taxpayer’s possession or control, including documents relevant to taxation years outside the identified audit period. Recent legislative amendments stipulate that the CRA can require taxpayers to answer “all proper questions” and provide “all reasonable assistance” for any purpose relating to the administration or enforcement of the ITA, including by submitting to oral questioning at any place designated by the CRA. A detailed review of the CRA’s audit powers and their limits is beyond the scope of this guide.

In recent years, heightened audit activity has been observed in the following areas:

• compliance with Canada’s foreign reporting requirements;
• aggressive tax avoidance and tax evasion using offshore entities;
• transfer pricing and cross-border financing;
• benefits under Canada’s tax treaties;
• transactions involving cryptocurrency;
• tax scheme promoters;
• high net worth individuals and their related entities;
• aggressive GST/HST planning involving refund and rebate claims (and suspected “carousel” fraud); and
• benefits provided under COVID-19 programmes, including (in particular) the Canada Emergency Wage Subsidy.

Canada’s tax treaties generally provide that the competent authorities of the contracting states shall exchange information relevant to carrying out the treaty or to the administration or enforcement of Canada’s domestic tax laws. While it is difficult to be certain, increased co-operation between Canada and other jurisdictions appears to have had a corresponding impact on the frequency and effectiveness of CRA audit activity relating to foreign assets and offshore transactions. Notably, a request by the CRA for assistance from the Swiss tax authorities was recently the subject of unsuccessful challenges in both Canada and Switzerland (see Levett v Canada (Attorney General), 2022 FCA 117).

In general, consideration should be given to the following points:

• the involvement of outside tax counsel and other tax advisers in Canada;
• determining who will be the main point of contact with the auditor;
• where, when and how the audit will be conducted;
• optimising the presentation of facts and issues, with a view to controlling the record and minimising the risk of unfavourable adjustments or expansion of the scope of the audit;
• managing the extent of CRA requests for information and documents, and determining whether and when to challenge such requests;
• the provision of limitation-period waivers;
• circumstances involving referrals to other branches of the CRA (eg, the Income Tax Rulings Directorate or the Transfer Pricing Review Committee); and
• consequential impacts of proposed adjustments on other taxation years.

Notices of Assessment, Reassessment and Objection

The CRA will generally assess the tax payable for a taxation year shortly after the taxpayer files their return for the year, and will send the taxpayer a “notice of assessment”. This initial assessment usually reflects the information reported in the taxpayer’s return. If the CRA later audits the taxpayer and makes adjustments that impact on tax liability, the CRA will reassess the tax payable for the taxation year and send a “notice of reassessment”. 

Taxpayers wishing to contest an assessment or reassessment are required to serve the CRA with a “notice of objection” addressed to the “Chief of Appeals”. Notices of objection are generally required to set out the reasons for the objection and all relevant facts, and may be filed by delivering or mailing a copy to a CRA Tax Services Office or Tax Centre, or through the CRA’s online My Account and My Business Account services (as applicable).

Special Rules Applicable to Large Corporations

If the taxpayer is a “large corporation” (where the “taxable capital employed in Canada” of the corporation and all related corporations is greater than CAD10 million), the notice of objection must:

• reasonably describe each issue to be decided;
• specify the relief sought in respect of each issue, expressed as the amount of a change in a balance; and
• provide facts and reasons relied on by the corporation in respect of each issue.

The failure of a large corporation to raise a specific issue and request corresponding relief can result in the corporation being precluded from raising the issue or obtaining relief in a subsequent judicial appeal. These rules have frequently been the subject of litigation, and large corporations are therefore well advised to consult with qualified Canadian tax advisers when filing notices of objection.

Deadline to Object and Extensions of Time

A notice of objection must generally be filed within 90 days of the sending of the relevant notice of (re)assessment. 

If a taxpayer fails to object within the 90-day period and not more than one year has passed since the expiry of that period, the taxpayer may apply to the CRA for an extension of time to object. To be considered valid, an application for an extension of time must set out the reasons why the notice of objection was not filed within the normal time period, and must demonstrate that the taxpayer made the application as soon as circumstances permitted and that, within the normal time period, the taxpayer either:

• was unable to act or instruct another to act in their name; or
• had a bona fide intention to object to the assessment.

If the CRA refuses to grant an extension of time to object, the taxpayer has the right to appeal the refusal to the Tax Court of Canada (the “Tax Court”). 

Notices of objection are considered by the CRA’s Appeals Branch (“CRA Appeals”), which is a division of the CRA separate from CRA Audit. As of February 2024, the CRA has reported that medium-complexity income tax cases were being completed in an average of 301 days, and that high-complexity cases (representing 2%–3% of the CRA’s Objections Program workload) may take over 690 days. In practice, it routinely takes the CRA more than two years to assign an Appeals Officer to a high-complexity case.

While filing a notice of objection is a mandatory step in the dispute resolution process, taxpayers are not obligated to conclude the administrative appeals process before commencing a judicial appeal to the Tax Court (see 4.1 Initiation of Judicial Tax Litigation). 

To initiate an appeal to the Tax Court, the taxpayer must file a “notice of appeal” that sets out:

• the details of the assessment under appeal;
• the material facts relied upon;
• the issues to be decided;
• the statutory provisions and reasons relied upon; and
• the relief sought. 

Proceedings in the Tax Court may be initiated where the CRA has considered a taxpayer’s objection and confirmed the disputed (re)assessment, or has issued a new reassessment. Taxpayers also have the right to terminate the administrative appeals process and appeal directly to the Tax Court where a notice of objection has been filed and 90 days have elapsed without the CRA having made a decision. “Fast-tracking” the dispute in this manner may be appropriate where, for example, the assessment under objection reflects the CRA’s institutional policy with respect to the interpretation of a particular provision, and the administrative appeals process is therefore unlikely to result in a satisfactory resolution.

A notice of appeal must generally be filed within 90 days of the CRA issuing a notice of confirmation or reassessment. If a taxpayer fails to appeal within the 90-day period and not more than one year has passed since the expiry of that period, the taxpayer may apply to the Tax Court for an extension of time. In order for such an application to be granted, the taxpayer must generally satisfy the same criteria that apply to an application for an extension of time to object (see 3.1 Administrative Claim Phase).

Appeals in the Tax Court may be governed by either the Informal Procedure rules or the General Procedure rules. For income tax appeals, the Informal Procedure is limited to cases in which the amount of federal tax and penalties in dispute for each taxation year, excluding interest, is CAD25,000 or less and to cases in which the amount of a loss in question is CAD50,000 or less. 

The following discussion, which generally pertains to appeals under the General Procedure, is intended to be summary in nature, and does not address interlocutory steps such as status hearings, motions and case-management conferences. This guide also does not address the procedure for challenging discretionary decisions or other administrative action taken by the Canadian tax authorities.

Upon receipt of the notice of appeal and a filing fee, the Tax Court will serve the notice of appeal on the opposing party (the “respondent”). Formally, the respondent is Canada’s head of state, King Charles III, as represented by the Attorney General of Canada. In practice, the respondent is represented by one or more lawyers from Canada’s Department of Justice (“DOJ Counsel”), who are instructed by a CRA litigation officer.

After service of the notice of appeal, the respondent has 60 days in which to file a reply to the notice of appeal. In the reply, the respondent is required to state whether the respondent admits, denies or has no knowledge of each fact pleaded in the notice of appeal. The respondent must also set out the assumptions of fact made by the CRA in assessing the taxpayer, and any additional facts relied upon. 

After a reply has been served, the taxpayer has 30 days in which to file an optional pleading, referred to as an “answer”. 

Discovery Phase

The second phase of a Tax Court appeal is the “discovery phase” and has two components: documentary discovery and examinations for discovery.

Documentary discovery involves the service and filing of a list of documents, and the production of those documents to the opposing party. By default, it is only necessary to include those documents that might be used in evidence, either in establishing the party’s own case or in rebutting the opposing party’s case. However, either party may apply to the court for an order directing full disclosure of all documents relevant to any matter in issue.

Examination for discovery will generally involve the oral examination of the taxpayer (where the appellant is an individual) or a nominee (where the appellant is a corporation, trust or partnership). The nominee for the respondent is, in most cases, the auditor who recommended the adjustment(s) in dispute or the appeals officer who confirmed the disputed assessment. 

Prior to the COVID-19 pandemic, oral examinations were generally held in person. During 2020, 2021 and 2022, many examinations were instead conducted virtually on platforms such as Zoom or Microsoft Teams. It is now relatively common for examinations to be conducted in a hybrid format, where some participants attend in person and others attend virtually. Examinations for discovery may also be conducted in writing, particularly where the amounts in dispute are modest, but this is less common.

Examinations are often extensive and can range in length from several hours to several weeks. Where the answers to questions are initially not known or additional production of documents is requested, counsel may undertake to provide a response at a later time in writing, which will usually lead to additional follow-up questions. This process generally unfolds over a period of several months and is ordinarily governed by a timetable order issued by the court.

Settlement Conferences

Following the completion of the discovery phase, either party may request a settlement conference moderated by a judge of the court. 

A settlement conference is an off-the-record meeting in which the parties have the opportunity to present their arguments in summary form and receive a judge’s perspective on the merits of their respective positions. In the event that the appeal does not settle, the judge that presided over the settlement conference cannot preside over the hearing.

Where a settlement conference is scheduled, each party is required to file a “settlement conference brief” that summarises the party’s case, including their theory of the case and the manner in which material facts will be proven. The format of the settlement conference itself is at the discretion of the presiding judge, who may consult with the parties as to their preferences.

Hearing and Decision

A Tax Court hearing takes place before a single judge assigned by the Chief Justice of the court. In most cases, the taxpayer bears the burden of proof and will present their case first. 

Counsel will generally begin with a brief opening statement, and will then proceed to call their witnesses (if any). Each witness called by taxpayer’s counsel will be examined first by the taxpayer’s counsel (the “examination-in-chief”) and then by DOJ Counsel (the “cross-examination”). Witnesses may include individuals with direct knowledge of events at issue, as well as expert witnesses. A party calling an expert witness must, among other things, serve an “expert report” on the other party at least 90 days before the hearing.

Following the presentation of the taxpayer’s case, including documentary evidence relied upon, DOJ Counsel will present the government’s case in the same manner. Counsel for each party will then have the opportunity to present legal arguments.

At the end of the hearing, the judge will either deliver their decision orally or, in most cases, reserve the decision to be rendered later in writing. There is no time limit for a decision to be rendered, but in a typical case the decision will be released within approximately three to nine months.

See 4.2 Procedure for Judicial Tax Litigation.

The taxpayer generally bears the burden of proof in civil tax litigation proceedings in Canada. In particular, the taxpayer has the burden of establishing, on a balance of probabilities, each material fact stated in the notice of appeal. In addition, assumptions of fact made by the CRA in assessing the taxpayer or in confirming an assessment are presumed to be true unless the taxpayer can either disprove them or establish that such assumptions were not in fact made by the CRA. 

The respondent will have the burden of establishing the material facts necessary to support a reassessment made after the expiry of the normal reassessment period or necessary to justify the imposition of certain penalties, including gross negligence penalties. The respondent also has the burden of proving any additional facts alleged in the reply that were not assumed by the CRA.

Throughout the Tax Court process, taxpayers and their counsel will be presented with opportunities to make strategic decisions that may significantly affect the trajectory of the appeal. These will generally include:

• how to present material facts, issues and reasons in the notice of appeal; 
• the appropriate nominee to be examined for discovery;
• during the examination for discovery, the extent to which it is appropriate to limit DOJ Counsel’s questions and the manner in which to examine the respondent’s nominee;
• whether and when to bring motions (eg, where the respondent’s pleadings or responses to discovery questions are deficient);
• whether and when to actively pursue settlement discussions, extend a settlement offer, disclose legal analysis in an effort to encourage settlement, or request a settlement conference;
• which witnesses should be called to testify at the hearing, including whether to call one or more expert witnesses; and
• which legal authorities should be relied upon at the hearing, and how they should be presented to the court.

Canadian courts are bound by applicable Canadian statutes and regulations, treaties to which Canada is party, and the jurisprudence of higher Canadian courts. In the case of the Tax Court, these higher courts are the Federal Court of Appeal (FCA) and the Supreme Court of Canada (the “Supreme Court”). Each of these courts will generally follow their own precedents, but has the authority to depart from them when they consider it appropriate to do so.

Jurisprudence of international courts and courts of other jurisdictions, secondary sources (eg, academic articles), government documents (eg, published administrative positions of the CRA) and international guidelines (eg, the OECD’s Transfer Pricing Guidelines) may be considered persuasive but are generally not binding. This notwithstanding, the authors note that the ITA provides that certain provisions be interpreted consistently with international guidelines (see, for instance, Section 270(2), which relates to the Common Reporting Standard).

Decisions of the Tax Court may be appealed to the FCA as of right. Decisions of the FCA may be appealed to the Supreme Court if the Supreme Court grants leave (ie, permission) to do so. Since the Supreme Court grants applications for leave to appeal in very few taxation cases, the FCA is most often the court of last resort for Canadian tax disputes. 

A party may appeal to the FCA by filing a notice of appeal within ten days (in the case of an interlocutory judgment) or 30 days (in all other cases) of the relevant decision of the Tax Court. The 30-day time limit does not include any days in July and August. The notice of appeal must include a statement of the relief sought and the grounds intended to be argued, among other things. 

The FCA will only allow a party to present new evidence in special circumstances (eg, where the evidence could not have been adduced at trial with the exercise of due diligence, and where it meets certain other requirements).

Where the appellant alleges that the lower court erred in answering a question of fact or of mixed fact and law (eg, determining whether a particular legal test was satisfied in a specific situation), the appeal will only be successful if the FCA determines that the lower court made a palpable and overriding error. On the other hand, where the appellant alleges that the lower court made an error of law (eg, applying the wrong legal test), the FCA will determine the appeal on the standard of correctness. 

Before the FCA schedules a hearing, each party must file a memorandum of fact and law containing:

• a concise statement of fact;
• a statement of the points in issue;
• a concise statement of submissions;
• a concise statement of the order sought, including any order concerning costs; and
• a list of the authorities to be referred to.

An FCA hearing takes place before a panel of three judges selected by the FCA’s Chief Justice, and is typically scheduled to last between two and four hours. Each side is given an opportunity to orally argue their case and to answer questions from the court. At the conclusion of the hearing, the court will either deliver the decision orally or (in most cases) reserve the decision to be rendered later in writing.

A party wishing to appeal a decision of the FCA to the Supreme Court must file an application for leave to appeal within 60 days of the date of the FCA’s judgment. The application must include a memorandum of fact and law, among other things. Applications for leave to appeal will only be granted where the court is of the opinion that the matter deals with issues of law that are of public importance, or that are of such nature or significance as to warrant a decision by the court.

A Supreme Court hearing will typically be heard by at least seven of the court’s nine judges. The specific composition of the panel is determined by the Supreme Court’s Chief Justice. At the conclusion of a hearing, the Supreme Court may render its decision orally, or may reserve its decision to be issued in writing. Where a decision is reserved, the Supreme Court’s written reasons are released on average six months after the hearing.

See 5.2 Stages in the Tax Appeal Procedure.

Canada does not currently have any formal alternative dispute resolution mechanisms for domestic tax disputes.

There is no applicable information in this jurisdiction.

Canada’s Minister of National Revenue has broad statutory discretion to waive or cancel interest and penalties arising under the ITA or in relation to GST/HST. The CRA’s published administrative position is that this discretion will normally only be exercised in “extraordinary circumstances” (eg, where there is an inability to pay or financial hardship, or where the interest/penalties arose due to delay or other actions of the CRA). The Minister’s discretion to grant relief is limited to any period that ended within ten years before the calendar year in which a request is submitted or an income tax return is filed. 

The CRA also operates a Voluntary Disclosures Program, under which the Minister grants relief on a case-by-case basis to taxpayers who voluntarily come forward to correct errors or omissions in their tax filings. In exceptional circumstances, it is also possible obtain a remission order under Canada’s Financial Administration Act, which can provide relief from any tax, interest, penalties or other debt paid or payable under legislation administered by the CRA.

A review of the procedures for requesting discretionary relief under the ITA, Part IX of the ETA or the Financial Administration Act, and for disputing ministerial decisions in this regard, is beyond the scope of this guide.

Taxpayers may seek to avoid income tax disputes by requesting either an income tax technical interpretation or an advance income tax ruling from the CRA. Similar services are also available with respect to GST/HST questions arising under Part IX of the ETA.

A technical interpretation is generic in nature and provides the CRA’s interpretation of specific provisions of the legislation. It is not intended to be determinative of the tax consequences for a particular taxpayer. 

In contrast to a technical interpretation, a ruling is a written statement that confirms how the CRA’s interpretation of specific provisions applies to a definite transaction or series of transactions contemplated by a taxpayer. A ruling is generally regarded as binding on the CRA with respect to the recipient taxpayer and the described transactions, to the extent that there is no material omission or misrepresentation in the statement of relevant facts, proposed transactions or other information described in the ruling. 

Disputes have arisen in cases where issues that were outside the scope of the ruling were subsequently raised by the CRA on audit. It should also be noted that rulings are administrative in nature and are not legally binding. While rare, there may be circumstances where the CRA seeks to resile from a ruling. It often takes significantly longer than the CRA’s published service standard of 90 days to obtain a ruling, particularly in complex cases.

The CRA will not issue either a technical interpretation or a ruling where the request relates to a matter that is under audit, under objection or the subject of a current or completed court process. It is generally advisable to seek assistance from counsel or other tax professionals in requesting a technical interpretation or ruling.

There is no applicable information in this jurisdiction.

There is no applicable information in this jurisdiction.

Both the ITA and Part IX of the ETA provide for administrative penalties, which are monetary in nature and are assessed by the CRA in the same way as additional tax liability. The circumstances in which penalties may be imposed vary and include (among other things) where a taxpayer:

• has failed to file a return as and when required;
• has repeatedly failed to report income; or
• has knowingly, or under circumstances amounting to gross negligence, made a false statement or omission in a return or other document.

The fact that the CRA disagrees with the manner in which the taxpayer computed their payable tax is, by itself, currently not sufficient to assess a penalty, nor is the fact that the GAAR or a specific anti-avoidance rule applies to transactions undertaken by the taxpayer . However, once enacted, pending legislative amendments will create a new 25% penalty where the GAAR will apply. 

Where the taxpayer’s misconduct is more serious, they may be investigated and charged with a criminal offence and, if convicted, may be liable to fines or imprisonment. The most serious tax offences are commonly described as “tax evasion”, and include:

• participating in, assenting to or acquiescing in the making of false or deceptive statements in a return, certificate, statement or answer;
• destroying, altering, mutilating, secreting or otherwise disposing of the records or books of account of a taxpayer to evade payment of a tax;
• making, assenting to or acquiescing in the making of false or deceptive entries in records or books of account of a taxpayer;
• wilfully, in any manner, evading or attempting to evade compliance with the ITA/ETA or payment of taxes imposed by the ITA/ETA; or
• conspiring with any person to do one of the things described above.

Administrative penalties may be assessed automatically (eg, due to a return being late-filed) or may be proposed and assessed as a result of an audit (see 2. Tax Audits).

Criminal tax investigations are generally handled by officers of the CRA’s Criminal Investigations Division (“CRA Investigations”). An investigation may be initiated as a result of a referral from CRA Audit or as a result of a lead originating from another source.

When the predominant purpose of a CRA inquiry becomes investigation for purposes of prosecution rather than assessment of tax and administrative penalties, the taxpayer’s rights under the Canadian Charter of Rights and Freedoms are engaged and the CRA is prohibited from using its ordinary civil audit powers. Because of this, if CRA Investigations wishes to perform a search of the taxpayer’s property, it must first obtain the proper legal authorisation (eg, a search warrant). Similarly, if CRA Investigations wishes to interview the taxpayer under investigation, it must advise the taxpayer of their constitutional right not to self-incriminate. If CRA Investigations does not follow the proper procedures, any evidence obtained may be inadmissible in court.

Where taxability is relevant to the offence (eg, in a tax evasion case), Canadian courts have held that the taxability must be clear, obvious and indisputable, as a criminal court is not the forum for such an issue to be determined. Accordingly, it is rare for charges to be brought in a case where there is any likelihood of a dispute regarding whether tax was owed.

If CRA Investigations concludes that prosecution may be warranted, the matter will be referred to the Public Prosecution Service of Canada (PPSC), the federal agency that prosecutes cases under federal statutes. If the PPSC prosecutor is satisfied that there is a reasonable prospect of a conviction and that it would be in the public interest to prosecute, the PPSC will lay charges in the appropriate provincial court or provincial superior court. At this point, the prosecution of a tax offence generally resembles that of any other criminal offence.

See 7.2 Relationship Between Administrative and Criminal Processes.

A taxpayer wishing to challenge an administrative penalty must follow the same procedure that is used to challenge an assessment of tax (see 3. Administrative Litigation and 4. Judicial Litigation: First Instance).

Criminal offences are tried in Canada’s provincial courts or provincial superior courts.

In order for a person to be convicted of a tax evasion offence, the prosecution must prove, beyond a reasonable doubt, all of the elements of the alleged offence, including that the person had the necessary criminal intent. In contrast, where a person is charged with one of the less serious criminal offences provided for in the ITA/ETA (eg, failing to file a return as and when required, and other “strict liability” offences), it is not necessary to prove criminal intent. A person charged with a strict liability offence may nonetheless avoid liability if they can establish that they were duly diligent. In certain cases, prosecutors may instead charge a taxpayer with fraud or another offence set out in Canada’s Criminal Code.

The less serious criminal tax offences may only be prosecuted as “summary offences”, which carry a lighter penalty and are tried in Canada’s provincial courts before a judge alone. Tax evasion offences are summary offences by default, but at the option of the prosecutor may be upgraded to “indictable offences”, which carry more serious potential penalties and entail a more complex judicial procedure (eg, the possibility of a trial by jury).

If a person is convicted of a summary offence by a provincial court and wishes to challenge the conviction or sentence, they may appeal to the relevant provincial superior court. A person convicted of an indictable offence by a provincial superior court would appeal instead to the relevant provincial court of appeal. If the person’s appeal is dismissed, they would appeal to the next level of court (ie, the relevant provincial court of appeal, or the Supreme Court).

If a person is acquitted of a criminal offence or is believed to have received an insufficient sentence, the prosecution may also, in certain circumstances, appeal the decision. However, their right to do so is much more restricted.

A person charged with a tax offence does not have an automatic right to reduce any potential fines by making payment of taxes owed. However, promptly and voluntarily paying all taxes, administrative penalties and interest owed may be viewed favourably by the court in deciding what sentence to impose.

Prior to charges being laid, it is common for the PPSC to offer an “early resolution” of the matter in order to avoid the time and expense of a trial. Such an offer may include a proposal that the taxpayer plead guilty to certain charges in exchange for other charges being dropped, or a recommendation that a lighter-than-normal sentence be imposed.

See 7.5 Possibility of Fine Reductions.

See 7.4 Stages of Administrative Processes and Criminal Cases.

At present, transactions that have been challenged in Canada under the GAAR or under a specific anti-avoidance rule have not given rise to administrative or criminal tax cases. With respect to transfer pricing, penalties may apply where the taxpayer has not complied with certain rules regarding contemporaneous documentation and the provision of such documentation to the CRA when requested.

Canada has adopted the minimum standards in the MLI for resolving treaty-related disputes, requiring it to implement a mutual agreement procedure (MAP) under which the competent authorities of each jurisdiction are required to attempt to resolve disputes within three years of notification. Additionally, Canada has opted into the mandatory arbitration procedures under the MLI, such that the “final offer” arbitration process operates as the default mechanism for addressing double taxation.

Where competent authority relief is requested under the MAP of an applicable treaty, taxpayers are responsible for taking steps to prevent affected taxation years from becoming statute-barred under the ITA. This can be accomplished either by filing waivers or, more often, by filing a notice of objection on a protective basis. For additional information in this regard, see 3. Administrative Litigation.

In its published administrative guidance, the CRA has indicated that it will not consider certain cases for negotiation, including cases involving notional income adjustments or thin capitalisation, or where the underlying assessment relies on a domestic anti-avoidance provision. In any circumstances where the CRA may decide not to entertain a request under the MAP, taxpayers may instead opt to challenge the assessment solely under Canada’s domestic litigation process. Notably, the CRA’s conduct in relation to its obligations under Canada’s treaties has resulted in administrative law challenges in several cases.

Provided that the taxpayer has filed a notice of objection, the taxpayer retains the right of appeal to the Tax Court in the event that the competent authorities do not resolve the issues or the taxpayer decides to reject a competent authority agreement. However, taxpayers are administratively not permitted to proceed with either a notice of objection or an appeal to the Tax Court while the matter is under competent authority consideration.

Canada’s domestic GAAR has applied explicitly to Canada’s tax treaties since at least 2005, and arguably since the advent of the GAAR in 1988. Nonetheless, one might expect that the principal purpose test (PPT) introduced by the MLI, coupled with the amended preamble to covered tax agreements, will have an impact on the way Canadian tax authorities and courts approach cases involving BEPS in cross-border situations. 

Canada’s domestic GAAR applies to deny a tax benefit in an associated avoidance transaction where it may reasonably be considered that the transaction would result directly or indirectly in a misuse of the provisions of the domestic legislation or tax treaty, or in an abuse having regard to those provisions read as a whole. 

The PPT, on the other hand, provides that a benefit under a covered tax agreement shall not be granted if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction, unless it is established that granting the benefit in these circumstances would be in accordance with the object and purposes of the relevant provisions of the covered tax agreement. 

The difference between the GAAR and PPT is subtle but potentially significant, in that the GAAR places the burden of establishing a misuse or abuse on the government of Canada, whereas the PPT appears to place the burden on the taxpayer to establish that obtaining the benefit aligns with the object and purposes of the relevant provisions. 

In Canada, the vast majority of transfer pricing disputes are resolved through the MAP under Canada’s existing tax treaties. A relatively small number of cases have been resolved through the domestic litigation process.

Canada has a well-established Advance Pricing Agreement (APA) programme, which is administered by the Competent Authority Services Division of the CRA. The objective of the APA programme is to assist taxpayers in preventing transfer pricing disputes by negotiating bilateral APAs or multilateral APAs that govern the determination of business profits in Canada from cross-border intercompany transactions. While unilateral APAs can be obtained, they are generally not preferred due to the potential for double taxation.

The process for obtaining an APA in Canada includes the following stages:

• submission of a pre-filing meeting request;
• CRA review of the pre-filing package
• pre-filing meeting
• the formal APA request;
• a conditions letter issued by the CRA;
• the detailed APA submission;
• review, analysis and evaluation by the CRA; 
• preparation of the CRA position paper and government-to-government negotiations;
• presentation of the proposed arrangement to the Canadian taxpayer and their foreign related party; and
• finalising the agreement.

Although Canada’s APA programme is well established, the time and costs involved in pursuing an APA generally mean that the programme will normally only be accessed by large multinationals that are frequently subject to Canadian transfer pricing audits. Notably, for 2022 (the most recent year for which statistics are publicly available), the CRA reported only 26 new applicants to the programme, ten completed cases (eight of which were bilateral) and a closing inventory of 89 active cases in progress. The CRA also reported that the average time for completing a bilateral APA was 37 months, down from 49.4 months in 2021 as delays from the COVID-19 pandemic subsided. The significant time required means that many agreements are implemented – at least partly – on a retroactive basis. 

The CRA also administers an APA programme for small businesses, which is designed to reduce the time and cost of the traditional APA process described above. However, the programme is only for unilateral APA requests, and is generally limited to requests from taxpayers with gross revenues of less than CAD50 million or a proposed covered transaction with a reported value of less than CAD10 million.

Canadian tax litigation in cross-border situations can arise in relation to disputes involving transfer pricing and related issues regarding the assessment of withholding tax on cross-border transactions. Recent decisions, including the FCA’s decision in Canada v Cameco Corporation, 2020 FCA 112, involved the interpretation and application of the recharacterisation rules in paragraphs 247(2)(b) and (d) of the ITA. Those rules provide a mechanism for the Minister to determine arm’s length prices based on substituted transactions in circumstances where:

• a transaction or series of transactions would not have been entered into between persons dealing at arm’s length; and
• it can reasonably be considered not to have been entered into primarily for bona fide purposes other than to obtain a tax benefit.

A number of cases involving the application of these rules to hybrid cross-border financing arrangements are currently pending in the Tax Court.

In addition to transfer pricing, cross-border situations have also generated tax controversy in relation to:

• treaty shopping (see 8.2 Application of GAAR/SAAR to Cross-Border Situations);
• beneficial ownership for purposes of Canada’s tax treaties (eg, Husky Energy Inc v Canada, 2023 TCC 167); and
• Canada’s regime for taxing income earned by foreign affiliates of Canadian companies (eg, Canada v Loblaw Financial Holdings Inc, 2021 SCC 51).

Disputes have also arisen in relation to the scope of the CRA’s audit powers relating to foreign-based information (see 2.5 Impact of Rules Concerning Cross-Border Exchanges) and Canada’s foreign reporting requirements.

There is no applicable information in this jurisdiction.

There is no applicable information in this jurisdiction.

There is no applicable information in this jurisdiction.

There is no applicable information in this jurisdiction.

As of 16 December 2022, Canada’s competent authority had settled the mode of application of the provisions contained in Part VI of the MLI with the competent authorities of 22 other countries, including most EU jurisdictions. The “final offer” arbitration process (otherwise known as “last best offer” or “baseball” arbitration) will apply as the default type of arbitration process to Canada’s covered tax agreements.

Canada reserved the right to not apply independent opinion arbitration. In cases where one of its treaty partners to a covered tax agreement reserves the right to not apply final offer arbitration, Canada and its treaty partner will endeavour, in accordance with Article 23(3) of the MLI, to reach an agreement on the type of arbitration process that will apply. In these cases, Article 19 will not apply between Canada and the treaty partner until such agreement is in place.

Canada reserved the right to limit the scope of issues eligible for arbitration under the MLI to the following: 

• issues arising under provisions akin to Article 4 (Resident) of the OECD Model Tax Convention (the “OECD Model”), but only in so far as the issue relates to the residence of an individual; 
• issues arising under provisions akin to Article 5 (Permanent Establishment) of the OECD Model; 
• issues arising under provisions akin to Article 7 (Business Profits) of the OECD Model; 
• issues arising under provisions akin to Article 9 (Associated Enterprises) of the OECD Model; 
• issues arising under provisions akin to Article 12 (Royalties) of the OECD Model, but only in so far as such a provision might apply in transactions involving related persons to which provisions akin to Article 9 of the OECD Model might apply; and 
• any other provisions subsequently agreed by the Contracting Jurisdictions through an exchange of diplomatic notes.

Canada reserved the right to exclude from the scope of the arbitration provisions of the MLI issues pertaining to the application of anti-abuse provisions, whether contained in the MLI, a covered tax agreement, or the domestic law of a contracting jurisdiction.

See 10.1 Application of Part VI of the Multilateral Instrument (MLI) to Covered Tax Agreements (CTAs) and 10.2 Types of Matters That Can Be Submitted to Arbitration.

The arbitration provisions of the MLI were largely influenced by the Canada-United States Tax Convention, which incorporated binding final offer arbitration in 2007 to address cases where the competent authorities have endeavoured but are unable to reach a complete agreement under the MAP. 

See 10.1 Application of Part VI of the Multilateral Instrument (MLI) to Covered Tax Agreements (CTAs).

As noted in 10.3 Application of the Baseball Arbitration or the Independent Opinion Procedure, final offer arbitration was incorporated into the Canada-United States Tax Convention in 2007. The relevant rules and procedures are detailed in Annex A to the 21 September 2007 Protocol to the Convention, and in a Memorandum of Understanding between the competent authorities of Canada and the United States.

Both Pillar One and Pillar Two are expected to eventually take effect in Canada. 

Canada has released legislative proposals to enact a digital services tax, effective 1 January 2024, in the event that a multilateral treaty implementing the Pillar One tax regime has not come into force. Canada has also released legislative proposals to implement the Pillar Two global minimum tax by way of a domestic minimum top-up tax (effective for taxation years beginning on or after 31 December 2023) and an undertaxed profits rule (for taxation years beginning on or after 31 December 2024).

Canadian law generally prohibits the CRA or other government officials from:

• knowingly disclosing taxpayer information;
• knowingly allowing such information to be disclosed; or
• knowingly allowing any person to have access to such information.

As such, information relating to arbitration proceedings involving Canadian taxpayers will not be made public by the CRA.

See 8.1 Mechanisms to Deal With Double Taxation and 10.1 Application of Part VI of the Multilateral Instrument (MLI) to Covered Tax Agreements (CTAs).

Taxpayers generally rely on outside tax counsel and other professional advisers, including independent economists, in cases involving Canadian competent authority assistance.

There are no costs or fees associated with the CRA’s administrative appeals process.

The Tax Court, the FCA and the Supreme Court each charge a fee to the party that initiates a proceeding. This fee is payable at the time the notice of appeal or application for leave to appeal is filed. In the Tax Court, the filing fee is between CAD250 and CAD550, depending on the amount at issue. Filing fees at the FCA and Supreme Court are CAD50 and CAD75, respectively. 

The courts’ rules specify certain circumstances in which other payments must also be made. For example, non-expert witnesses attending a Tax Court proceeding are entitled to be paid CAD75 per day by the party who arranged for their attendance, plus transportation and living expenses. For certain witnesses, this amount may be increased to up to CAD350 (or a greater amount if the Tax Court’s taxing officer sees fit). These and other fees are generally modest compared to the other expenses a party will incur in connection with an appeal. 

Canadian courts will generally order the unsuccessful party in litigation to pay costs to the successful party. In tax disputes, the most substantial costs awards generally arise in relation to litigation in the first instance at the Tax Court.

The Tax Court has broad discretion in the determination of costs awards. The Court may take into account a wide array of factors, including (but not limited to):

• the amounts in issue;
• the importance and complexity of the issues;
• the volume of work required;
• the conduct of the parties; and
• the nature of any settlement offers that were made.

The Court may also award costs based on a tariff annexed to the Tax Court rules.

A costs award will generally not take into account any expenses incurred in contesting an assessment at the administrative appeals stage. It should be noted that cost awards are not intended to fully compensate the successful party for their actual costs incurred, and will generally fall significantly short of doing so. However, large costs awards (occasionally in excess of CAD1 million for complex, high-value appeals) are becoming increasingly common.

There is no applicable information in this jurisdiction.

As of 31 March 2023 (the most recent date for which official statistics are available), the Tax Court had 8,328 active income tax proceedings and 1,584 active GST/HST proceedings.

As of 31 December 2023, the FCA had 88 active appeals from decisions of the Tax Court.

With respect to tax cases at the Supreme Court, as of May 2024 there were no appeals scheduled for hearing and two appeals heard with judgment reserved (Dow Chemical Canada ULC v His Majesty the King, SCC case No 40276; and Iris Technologies Inc v Attorney General of Canada, SCC case No 40346).

The Tax Court does not publish official statistics regarding the number of cases initiated and terminated every year as relates to different taxes or their value.

The Tax Court does not publish official statistics regarding the relative success of taxpayers and the CRA in tax litigation. Such statistics would be challenging to assemble due to the frequency that appeals are allowed in part or settled on a confidential basis.

Strategic points are specifically addressed in 2.6 Strategic Points for Consideration During Tax Audits, 4.5 Strategic Options in Judicial Tax Litigation, and elsewhere throughout this guide.