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FROM: SEP-OCT 2009 ISSUE | BY VERN KRISHNA
The income tax system relies primarily upon self-assessment and “voluntary” reporting of tax liabilities. Nevertheless, the CRA is always looking over taxpayers’ shoulders and has substantial audit and investigative powers to ensure compliance. Some CRA powers are subject to Charter protection, others are not.
There are two types of audits: civil and criminal. However, the line between the two is not always clear. A civil audit under the CRA’s regulatory powers is a routine process for verifying the taxpayer’s financial information and examining relevant supporting documents. If the Agency disagrees with the taxpayer’s self-assessed income, it will reassess him and charge interest on any deficiency in taxes paid.
A tax investigation is essentially a criminal examination. In an investigation the State is pitted against the individual in an attempt to establish culpability. The adversarial relationship between the taxpayer and the state escalates because the liberty of the subject is at stake.
The difficulty is that an examination that starts out as a routine civil audit can turn into a criminal investigation when its predominant purpose is to determine penal liability. There is no bright line test for determining the predominant purpose of an inquiry.
The CRA may also conduct an audit and an investigation concurrently. However, once the Agency begins its investigation, it can use further information that it obtains under its concurrent audit powers only for the purposes of the audit and not for the purposes of the investigation. It is not easy in practice, however, to distinguish the divergence in powers and obligations related to civil audits and investigations.
Apart from a clear decision to pursue a criminal investigation, no single factor governs in every circumstance. Hence, a court has considerable latitude in deciding to admit evidence resulting from an investigation. In arriving at its decision, however, the court will consider the totality of the circumstances to determine whether the inquiry sufficiently engages the adversarial relationship between the State and the taxpayer to warrant Charter protection.
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