Solicitor-client privilege is a constitutionally-entrenched right that protects communications between a lawyer and his or her client. The foundation of such privilege is to encourage full and frank disclosure between lawyers and their clients for the purpose of providing legal advice. A lawyer cannot be compelled to disclose information shared by his or her client and only the client can waive privilege. In the tax planning context, protecting the confidentiality of taxpayer information is important to ensure that a taxpayer’s tax position is not unfairly prejudiced by legal requirements to provide subjective analysis or information to taxing authorities where such analysis or information was communicated or created for purposes of providing tax advice. Further, to better ensure taxpayer compliance under a self-reporting tax system, the confidentiality of communications with one’s tax lawyer is protected to encourage full and complete disclosure of the facts necessary to provide tax advice.
A huge data leak from a Panama-based law firm has exposed billions in secret, offshore transactions involving multiple political leaders around the world and approximately 350 Canadians with offshore tax haven investments.
Previous leaks of offshore activities have led the Canada Revenue Agency (CRA) to engage in multiple tax audits targeting wealthy Canadians, such as clients of the LGT Bank, the Swiss HSBC Bank, and recently clients of one international accounting firm, just to name a few. This time should be no different. CRA was already instructed to get the leaked data in Panama Papers.
Many OECD-participating countries have engaged in a fight against tax evasion, treaty shopping and base erosion and profit-shifting (BEPS). Combined with the upcoming exchanges of financial information between countries starting in 2017 and 2018, Canada’s “new” offshore tax compliance section since 2013 and the offshore tax informant program (OTIP) rewarding whistleblowers, wealthy Canadians and businesses engaged in aggressive tax planning are more likely than ever to be audited.
In addition, the 2016 Federal budget proposed a plan to “improve tax compliance, prevent underground economic activity, tax evasion and aggressive tax planning,” requiring an investment of $444.4 million over five years to be used by the CRA for:
- hiring additional auditors and specialists
- developing robust business intelligence infrastructure
- increasing audit activities
- improving the quality of investigative work that targets criminal tax evaders
The expected additional revenue from such measures is $2.6 billion.
To most Canadians, these measures may sound perfectly legitimate. But many taxpayers in the province of Québec will hear a familiar tune that evokes unpleasant memories.
A GST/HST or income tax audit may result in an assessment that the taxpayer does not agree with. In this situation, it would be in the best interest of the taxpayer to object to a tax assessment by following these steps:
A tax audit on a specific subject can be short (an audit of the business promotional expenses and advertising) or if it is more general in nature, it can be longer (for example dealing with unreported income). During the audit stage, the taxpayer will be asked to provide documentary evidence, bank statements and explanations supporting his position in relation to the audited items. Many audits go well, however, some do not.
Generally, prior to the issuance of a notice of assessment following the audit, the auditor issues a draft assessment and invites the taxpayer to make representations prior to a predetermined date (usually 21 days). The taxpayer should take this opportunity to make representations explaining why he disagrees. It is preferable to make written representations and to submit any additional documents at this stage. It is wise to obtain professional assistance from an expert in the field to help with the representations during this period.
Following the representations on the draft assessment, it is possible that the Revenue agency (Quebec or Canada) will issue an assessment. Whether it is for income tax or GST/HST, this assessment carries interest at the prescribed rate starting on the day on the notice. Whether the taxpayer contests it or not, it is generally advisable to pay the amounts assessed in order to avoid an accumulation of interest. Furthermore, tax laws permit the imposition of costly penalties in certain circumstances, for example, gross negligence, which can form part of the assessment.