The Standard of Conduct the CRA Must Uphold in an Audit

August 28, 2018
Corporate taxes

written on behalf of Feigenbaum Law

Last week, we reviewed a decision in which the Canada Revenue Agency (CRA) was ordered to pay $5 million in damages after a court found that the Agency had engaged in a number of questionable practices during the “Billionaire’s Audit” targeting high net worth Canadians in the mid-2000’s.

This week we explore the standard of conduct that ought to apply during any audit undertaken by the CRA. The Quebec Superior Court examined this issue in its awards decision.

The Position of the Parties

The parties took different positions on the standard of fault that applied in this matter.

The two men argued that:

  • the applicable standard was the general notion of civil fault under the Civil Code of Quebec and that the CRA failed to meet the standard of the reasonably competent tax auditor; and
  • their claim was based, in part, on the notion of abuse of rights.

The CRA argued that the case was framed in such as way that they were only liable if they:

  • intended to cause harm to the two men; or
  • were reckless in that regard.

The Crown Liability and Proceedings Act

Since this was a claim against the federal Crown, the starting point for any analysis of conduct is s. 3(a) of the Crown Liability and Proceedings Act, which provides that:

3 The Crown is liable for the damages for which, if it were a person, it would be liable

(a) in the Province of Quebec, in respect of

(i) the damage caused by the fault of a servant of the Crown, or

(ii) the damage resulting from the act of a thing in the custody of or owned by the Crown or by the fault of the Crown as custodian or owner;

Based on the above, the general principles of civil liability that are applicable to persons under Quebec law also apply to the actions of the federal Crown in Quebec, which is also confirmed by the Quebec Civil Code.

The Court noted that the CRA is considered to commit a fault where it does not meet the standard of a reasonable person in similar circumstances.

Negligence in Performing an Audit

The Alberta Court of Appeal recently found that the CRA cannot be sued for negligence in the performance of an audit:

In our view, it is plain and obvious that an action in negligence cannot succeed. It is clear that, because of the inherently adverse relationship between auditors who are exercising a statutory function and taxpayers, a finding of sufficient proximity to ground a private law duty of care does not exist. The chambers judge correctly applied the Cooper-Anns test and considered foreseeability and proximity to reach the same conclusion. Not only is her decision entitled to deference, the chambers judge could have gone further to conclude that public policy considerations also militate against finding the existence of a prima facie duty of care in this case.

However, that decision was based on common law notions of duty of care, foreseeability, and public policy which do not apply in Quebec (a civil law jurisdiction).

The Quebec Civil Code instead recognizes that the application of general rules of civil liability to the Crown is subject to general rules of public law, which either prevent entirely the application of civil liability rules or substantially alter their application. In some situations, for instance, the Crown or other public body receive a general or limited immunity.

However, the Supreme Court of Canada has found that limited immunity for Crown actors is limited to true core policy acts. Moreover, even in cases where an immunity is available or where the Crown or public body acts in good faith, this does not protect the Crown where a plaintiff is able to demonstrate bad faith on the part of the Crown or public body, within the definition of “bad faith” as defined by the Supreme Court:

Bad faith can be established by proving that the Minister acted deliberately with the specific intent to harm another person. It can also be established by proof of serious recklessness that reveals a breakdown of the orderly exercise of authority so fundamental that absence of good faith can be deduced and bad faith presumed.

The Decision

The court noted that in this case, the two men sued the CRA for its behaviour in conducting the Billonaire’s Audit.

This was not a “true core policy act” (i.e. the CRA was not charged with exercising a legislative or regulatory power or with setting a tax policy). Rather, the CRA’s role was limited to collecting the tax that was due. The court, therefore, concluded that the CRA could not claim immunity, and was subject to the regular civil standard of fault.

The court further noted that the further argument of discretionary power of a public authority was also raised. The court pointed out that the CRA does not generally exercise discretionary powers. Rather, its mandate is to calculate taxes owing only. However, it may exercise discretionary powers when it decides, for instance, to issue a demand for information.

The Quebec Court of Appeal applied both the notions of failing to meet a standard of conduct and the abuse of discretionary powers in a review of the action of the Quebec Revenue Agency (ARQ) in an earlier decision, in which the court found, broadly, that:

  • if the auditor or the tax collector does not respect the professional, ethical and ethical obligations incumbent upon them, and its obligation to act with transparency and honesty as a public servant, or if it abuses its discretionary powers, the ARQ may have to compensate the taxpayer to whom these actions cause prejudice.
  • The more exorbitant powers a government agency has, the more likely it is to cause harm to the taxpayer if it is abusive, unreasonable or irrelevant to the consequences that may result.
  • the ARQ must ensure tax fairness between taxpayers while respecting its own rules and directives, its duty to act fairly and not to abuse the powerful tools at its disposal. It cannot be denied that marriage or the balancing of these two imperatives can sometimes be difficult.

In terms of respecting its own rules and directives, the ARQ should be guided by the Déclaration de services aux citoyens et aux entreprises. The equivalent for the CRA is the Taxpayer Bill of Rights) which states:

  • You have the right to receive entitlements and to pay no more and no less than what is required by law
  • You have the right to service in both official languages
  • You have the right to privacy and confidentiality
  • You have the right to a formal review and a subsequent appeal
  • You have the right to be treated professionally, courteously, and fairly
  • You have the right to complete, accurate, clear, and timely information
  • You have the right, unless otherwise provided by law, not to pay income tax amounts in dispute before you have had an impartial review
  • You have the right to have the law applied consistently
  • You have the right to lodge a service complaint and to be provided with an explanation of our findings
  • You have the right to have the costs of compliance taken into account when administering tax legislation
  • You have the right to expect us to be accountable
  • You have the right to relief from penalties and interest under tax legislation because of extraordinary circumstances
  • You have the right to expect us to publish our service standards and report annually
  • You have the right to expect us to warn you about questionable tax schemes in a timely manner
  • You have the right to be represented by a person of your choice
  • You have the right to lodge a service complaint or request a formal review without fear of reprisal

The court went on to say that the CRA’s role is limited to matters of administration and enforcement:

Its duty is to assess no more and no less than the amount of tax payable under the ITA, and not to take the highest assessing position in order to collect the most tax.

The court concluded, therefore, on the issue of standard of conduct, that:

  • The CRA must act reasonably in the conduct of an audit. The Taxpayer Bill of Rights helps define what a reasonable auditor would do;
  • Negligence is sufficient to establish fault;
  • It is not necessary to prove that the CRA acted maliciously with a view to hurting the Plaintiffs. Intentional conduct will be necessary for punitive damages;
  • The CRA can be wrong without being at fault – the CRA does not commit a fault if it reasonably takes a position that turns out to be wrong;
  • To the extent that the CRA has certain powers under the ITA, it must exercise those powers reasonably and not in an abusive fashion.

If you have questions about tax litigation, including litigation stemming from a CRA audit, reassessment or similar, contact Feigenbaum Law.  Our approach is always personalized. We carefully consider all administrative solutions available to craft a response that proactively takes into account the policies and best practices of a given tax authority. Mark Feigenbaum  brings practical business knowledge, gained through roles in the entertainment industry, manufacturing, retail, public accounting and education, to all aspects of his law practice.

Contact us at, or call us at (416) 777-8433 or toll free at (877) 275-4792 to learn more about how we can help.



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