Limitations On CRA Collections Abilities

Limitations On CRA Collections Abilities

Tax law is complex and it is unwise to proceed without proper guidance. The extensive powers granted by the Canadian Income Tax Act to the CRA to collect tax creates additional problems, thus certain limitations are imposed on the CRA Collection abilities. These limitations specify that the CRA does not have the power to re-characterize employment relationships or other legally implemented business decisions to aid them in collecting tax arrears. When the CRA goes beyond its powers, taxpayers are able to use the legal system to fight back; this provision is clearly demonstrated in the case of Central Springs Limited et al v. The Queen.

The corporate group had three corporations with different purposes. The CRA collections officer assigned to recover Humby Enterprises’ payroll remittance arrears requested that all three corporations receive a payroll audit. The CRA sent two payroll auditors to conduct a trust exam for all three companies. Nothing in the payroll records of the corporations suggested that Central Springs or A&E, the other 2 corporations had any employees prior to a payroll reorganization. Nevertheless, the payroll auditors found that Central Springs and A&E paid salaries to employees prior to the payroll reorganization, and issued assessments for unpaid payroll remittances.

Mr. Humby decided to appeal the payroll assessments to the Tax Court of Canada. At trial, the tax judge came to the conclusion that none of the documentation reviewed by the tax auditors suggested that Central Springs or A&E had any employees or paid any wages prior to the payroll reorganization. As such, the court found that there was no factual basis to believe that Central Springs or A&E had any employees or paid any wages before the reorganization. The tax court Judge also found that the CRA does not have the legal authority to re-characterize genuine employment relationships for the purposes of payroll remittance under the Canadian Income Tax Act or to help them collect tax debts. Since the Canada Revenue Agency was unable to provide any legal or factual basis for the claims made by payroll the auditors, the court allowed Mr. Humby’s tax appeal and vacated the tax assessments against Central Springs and A&E.

Thus from the above case it is clear that the Canadian Income Tax Act gives CRA collections officers’ extensive powers to collect tax arrears, including the ability to put liens on properties and garnish the wages and bank accounts of taxpayers. However, these powers do not include the ability to re-characterize legally implemented business decisions, including employment contracts, to make it easier to collect a tax debt. In a similar situation the taxpayers need two keep in mind two crucial points. First, their ability to contest the claims of the Canada Revenue Agency is dependent on them having actually legally implemented their business decisions and documented them appropriately. Having a strong evidential record will significantly increase the taxpayer’s chance of success. Second, once they are contacted by CRA, it is essential to retain Canadian tax lawyers familiar with contesting the claims made by CRA. Tax law is complex and it is unwise to proceed without proper guidance. If you need help legally implementing your business decisions or assistance in a dispute with the Canada Revenue Agency, please consider contacting one of our best Toronto tax lawyers.

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