Editor’s note: This article builds on our earlier overview of the CRA’s expanded audit powers, including its proposed authority to compel written and oral testimony under oath.
In our previous article, we examined proposed amendments that would allow the Canada Revenue Agency (the “CRA”) to compel sworn testimony during an audit – a development that would make the audit process look far more like a courtroom examination than a traditional information-gathering exercise.
That change does not stand alone. Alongside the new oath power, draft legislation introduces another significant and historically novel tool: the Notice of Non-Compliance (the “NNC”). While the NNC can interact with the oath power in important ways, it is also a standalone enforcement mechanism with meaningful consequences of its own. Together, these measures signal a shift in audit dynamics, increasing both the procedural formality of audits and the stakes associated with how taxpayers respond.
This article explains what the NNC is, how it can interact with the oath power, and why early and careful management of audit responses has become more important than ever.
What is a Notice of Non-Compliance?
Under the proposed NNC regime in section 231.9 of the Income Tax Act (Canada) (the “Act”), the CRA may determine that a taxpayer or another person has failed to comply with an information or assistance request made during an audit, a requirement to provide information under section 231.2, or a requirement to provide foreign-based information under section 231.6. Unlike other enforcement tools, the CRA may issue an NNC administratively, without first obtaining a compliance order from the Federal Court.
Once issued, an NNC carries two significant consequences. First, it can give rise to a penalty of $50 per day for each day the notice remains outstanding, up to a maximum of $25,000. Second, while the notice is in effect, the CRA may suspend the normal reassessment limitation period. Both consequences are serious: penalties accrue quickly, and the “stop-the-clock” feature can materially extend an audit and prolong uncertainty for taxpayers.
The NNC may be particularly impactful in cases involving foreign-based information, where such information may be practically difficult for the CRA to obtain directly. In that context, the NNC can function as a powerful tool to pressure compliance.
From a historical perspective, this represents a notable expansion of the CRA’s audit authority. The NNC gives the CRA greater discretion to escalate the intensity of an audit at an earlier stage where it concludes information requests have not been adequately satisfied.
How the Notice of Non-Compliance and the oath power can interact
Although the NNC is a distinct audit tool, it takes on added significance when viewed alongside the CRA’s proposed power to compel answers under oath. In that context, refusals to provide answers under oath – including where responses are appropriately qualified due to uncertainty or incomplete information – may give rise to follow-up demands and closer scrutiny of whether underlying audit or information obligations have been satisfied.
If the CRA ultimately concludes that a person has not complied, in whole or in part, with a requirement or notice described in subsection 231.9(1) of the Act, an NNC may be issued.
In practice, the two tools can operate in tandem: sworn testimony can inform the CRA’s assessment of compliance, while the NNC enforces the CRA’s expectations regarding the completeness and adequacy of information provided under the ordinary audit process. This creates a higher-risk environment, particularly where facts are complex, records are incomplete, or explanations evolve as professional advice is obtained.
What might once have been treated as ordinary audit issues can now more readily escalate into penalties and extended reassessment periods.
Why early involvement of tax counsel can matter
These developments highlight the value that tax counsel can potentially bring by being involved early in an audit, especially where compelled testimony, foreign information requests, or privilege issues are anticipated. Early involvement is not about resisting compliance, but about managing how compliance is demonstrated and documented.
Tax counsel can help ensure that responses clearly reflect good-faith efforts, appropriately explain the limits of the information available to a taxpayer, and preserve legitimate protections such as solicitor-client privilege. The legislation also recognizes that a failure to comply will not give rise to an NNC where one of the reasons for that failure is the person’s reasonable belief that information, documents, or answers are protected by solicitor-client privilege. This increases the importance of disciplined management of audit responses. Counsel can also help anticipate how answers given under oath may later be interpreted, and whether follow-up requests risk escalating into a non-compliance allegation.
Challenging a Notice of Non-Compliance
The legislation provides a mechanism to challenge an NNC. A taxpayer may request an internal CRA review within a prescribed time period (currently proposed as 90 days), and judicial review remains available where appropriate. Notably, the regime also includes an unusual safeguard: if the CRA fails to complete its review within a prescribed timeframe, the notice may be automatically vacated.
This automatic cancellation mechanism is rare in Canadian tax administration and may reflect a concern about unchecked or prolonged use of the new power. While it offers meaningful protection, it also underscores the importance of careful procedural management once an NNC is issued.
Conclusion
The NNC, particularly when considered alongside the CRA’s proposed authority to compel sworn testimony, represents one of the most consequential shifts in the audit landscape in decades. Audits are becoming more procedural, more formal, and more consequential at an earlier stage.
For private and mid-market businesses, this means that early audit responses – including how information is framed, qualified, and documented – can have lasting effects. As these draft measures move closer to implementation, understanding how the NNC operates, both on its own and in combination with other expanded audit powers, is essential to managing audit risk.
If you are facing an audit inquiry or are concerned about how the CRA’s expanded powers may affect your organization, members of the Miller Thomson Tax Group can assist with assessing exposure, safeguarding privilege, and preparing for a more formal audit process.
