This blog has been written by Rahul Sharma, Partner, at Fasken Martineau DuMoulin LLP, Toronto

2025 is flying by.  We are now in its final quarter.  Looking back at the year, I can think of one consistent theme in my discussions with other tax professionals: Canada Revenue Agency (“CRA”) audits and reviews.  Industry professionals have remarked—and quite rightly, perhaps—that we are dealing with more audits, reviews and reassessments issued by the CRA than perhaps at any other point in our careers.

This is not necessarily a bad thing.  Audits are very much part of a self-reporting tax system.  Under sections 231.1, 231.2 and 231.6, of the Income Tax Act (Canada) (the “Act”), in particular, the CRA is provided with broad civil audit powers to make inquiries and require the production of documents related to Canadian tax matters, and compliance with the provisions of the Act.  These powers are regularly exercised.  A simple example may be the issuance of a questionnaire to a Canadian resident regarding such taxpayer’s international assets and accounts, as well as ties to any entities (such as trusts) outside of Canada.

On that note, we are seeing considerable CRA scrutiny today on distributions or payments that residents of Canada receive from foreign trusts, or more generally in terms of payments being received from sources outside of the country.  I previously wrote blog posts on the importance of T1141 and T1142 reporting for contributions made to, and distributions received from, foreign trusts (see: Don’t Forget the T1141s and T1142s! – All About Estates), as well as, inter alia, reporting obligations for new Canadians in relation to their foreign assets (Certain Recurring Tax and Estate Planning Questions from New Canadians – All About Estates).  Those discussions do not need to be rehashed here; but it is worth observing that non-compliance continues to be prevalent, and it is not always intentional.

Receiving a request for information or documentation from the CRA can be daunting.  I want to say that the first thing you should do when you are contacted by the CRA is to remain calm, but we all know that might be impossible.  So, it only makes sense to engage someone who can remain calm on your behalf, and who can rationally deal with and advise you in relation to the CRA inquiry.

A frequently asked question is whether, after contact by the CRA regarding potential non-compliance with the Act, such non-compliance can be remedied through a voluntary disclosure.  Understandably, taxpayers want to have their affairs in order and do not want to face the imposition of penalties and interest.  Such regularisation was practically difficult until two days ago (October 1^st) when changes to the CRA’s voluntary disclosure programme took effect.

Of relevance to this discussion, disclosures to the CRA can now be “prompted” or “unprompted”.  Very generally, an “unprompted” application is one that is made to the CRA when there has been no prior communication with the revenue authority about a compliance issue related to the disclosure.  To the contrary, a “prompted” application is one that is made after a communication with the CRA about a compliance issue that is related to the disclosure.  “Unprompted” disclosures are eligible for 75% interest relief and 100% penalty relief, whilst “prompted” disclosures are eligible for 25% interest relief and 100% penalty relief.

The expansion of the voluntary disclosure programme to include “prompted” disclosures is, on its face, a welcome change.  Time will tell how the changes are implemented and treated.

For those who have identified or are concerned about non-compliance with the Act, including as it relates to foreign assets or payments, you should act now and ensure that your disclosure is “unprompted”, with the understanding that you do not control the day that the CRA decides to contact you.  In other words, although a new “prompted” disclosure category has become available, do not rely on that and risk losing increased interest savings whilst taking on the stress and hassle of a CRA inquiry.  However, if you have been contacted by the CRA regarding potential non-compliance with the Act, you should seek professional assistance and act with haste to determine whether you may be able to benefit from the new category of “prompted” disclosures.