Anna Malazhavaya

3Hi, Pulat. Thank you for having me again. It's a pleasure. Always your interviews are a lot of fun. My name is Anna Malazhavaya. I am a tax lawyer and I'm the founder of a tax law firm called Advotax Law in Etobicoke. West part of Toronto. And we help people with any kind of tax problems, tax litigation problems, when they're being audited or reassessed, or when they're appealing the results of the CRA's decision at the tax court. We're also helping people who are trying to organize their affairs in the most tax-efficient manner. So we help people who are looking for help with tax planning. So anything tax.

5Like everything else in this country, they were on hold for some time starting March 13th, I think, or March 16th. So like everyone else in this country, the CRA employees were sent home to the extent that their service is not absolutely essential. And they continued working from home, but as you can imagine, for some people it was possible, for some people it was not realistic because they had small children or they didn't have equipment. So if you're being audited, if you're currently being audited, chances are you did not hear from your auditor in a while. And this is because there was a formal direction sent to CRA employees with instructions not to contact taxpayers.

6And for a while, we did not have any contact with CRA auditors or appeals officers. Everyone was at home waiting to see what happens. Starting from June 26th, June 26th, we heard that the CRA began a transition to full business, full service mode. It doesn't mean that immediately we're gonna hear back from CRA auditors and appeals officers. There may still be a bit of a delay in everything that's going on, but if you If you were audited before COVID and you did not hear from your auditor, that does not mean that your audit disappeared or somehow resolved and it's not a problem anymore. No, it's still there. It's a problem and chances are you're going to hear from someone maybe this summer, maybe this fall.

7I hear that the latest instructions CRA auditors received is that they have to resume their normal working operation, normal workload, and apparently it's gonna— we're gonna see some serious activities soon.

9It's a way to ensure, protect the integrity of our tax system. In Canada, we have something called self-assessment system. Every April or every June, depending on your business organizational structure, we prepare tax returns or we prepare tax returns for our corporations and we file those tax returns. We include information in those tax returns and the CRA relies on that information in assessing our tax liability. So it's called self-assessing. I, Anna, decide that I made X amount of dollars this year. I put that number on my tax return. I file it. The CRA assesses it at first at face value, determines my— I determine my tax liability. I pay the tax. And then if we did not have audits, I may not necessarily always be truthful in declaring that number.

10That number may be much higher, but I may only declare X amount of dollars. So that's why we have audits to protect the integrity of our tax system, to make sure we have schools and roads and hospitals and everything else in Canada.

12Exactly right. That's a good way to put it.

14In alphabetical order. I'm just joking. It depends. Lately what we see, we see the CRA investing a lot of money into what's called risk assessment software. This is a sophisticated software that analyzes data to pick out of millions of tax returns filed every year, to pick the ones that may not necessarily, you know, be correct. And, and sometimes that risk is determined based on the correlation between your reported income and your reported expenses. Sometimes you may get flagged because of the losses you declared. There is a number of different risk assessment programs that are very sophisticated, developed by the CRA. And a lot of audits these days, we see originated from these softwares. On top of it, obviously, we have what's called projects, so audit projects.

15The most famous probably now is the real estate projects in large cities in Canada, Toronto, Vancouver, maybe some activity in Montreal. So there is a task force, real estate task force within the CRA, formed specifically with a goal to identify non-compliance in the real estate sector. So if you are in real estate, chances are the CRA scrutinizes you more than someone who is working in, let's say, manufacturing. And I'm talking about large cities too. Another project that's very, famous as an offshore compliance project where the CRA tries to identify people who may not declare all offshore earnings in their Canadian tax returns. And my apologies. And also The question was how people get picked for an audit.

16Sometimes it's a tip. Sometimes it's your former spouse. Sometimes it's your former business partner who uses an anonymous tip line that's available on the CRA's website to call and to report you, whether truthfully or not. Sometimes it's the legal trouble that you got yourself in and somehow the information of that legal trouble is transferred to the CRA. So different sources.

18It's in that area. I'm not going to pretend to be an expert in AI, but all I know is that there are some very smart people working on those programs, and they're becoming more and more sophisticated every year because they receive a lot of funding from the government.

20Absolutely. And as we move towards cashless society, look at the impact of COVID A lot of businesses just don't accept cash. And as we move towards cashless society and there's more data to analyze, it will become even better, even more sophisticated, for sure.

22It's the Income Tax Act, and there are a number of provisions that first of all impose the obligation to file a return. That's Section 150 of the Income Tax Act, and there is a number there's a whole section in the act that's devoted to the CRA's powers as they conduct those audits, and the powers are quite wide.

24No, right to counsel would not be extended to— well, you'd You have a right to retain counsel, absolutely. Most people at the initial stage of the audit choose not to. Charter arguments are not accepted in the Tax Court of Canada, so it's not something you can argue within the Tax Court. It's outside of the jurisdiction of the Tax Court. Where we see tax— where we see charter arguments in our tax practice more commonly used is the, that the transition, that, that line where a civil audit, a civil audit is no longer a civil audit and it becomes a criminal investigation. And as soon as it becomes a criminal investigation, the taxpayer has all the rights that every accused must have.

25So this is where we have charter arguments used commonly.

27There is a special criminal investigation division within the CRA, and they do work with RCMP together in implementing the investigation and then placing charges.

29Income Tax Act, Section 238 to 239.

31Yes, you can be liable for a penalty anywhere from 50 to 200% of the tax you tried to evade. And that's on top of the civil penalty. And there's a jail term that you can go to jail up to 2 years per charge, I believe, for some offenses. And the most serious offenses can carry a 5-year jail term.

33Tax evasion, different varieties of it, making false statements on tax return, and a number of— inciting other people to make false statements, inciting other people to evade tax. A number of different offenses.

35Good question. Obviously, I can't tell you from experience because the rules are so new. But what we're seeing now, we're seeing a lot more activity in criminal investigation area. And this is something new for the CRA, and we think it's, you know, it's a speculation, but we think it's connected to all the government spending that has, that had happened recently. And now the the need to somehow compensate that spending through collection of taxes. And some of it will be done through civil audits and some of it will be done through criminal investigations and criminal charges. That's why we see in the last, you know, I think I would say it happened even before COVID we see a lot more criminal investigation activity on the CRA side than we had seen before.

36And if before criminal charges were reserved for the most evil, non-compliant, obviously, obviously very evil people, but now we see criminal charges used in seemingly regular audits with modest amounts involved, yet we see referrals to criminal investigation.

38As soon as they are able to start working full force despite the working from home limitations. I would expect a lot of activity, yes.

40Absolutely.

42Absolutely, yes.

44I'm not a criminal lawyer.

46It depends. In my practice, we currently don't do criminal tax evasion. We refer the files to criminal lawyers, and from my research, there weren't many many lawyers who make it their specialty or their only area because there wasn't enough work before. But times are changing and it may become a very, very interesting area and with a lot of

48There

50wage

52will definitely

54CEBA, Canadian Emergency Business Account. Right,

56It's a very good question because really the legislative basis for CEBA loans and for CECRA, that's, this is Commercial Canadian Emergency Commercial Rent Assistance. The basis for this program is the ability given to the government in in the case of CEBA, to guarantee loans provided to taxpayers. This is in Bill C-14 that was provided, that was enacted in, at the start of the pandemic, I think was April of 2020. And based on that sole provision that allows the government the power to guarantee loans to taxpayers, the CEBA program was designed and implemented. But the agreement, the only basis for the loan is your agreement with the bank. It's not a law, it's not a section in the Income Tax Act, it's not a section in any other legislation that allows and regulates the terms of that loan.

57It's your agreement with the bank and your, the whatever attestation that you signed, the representation that you made to the bank. It's unclear still as to the penalties that may follow in the case if in case someone misrepresents the information in your CEBA application. Unclear what exactly that person may expect. For sure, it's a breach of contract. But when it comes to consequences from the CRA, we as tax lawyers are not really certain as to what else that would entail. This is to compare— this is on— sorry, for the wage subsidy, however, the situation is different because we have amendments to the Income Tax Act that provide for the wage subsidy. And if you made false statements in your wage subsidy application, that will be governed by the penalties already included in the Income Tax Act.

58So wage subsidy is in the tax act. Penalties and criminal charges will apply if things go wrong. But CEBA and the— my apologies— but CEBA and the commercial rent program, we still don't know how how penalties are going to work there. I'm sure there'll be consequences for misrepresentation in, for those programs, but we just don't know exactly what they will be.

61It makes total sense, and there may be other ways. What we are sure is that there will be consequences for misrepresentation on those applications. What we are not certain is exactly what those consequences will be.

63Yes, something interesting we've seen recently. It's not new, but this is a new trend. Unnamed person requirements. This is when you get a letter from the CRA, you third party, you have nothing to do, you good honest taxpayer or good honest business. You get a letter from the CRA where they ask you to provide all your clients' names and contact information, bank account information for all your clients. Imagine how happy your clients would be if they know you have to do it. Imagine how uncomfortable you would be to do it. So naturally we see a lot of resistance from businesses. They don't want to release the names of their clients to the CRA. And the really, the only test that, that's, that's applicable in this situation is that the group of that, that person, the CRA doesn't know who they— it's not like they know that Mr.

64X evaded tax and had dealings with your business. They only know that you may have dealt with someone who did not pay tax, and that's enough for them to request a list of your entire clients. It doesn't matter if some of those clients clearly have done nothing wrong. It doesn't matter if that list is very large, voluminous, and it's going to take you a lot of time to produce it. All that matters is that there is a way to somehow identify that group. And in that requirement, in that case, you would have to release that list of your client, the list of your clients to the CRA.

66By Facebook you mean a— well, they have that Facebook already. They just want to complement it with more pictures and posts.

68Usually it's less— well, this time it's— there is a more obvious answer to the question as to why they're doing it. They're doing it because it's a handy tool for them to pick people for the audit. And where we see these requirements is again construction and real estate sector. You must have heard the story of Home Depot where they had to release information on all their business accounts with transactions over $50,000. They had to do it. They took it to court. They lost. They still had to release the names of their clients. This is thousands.

70Home Depot had to— so if you have a credit card with Home Depot and if you transacted over a year, if you've made purchases for over $50,000, your name and all your information will be revealed to the CRA. And then the CRA will compare your reported income with that with the volume of activity on your Home Depot credit card. And if their risk assessment software determines that the two numbers don't match up, for example, some people in construction industry like to declare $14,000 of income regularly but live in $2 million houses and have $400,000 expenses transactions, worth of transactions on their credit cards. If those numbers don't add up, that's a very useful way for the CRA to spot a person who may not be compliant.

72Yes. Yes.

74Yes, but then again, it depends on the type of information they would be seeking. Generally, yes, that would be subject to solicitor-client privilege, but, you know, I Sometimes there would be— there could be rare circumstances where some documents still need to be provided, maybe redacted so that certain information is not available to the CRA. But generally, in most cases, lawyers should not be subjected to these orders.

76Thank you for having me.

78Bye.