Five Tax Lessons from Recent CRA Guidance and Court Decisions
Canadian tax disputes often turn on issues that seem minor when a return is filed: a document that wasn’t kept, a tax position that wasn’t adequately investigated, or an assumption that a payment won’t have tax consequences.
Recent court decisions and guidance from the Canada Revenue Agency provide useful reminders about five areas taxpayers should keep on their radar: life insurance refunds, taxpayer due diligence, voluntary disclosures, aggressive tax claims and supporting documentation.
Here is what Canadian taxpayers and business owners should know.
Life Insurance: Could Getting Your Premiums Back Trigger Tax?
Some term life insurance products include a return-of-premium feature. If certain conditions are satisfied, the policyholder may eventually receive some or all of the premiums they previously paid.
It sounds straightforward. You paid premiums and received those premiums back, so there should be nothing to tax.
Unfortunately, Canadian tax rules can make the answer more complicated.
Why a refund isn’t necessarily tax-free
For Canadian income tax purposes, payments associated with a life insurance policy have to be considered under the specific rules governing dispositions of interests in life insurance policies.
The important point for clients is that the marketing description of a payment does not necessarily determine its tax treatment. Calling an amount a “return of premiums” does not, by itself, establish that the entire payment can be received without tax consequences.
The policy’s adjusted cost basis, the nature of the insurance contract, the amount received and the circumstances in which the payment is made can all become important in determining the result.
Recent litigation is another useful reminder that insurance products should be reviewed for their tax consequences as well as their insurance benefits.
What should policyholders do?
If you have a policy containing a return-of-premium provision, don’t wait until the cheque arrives to investigate its tax treatment.
Ask the insurer for:
- a copy of the policy;
- the amount being paid;
- an explanation of how the payment is characterized;
- the adjusted cost basis information available for the policy; and
- confirmation of any tax reporting the insurer intends to issue.
The takeaway: “Getting my own premiums back” and “receiving a tax-free payment” are not necessarily the same thing. Have the tax treatment reviewed before assuming the amount has no income tax consequences.
Taxpayer Due Diligence: “I Didn’t Know” May Not Be Enough
Tax penalties often raise a deceptively simple question:
Did the taxpayer take reasonable steps to comply with the law?
Recent tax cases provide useful cautionary examples of taxpayers attempting to rely on a due diligence defence.
Due diligence is more than saying that a mistake was accidental or that the taxpayer did not understand the requirement. Whether the defence succeeds depends on the applicable legislation and the particular facts.
The practical lesson is important for individuals as well as corporations: tax compliance cannot always be delegated and forgotten.
Relying on someone else
Hiring a bookkeeper, accountant, payroll provider or other adviser is certainly a sensible compliance step. But simply handing records to someone else does not automatically establish that the taxpayer exercised reasonable care.
Depending on the circumstances, taxpayers should still be able to demonstrate what they did to ensure their obligations were being met.
That could mean retaining evidence of:
- information delivered to the accountant;
- questions asked about unusual transactions;
- tax filing instructions;
- correspondence regarding deadlines;
- calculations that were reviewed;
- notices or warnings received from CRA; and
- steps taken once a potential problem was discovered.
The same principle applies when a taxpayer relies on information supplied by somebody promoting a tax strategy. The larger or more unusual the tax benefit, the more important it becomes to ask questions and preserve the answer.
A practical rule
If something on your tax return produces a surprising result, particularly an unusually large refund, deduction, loss or credit, ask why.
Your accountant should be able to explain what is being claimed and the basis for the treatment.
Due diligence is much easier to demonstrate when there is a contemporaneous paper trail showing that the taxpayer actually took reasonable steps to comply.
Voluntary Disclosures: CRA Provides More Guidance
The Canada Revenue Agency’s Voluntary Disclosures Program (VDP) allows taxpayers and registrants to come forward and correct certain previous errors or omissions.
Relief is determined on a case-by-case basis, and a successful disclosure can provide relief from some of the consequences that might otherwise arise from non-compliance. CRA substantially revised the VDP effective October 1, 2025, with the stated objective of making the program easier to access and understand. [canada.ca]
The VDP can apply where a taxpayer needs to correct a previously filed return or file a return that should have been filed in the first place. [canada.ca]
Should you talk to CRA before applying?
Taxpayers contemplating a voluntary disclosure may be reluctant to approach CRA before knowing whether their situation qualifies.
CRA’s VDP process provides an avenue for taxpayers to obtain information about the program before proceeding with a formal disclosure. This can be particularly useful in complicated situations where the taxpayer needs to understand how CRA’s eligibility requirements may apply.
However, taxpayers should understand that a general or pre-disclosure discussion is not the same thing as receiving approval of a VDP application. An actual application must still satisfy CRA’s conditions and undergo review.
How far back should the disclosure go?
Another important issue arises when a taxpayer’s non-compliance covers many years.
Taxpayers should not assume that identifying a minimum number of years that must be disclosed means earlier non-compliance can simply be ignored. A voluntary disclosure needs to be considered in the context of the taxpayer’s complete circumstances and the information required by CRA.
The central idea behind the program is that taxpayers come forward to correct errors or omissions, with CRA determining relief based on the particular application. [canada.ca]
Don’t wait until CRA comes knocking
Timing can be extremely important in a voluntary disclosure.
Someone who discovers years of unreported foreign income, unreported business revenue, GST/HST problems or another significant filing omission should consider the VDP before CRA begins compliance action relating to the issue.
That is a situation where contacting your accountant promptly can make a major difference.
The takeaway: discovering an old tax problem does not necessarily mean you should simply amend several returns online. Determine whether the VDP is available and preferable before taking corrective action.
Aggressive Tax Claims: CRA May Be Able to Go Back Further Than You Think
Many taxpayers understand that there is a limit on how long CRA normally has to reassess a tax return.
This sometimes produces a dangerous assumption:
“The year is too old. CRA can’t touch it.”
That is not always true.
The Income Tax Act contains circumstances in which CRA can reassess beyond the ordinary reassessment period, including situations involving a misrepresentation attributable to neglect, carelessness, wilful default or fraud.
That distinction becomes particularly important where CRA challenges aggressive or unsupported tax claims.
Documentation and credibility matter
Recent court decisions are useful reminders of the problems taxpayers can encounter when a significant tax position is supported by little more than an assertion that the deduction or credit was believed to be legitimate.
In a dispute over an older taxation year, the issue may therefore extend beyond:
“Was the claim actually deductible?”
The court may also need to consider the circumstances under which the incorrect claim was made.
That makes the taxpayer’s evidence important.
For example:
- Who recommended the tax position?
- What explanation was provided?
- What documents supported it?
- Did the taxpayer review the return?
- Was the claim obviously unusual?
- Were there warning signs?
- Did the taxpayer ask questions?
- Is the taxpayer’s explanation consistent with contemporaneous records?
Large deductions should not be treated as a “try it and see if CRA accepts it” exercise.
Watch for extraordinary results
An especially large refund or dramatic reduction in taxes should prompt questions.
If a promoter tells you that everyone is entitled to an unconventional deduction that your regular accountant has never mentioned, that is a reason to investigate further, not proof that you have discovered a tax loophole.
Ask for the relevant provision of the Income Tax Act and have the strategy independently reviewed by a qualified Canadian tax adviser.
The takeaway: the passage of time does not necessarily protect an unsupported tax position. Good advice, reasonable investigation and contemporaneous documentation are considerably more valuable.
Supporting Documentation: Sometimes Your Accountant’s File Can Save the Day
The final lesson may be the most practical one.
Keep your records.
Canadian taxpayers routinely become concerned during a CRA review when an original invoice, receipt or other source document is no longer available.
That can certainly create problems, but a missing original document does not always mean that there is no other evidence capable of establishing what occurred.
Accountants often maintain extensive files supporting the preparation of a client’s return or financial statements. Those files can contain items such as:
- year-end adjusting entries;
- general ledgers;
- transaction listings;
- capital asset schedules;
- reconciliations;
- bank information;
- tax working papers;
- correspondence with the client; and
- calculations supporting amounts ultimately reported on a return.
Recent litigation provides a useful reminder of the potential evidentiary value of an accountant’s contemporaneous working papers when the client’s original source documents are no longer available.
Don’t underestimate secondary evidence
Imagine CRA reviews an expense several years after a return was filed.
The original supplier invoice is gone.
That isn’t ideal. But suppose the client’s accounting records show the payment, the bank statement confirms it, the accountant’s year-end working papers identify the expense, and the accounting treatment is consistent with the tax return.
Collectively, that evidence may tell a much stronger story than the taxpayer simply saying:
“I remember paying it.”
It also demonstrates why accountants retain working papers in the first place. They are more than historical calculations. Years later, they may help reconstruct what was reported, why it was reported and what information was available when the return was prepared.
Keep records organized before there is an audit
Businesses in particular should establish a systematic document-retention process.
Whenever possible, keep digital copies of invoices, receipts, agreements and supporting correspondence and link them to the accounting transaction. Accounting platforms such as QuickBooks Online and Xero make it possible to attach source documents to transactions, providing another layer of documentation beyond a paper filing cabinet.
And don’t assume that because an accountant has some records, the taxpayer no longer needs to retain their own supporting documents.
The takeaway: strong record-keeping rarely feels important when a return is filed. Its value becomes obvious five or six years later when someone asks you to prove why a number appeared on that return.
The Bottom Line
There is a common thread running through all five of these developments: tax results often depend on what happened before CRA became involved.
A return-of-premium insurance product should be reviewed before assuming the proceeds are tax-free. Taxpayers relying on due diligence need evidence showing the steps they actually took. A potential voluntary disclosure should be considered before CRA initiates compliance action. Unusual tax claims should be investigated before they appear on a return. And invoices and accounting records should be preserved long before an audit begins.
Good tax planning is therefore not just about calculating the right number. It is also about being able to explain how you arrived at that number and having the evidence to support it.
If you are unsure about a previous filing, an unusual deduction, an insurance payment or missing documentation, speak with your accountant before taking action. In many cases, dealing with the question proactively gives you considerably more options than waiting until CRA raises it.
This article provides general information only and is not intended as tax, legal or financial advice. Tax consequences depend on the particular facts and applicable legislation. Professional advice should be obtained regarding your individual circumstances.
