The Hidden Evidence that Wins Tax Court Appeals: Third-Party Records
Many taxpayers believe that once the Canada Revenue Agency “CRA” obtains third-party records, the outcome of an audit is inevitable. In reality, those records often hold the key to challenging reassessments…if used correctly.
In fact, some of the strongest tax disputes we see, both during audits and after formal appeals, turn on third-party records the CRA either misunderstood, selectively relied on, or failed to analyze altogether. Understanding how these records are obtained and evaluated can mean the difference between an unfavourable reassessment and a successful appeal at Tax Court.
What are Third-Party Records?
Under the Income Tax Act (ITA), and Excise Tax Act (ETA), the CRA has broad authority to require information not only from taxpayers, but from “any other person” who may hold relevant information.
Through formal requests for information (RFIs), the CRA can legally compel third parties to produce documents during an audit, or in the formal dispute process. These third parties commonly include:
- Banks and other financial institutions
- Realtors and real estate brokerages
- External accountants and bookkeepers
- Suppliers and customers
- Corporate officers and directors
With limited exceptions, recipients of RFIs are required to comply. But having the information is not the same as understanding it correctly.
How Third-Party Records are Misused During CRA Audits & Appeals
At the CRA audit and appeals stage, CRA agents often gather large volumes of third-party information (bank statements, transaction histories, real estate documents, trust ledgers) but often apply overly simplistic assumptions when reviewing them.
Example #1: Bank Records and “Unreported Income” Assumptions
Auditors and appeals officers frequently treat unexplained deposits in third-party records as income without conducting proper tracing. What those same records may actually reflect include:
- Transfers between personal and corporate accounts
- Loan proceeds or repayments
- Shareholder advances
- Family gifts or inheritances
When deposits are mischaracterized, the audit and appeals conclusions are flawed from the start, yet reassessments and confirmations are still issued.
Example #2: Real Estate Records Reviewed Without Context
The CRA often relies on third-party information from realtors or land registrars to allege:
- Undeclared capital gains
- Business income from alleged property flipping
- Improper principal residence claims
However, closing statements, trust ledgers, and realtor correspondence frequently contradict the auditor’s or appeal officer’s narrative, especially where intent, timing, or ownership structure is misunderstood.
What Happens after the Audit: Third-Party Records in the Dispute Process
Once a reassessment is issued, taxpayers may file a Notice of Objection, marking a shift into the formal dispute process. At this stage, the CRA’s Appeals Division is meant to conduct an independent review of the audit file.
In practice, however, appeals officers often rely heavily on the same third-party records, without re-examining whether they were interpreted correctly in the first place. This creates a strategic opportunity for taxpayers.
Using Third-Party Records to Win a Tax Court Appeal
In a Tax Court Appeal, third-party records can be used strategically to expose:
- Internal inconsistencies in the CRA’s assumptions
- Misread financial records
- Selective reliance on evidence
Example #3: Records the CRA Had – But Didn’t Understand
It is not uncommon for bank statements or accounting records already in the CRA’s possession to directly contradict the reassessment or confirmation once properly reconciled and explained.
In these cases, the issue is not missing information, but faulty analysis.
Tax Court judges are not bound by CRA assumptions. When third-party records reveal that the audit and appeals review were unreasonable or incomplete, the CRA’s position can become vulnerable.
Example #4: Records the CRA Never Requested
Equally important are third-party records the CRA never sought, yet would have undermined its conclusions.
On appeal, the absence of key third-party evidence can demonstrate that the audit lacked the depth and fairness required by law, particularly where sweeping conclusions were drawn without proper investigation.
Important Note on Lawyers, Privilege, and Limits on CRA Powers
Although the CRA has broad authority to obtain third-party information, it is not unlimited.
Solicitor-client privilege generally prevents the CRA from compelling lawyers to disclose client information held in their capacity as legal advisors. Instead, the CRA must seek information from the client directly, allowing privilege to be asserted.
There is no equivalent privilege for accountants in Canada, a distinction the CRA frequently relies on, but one that must be navigated carefully during both CRA audit and appeal.
Why All This Matters in Tax Court, and on Appeal
At the Tax Court of Canada, the focus shifts from volume of documents to quality of analysis. The judge examines:
- Whether the CRA’s assumptions were reasonable
- Whether third-party records were properly interpreted
- Whether the audit process itself was flawed
Time and again, third-party records become the evidence that exposes those flaws.
Mistakes Most Taxpayers Make
Many taxpayers assume that because the CRA already has third-party records, nothing more can be done. That assumption is often wrong. The key is how the records are used, not whether they exist.
Overall, third-party records, when properly understood and presented, can be decisive in Tax Court appeals. Even when the CRA has access to these records, misrepresentation or incomplete analysis creates opportunities for taxpayers and their lawyers to challenge reassessments successfully.
For those facing a CRA audit or reassessment, reviewing and organizing third-party evidence early, understanding its context, and working strategically can make all the difference.
Tax controversies require more than accounting support; they demand legal expertise grounded in Canadian tax law. Rosen & Associates helps clients navigate these challenges with confidence and precision.
If you are facing a CRA reassessment or have been contacted about potential unreported income, deductions, or GST/HST issues, it is important to act quickly. Schedule a free consultation with Rosen & Associates Tax Law to discuss your situation and protect your financial interests.
Disclaimer: This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article.
If you have specific legal questions, you should consult a lawyer.
Katelyn Adams