Deloitte - Canada Controversy Interview (i)

Interview with Sameer Nurmohamed

1. What is the most significant change to your region/jurisdiction’s tax legislation or regulations in the past 12 months?

Over the past 12 months, legislative changes and heightened tax authority activity have materially increased the complexity and uncertainty surrounding the resolution of Canadian tax controversies. The Canada Revenue Agency (CRA), Canada’s tax authority, continues to be highly active and very sophisticated for large-scale and precedent-setting disputes. The overlapping rollout of several major regimes deepens existing uncertainty and unpredictability in the application, administration, and enforcement of tax legislation in Canada. 

First, the application of the expanded general anti-avoidance rule (GAAR), in force since June 2024, has made it more difficult for taxpayers to predict tax outcomes. By lowering the avoidance threshold, imposing a penalty, and expressly legislating that transactions significantly lacking in economic substance are presumed to be abusive (and thus likely subject to the GAAR), the revised GAAR broadens the scope of potential challenges by the CRA. The GAAR has long been viewed as attenuating the Duke of Westminster principle (a cornerstone of Canadian tax law)—that taxpayers are entitled to arrange their affairs to reduce tax within the law—in circumstances where a tax-motivated series of transactions is considered abusive. We are hopeful that the Duke of Westminster principle will continue to be upheld by the courts even as it is likely to be further attenuated by the revised GAAR. Given the time involved in audit, assessment, administrative appeal, litigation, and judicial decision, jurisprudential guidance on the revised GAAR will take years to develop. As a result, taxpayers are increasingly operating without clear planning guardrails and with greater uncertainty as to where acceptable tax planning ends and impermissible, abusive avoidance begins. Strategic, early, careful consideration of the GAAR is more important than ever.

Second, the new mandatory disclosure rules, enacted in June 2023, require disclosure of numerous types of transactions. The expanded reportable transactions rules and new reporting requirements for notifiable transactions, together with shorter reporting deadlines and extended reassessment periods, mean many disputes are now being triggered through compelled disclosure rather than traditional audits. These disclosures have greatly supported the CRA’s national initiatives to re-purpose and coordinate audits across many taxpayers with theoretically similar fact patterns. While the CRA has been highly effective at identifying transactions it seeks to challenge, the mandatory disclosure rules increase identification of many of the remaining transactions, resulting in more tax disputes.

Third, proposed amendments would materially expand the CRA’s audit and information-gathering powers, including amendments that allow the CRA to (i) demand that taxpayers provide information under oath or affirmation, (ii) issue notices of non-compliance, (iii) pause the normal limitation period for reassessment where there is an outstanding notice of non-compliance, (iv) impose financial penalties for outstanding notices of non-compliance and compliance orders, and (v) issue compliance orders for foreign-based information.

Finally, Canada has enacted a modernized transfer pricing framework, aligned with the Organization for Economic Co-operation and Development (OECD) guidelines, effective for taxation years beginning after November 4, 2025. Under this new framework, the CRA may seek to recharacterize transactions as the CRA believes they “ought” to have been structured rather than how they actually were structured. Rather than being focused on a fairly short and clear arm’s-length principle in section 247 of the Income Tax Act (Canada), the new framework incorporates OECD transfer pricing guidelines into Canadian law. This shift will result in interpretive uncertainty and judgment calls that will undoubtedly turn on the application of complex and ever-changing OECD transfer pricing guidelines to the facts of each situation. The new transfer pricing framework arrives alongside many other OECD and global-led rules, such as excessive interest and financing expenses limitation (EIFEL) and Pillar Two.

These developments also interact with each other to meaningfully increase uncertainty and unpredictability in the tax controversy space. For instance, the CRA may consider certain cross-border structures to be subject to the mandatory disclosure rules, audit these structures under the proposed amendments to the CRA’s audit powers, and eventually determine that these transactions are subject to the GAAR and transfer pricing rules. In this environment, tax controversy lawyers are more than ever a critical component of any tax risk mitigation plan.

2. What has been the most significant impact of that change?

The most notable impact of these major regime changes has been a shift toward front-loaded controversy. CRA audits now increasingly consider the application of the GAAR and its economic substance analysis, transfer pricing rules, and a variety of issues. In many cases, even early in the audit process, the CRA appears to enter the audit with a working hypothesis about how the transaction should be characterized and assessed, which can leave less room for genuine engagement on alternative interpretations. The CRA also increasingly leverages national initiatives to standardize audits and (re)assessments, which are then applied across dozens of taxpayers with theoretically similar fact patterns. As a result, many taxpayers find they must respond to audits as if they were already highly contentious disputes, requiring litigation-level strategy, early evidence development, and strict privilege discipline at the audit stage, thereby materially increasing both the complexity and the stakes of the audit process.

3. How do you anticipate that change impacting your work and the market moving forwards?

The shift toward the front-loading of controversy means that taxpayers and their advisors are increasingly seeking tax controversy and specialist involvement much earlier in the dispute lifecycle, and typically at the CRA audit stage. To manage risk coherently and proactively across audits, administrative appeals, and court proceedings, taxpayers use tax controversy lawyers as advisors strategically during a CRA audit before proposal letters and reassessments are issued.

Naturally, this underscores the need for practitioners who can navigate disputes across regimes rather than in silos and for seamless integration among tax accountants, economists, and controversy lawyers. This trend is, of course, particularly pronounced for high-value, precedent-shaping disputes—such as in the financial services sector and for cross-border structures where transfer pricing comes into play. It is also increasingly evident, even in the mid-market and across sectors, that taxpayers increasingly seek advice during, or even before, CRA audits for risk mitigation and a strategic and practical approach to preventing or streamlining disputes as early as possible.

4. How has this changed the way you offer tax advice?

In this environment, tax advice must be dispute-integrated from inception. Positions should be assessed not only for technical defensibility, but also for how they may be scrutinized under the GAAR, withstand disclosure obligations, respond to expanded audit powers, and ultimately fare in formal tax court discovery and trial. In light of these major regime changes, the CRA is more frequently contesting the legal form of transactions and placing greater emphasis on internal communications, such as email traffic, to determine actual conduct and motivation. As a result, tax controversy lawyers are using their advocacy skills and litigation experience not only to effectively resolve formal tax litigation and administrative appeals but also throughout the CRA audit process. Every interaction with the CRA should be approached with a privilege‑focused mindset, recognizing that correspondence may later form part of an evidentiary record.

5. What potential other legislative/regulatory changes are on the horizon that you think will have a big impact on your region/jurisdiction?

Further refinements to enforcement and information-gathering tools, the CRA’s expanding use of data analytics and artificial intelligence (AI), and emerging jurisprudence interpreting the revised GAAR and the modernized transfer pricing framework are all expected to materially influence the trajectory of Canadian tax controversies. Because tax disputes are inherently time-lagged, addressing the application of past legislation to past transactions (often many years in the past), recent major regime changes in tax legislation will significantly affect future tax disputes (even more so than our current caseload).

6. What are the potential outcomes that might occur if those changes are implemented?

Recent developments in both legislation and case law signal a continued shift away from legal form and the contractual terms documented in intercompany agreements toward administrative assessments grounded in notions of economic substance and actual conduct.

7. Do you think that change will have a positive effect on both your practice and the wider regional/jurisdictional market?

While this environment is likely to boost demand for tax controversy specialists, it does so largely because the system has become less certain and predictable. Expanded CRA powers and economic substance-based analysis have increased the difficulty and uncertainty associated with assessing risk in advance of CRA audits, leading to more disputes driven by uncertainty and novel, assertive CRA positions rather than straightforward disagreement with the law.

8. Are there any regulatory/legislative changes you believe should be implemented in your region/jurisdiction?

Yes. What is needed now is greater clarity around where the legal boundaries actually lie. Many recent reforms rely on indeterminate and largely untested standards, such as “significant lack of economic substance”, purpose-based tests, and the extent to which the OECD transfer pricing guidelines inform Canadian transfer pricing legislation. These standards inherently invite legal interpretation, making outcomes less predictable and more dependent on not only how the standards themselves are construed but also the lens through which a particular decision-maker views the facts.

It is vital that the government provide clearer legislative guidance or Department of Finance technical explanations to articulate workable legal tests, the contours of these standards, and appropriate safe harbors. Not only would such guidance give taxpayers and practitioners more predictability and certainty to enable better compliance, but it would also help the CRA approach these rules consistently as it goes about administering and enforcing tax legislation. In the absence of clearer guidance from Parliament or the Department of Finance, or perhaps even from the CRA, greater certainty may only emerge as tax disputes work their way through the system to yield jurisprudence. 

9. How do you believe those changes would help improve the tax landscape in your market?

Clear legal tests for tax legislation provide certainty, predictability, and fairness; they also promote better compliance by taxpayers and practitioners, as well as more consistent administration and enforcement by the CRA.

10. What sort of issues surrounding the implementation of AI have you seen, and how will AI implementation likely affect your work?

The growing use of AI and advanced analytics raises important issues around transparency, explainability, and evidentiary fairness, particularly where agentic AI and algorithmic tools influence audit selection or case theory. These developments are likely to generate new procedural disputes and elevate the need for litigation-informed responses to the CRA’s information requests.

AI can also be helpful for taxpayers and their advisors, particularly in document-intensive matters, by accelerating large-scale document reviews and helping identify key issues more efficiently. However, rigorous oversight at every stage of AI use is critical to uphold quality standards and comply with procedural and evidentiary rules. Careful legal judgment remains essential to help make sure that AI enhances, rather than undermines, the litigation process. AI simply cannot be relied on in a vacuum; it should instead be a well-deployed tool within a broader approach to tax controversy.

11. How would you describe the tax authorities’ approach in your region/jurisdiction?

Canadian tax authorities are increasingly assertive, technically sophisticated, and willing to litigate, particularly in large-scale and policy-significant cases. Audits are now more likely to proceed from a firmly held enforcement position, with limited receptivity to taxpayer explanations that diverge from the CRA’s initial view. Taxpayers should expect intensive scrutiny, expansive information requests, and a greater readiness on the part of the tax authorities to advance novel positions and test them in court. Tax controversy lawyers should continue to view their main objective as seeking principled resolution through early settlement, which remains achievable in most cases, even though using judicial resources to resolve complex tax disputes is sometimes necessary.

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