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A recent Court of Quebec decision, Élite Chauffeur S.A. inc. v. Agence du revenu du Québec, 2024 QCCQ 5307, is an excellent reminder that during a tax audit, a taxpayer's cooperation is essential. A failure to cooperate can have far-reaching consequences.

Having initiated an audit of the Taxpayers (two corporations), and faced with their lack of cooperation, the Quebec Revenue Agency decided to send the Taxpayers peremptory demands under section 39 of the Tax Administration Act (“TAA”). Despite these demands, the Taxpayers failed to provide the requested documents. However, at the hearing before the Court, the Taxpayers attempted to introduce invoices, Excel spreadsheets, bank statements and cheques as exhibits. These documents were covered by the peremptory demands sent by the Agency.

The Court rightfully upheld the Agency's objections to the filing of these exhibits, since, according to section 39.1 of the TAA :

39.1 Where a person has not complied with a formal demand in respect of information or a document, any court shall, on application by the Minister, prohibit the introduction of such information or document unless the person establishes that the formal demand was unreasonable under the circumstances.

As a result, the Taxpayers were unable to introduce into evidence certain documents that would, presumably, have been favorable to their position. But there's more!

Still in connection with these additional exhibits, which were communicated late and required last-minute analysis, the Agency asked the Court to exercise its discretion in sanctioning the Taxpayers under article 342 of the Quebec Code of Civil Procedure, which reads:

342. The court, after hearing the parties, may, on its own initiative or on an application, punish substantial breaches noted in the conduct of the proceeding by ordering a party to pay to another party, as legal costs, an amount that it considers fair and reasonable to cover the professional fees of the other party’s lawyer or, if the other party is not represented by a lawyer, to compensate the other party for the time spent on the case and the work involved.

Following its review of the Taxpayers' behavior, the Court decided to impose a penalty of $5,000.

This decision should serve as a precautionary tale to any taxpayer subject to a tax audit. Cooperation is essential and a failure to cooperate, in the event the case is judicialized, could have serious consequences.