The Canada Revenue Agency is taking a recently retired Liberal-appointed senator to court to force her to answer questions and turn over documents as part of a multi-year audit of her tax returns.

The dispute centres on $1.35 million in business losses that Pana Merchant claimed but the CRA disallowed, and comes as the tax affairs of a number of prominent Liberals — including former senator Leo Kolber and the party's chief fundraiser, Stephen Bronfmanfaced public scrutiny in recent weeks.  

Filings in Federal Court show Merchant is being audited for several tax years going back to 2012.

In February 2016, the CRA sent her a request to fill out a questionnaire and provide certain documents "concerning her financial affairs and economic relationships."

But Merchant "refused to complete the questionnaire or provide the related documents" as required under the Income Tax Act, the CRA alleges in its court submission.

Then in July, the agency hit her with a $350,000 tax bill for the 2014 and 2015 years, the court records show.

Finally in October, the CRA applied for an order from a judge to compel her to complete the questionnaire and provide the documents it says it requested.

None of the CRA's claims has been proven in court. Merchant — who retired in March as a senator from Saskatchewan — has until the summer to file arguments in response, but a sworn statement her tax lawyer filed in court says she is "unclear" about what the CRA is contemplating.    

In a statement to CBC through her lawyer, Merchant said, "All documents were made available for CRA examination and continue to be available for examination."

'Losses occur'

The court documents show Merchant is contesting the CRA's assessments of her income for 2014 and 2015, which the tax agency calculated to be $497,787 and $574,282 respectively — well above the base senator salary of about $140,000 at the time.

Notices of objection Merchant's lawyer sent to the tax agency argue she should be allowed to deduct the $1.35 million in business losses she claimed for those two years.

"Mrs. Merchant has business interests," the statement provided to CBC by her lawyer said. "Losses occur. It is impossible to understand the CRA rejection of the loss, which is under appeal, but the appeal will be resolved within a few weeks and additionally your facts are not correct." (CBC asked Merchant, through her lawyer, what facts were "not correct" but received no reply.)

Merchant's losses appear to stem from a side business she had that lent out money. There is no detail in the court files on the nature of the loans.

Merchant was nominated to the Senate in 2002 by Liberal Prime Minister Jean Chrétien. She served as deputy whip of the Senate Liberals from last November until retiring at the end of March, a year before she would have reached the mandatory retirement age of 75.

"I am not resigning because of health. I am not resigning because of some pending problem. I am not resigning because I should spend time with my family," she said in her final speech in the Senate.

"Fourteen years — 5,200 days — helping to bring about change.... If 50,000 days were possible, it would not be enough.

"Well, sadly, enough."

This is not her or her family's first brush with the Canada Revenue Agency. Merchant launched three appeals against the CRA in Tax Court in 2005 and 2006, filings show, all of which were settled before going to trial. Her husband, prominent Saskatchewan class-action lawyer Tony Merchant, has also locked horns with the agency numerous times.

Merchant, her husband and his law firm — of which she is a part-owner — are all currently suing CBC over a 2013 report about his offshore financial dealings.

With files from CBC's Harvey Cashore