Section 231.1

The Minister applied for s. 231.7 compliance orders respecting CRA requests for various documents made pursuant to s. 231.1(1) (and s. 231.2(1)). In reversing the finding below that s. 231.1(1) did not authorize the compulsion of information, other than information contained in a document and in rejecting the appellants’ submission that, if in addition to s. 232.1(1), 231.1(1) also authorized the issuance of compulsory written demands requiring a person to provide information and documents, this would create operational incompatibility between the provisions, Roussel JA stated (at paras. 36-37):

The fact that the procedural requirements in section 231.2 are absent from section 231.1 does not establish a conflict. Given that subsection 231.2(1) allows the Minister to seek information from persons who are not part of the audit process (third-party record keepers), one can easily understand the requirement that notice be served on the person required to provide the information or documentation. …

The doctrine of paramountcy, as argued by the appellants, cannot be engaged in the absence of conflict between the two provisions.

Roussel JA also confirmed the finding below that “if the appellants wished to assert that the time afforded for compliance with the requirements was either objectively or subjectively unreasonable, they bore the burden of proof on that issue” (para. 48) and that such burden had not been met.

Roussel JA further found that “prior judicial authorization will only be required where the Minister seeks information relating to ascertainable unnamed persons with the intention that the information will be used to verify the unnamed persons’ compliance with their obligations under the ITA” (para. 59) whereas here, there was no reversible error in the Federal Court’s finding “that the evidence demonstrated that the Minister did not intend to investigate the tax compliance of the unnamed persons, but rather the tax compliance of the relevant appellants and other named entities” (para. 60).

In the context of applications by the Minister for s. 231.7 compliance orders respecting CRA requests for various documents made pursuant to s. 231.1(1), Southcott J rejected the submissions of the respondent taxpayers that s 231.1(1) affords the Minister only an inspection power, i.e., authority (for any purpose related to the administration or enforcement of the Act) to attend at the premises of a taxpayer or other person to inspect books and records or other documents, and that s 231.1(1) does not grant the Minister power comparable to s 231.2(1), either to: (a) compel provision of documents outside the context of an inspection; or (b) compel the provision of information other than information about the location or provenance of documentation sought in the context of an inspection. Southcott J stated (at paras, 73-74) that he found the analysis in Tellza “compelling” (e.g., that the equivalent ETA provision “indeed grants an authorized person the power to request or require a taxpayer to provide information in any form”) and concluded (at para. 78) that “s 231.1(1) entitles an authorized person to demand provision of documentation without physically attending at a place or premises where the documentation is kept.”

However, Southcott J accepted the taxpayers’ submissions in this regard by concluding (at para. 111) that “s 231.1 … does not authorize issuance of a demand compelling the recipient to provide, through written answers to questions, substantive information relevant to a taxpayer’s tax position” as contrasted to “authoriz[ing] compulsion of only pre-existing documentation” (para. 79). He stated in this regard (at para. 96):

[T]he distinction underlying the reasoning in Cameco is between documented and undocumented information. Section 231.1(1)(a) empowers the Minister to compel provision of the former but not the latter.

CRA, which had been auditing the taxpayers -Dr. Smith, an orthopaedic surgeon in Hamilton, and his Canadian professional corporation (“Smith MPC”) - for their 2010 to 2016 taxation years, learned of a USB key that included accounting data for a Caymans corporation controlled by Dr. Smith (“COG Ltd”) pertaining to the 2003 to 2018 taxation years. Dr. Smith initially had brought the USB key to Canada and provided it to his Canadian accountants, but they had sent it to their Buffalo office, which had the requisite software to extract the information on the key. The Minister issued request letters in October 2020 effectively requesting, pursuant to s. 231.1, information on the USB key along with certain other information, and also expanding the years of the taxpayers under audit to the years 2003 to 2018. Although the Minister brought compliance applications in April 2021, this hearing dealt only with the taxpayers’ application for judicial review of the request letters.

After noting that the reasonableness of the letters turned on a test of whether there may be considered to be “a rational connection … between the information sought and the administration and enforcement of the ITA” (para. 23), Fothergill J stated (at paras. 27, 37):

[A]ssessing or re-assessing a taxpayer, even for years that fall outside the normal reassessment period, in circumstances where the taxpayer may have made any misrepresentation attributable to neglect, carelessness or willful default … is a purpose for which a request for information may be made under s 231.1 … .

… I am satisfied that Dr. Smith is being audited with respect to potential unreported income and assets from his offshore holdings. His long association with, and ownership interests in, COG Ltd and Assets Ltd are sufficient to establish that the requests for information respecting the two entities are rationally connected to the audit of Dr. Smith personally.

In addressing a submission that the request letters sought foreign-based information and should have been issued under s. 231.6, he first noted (at para. 42) that Ghermezian:

did not rule out the possibility that "“there could be circumstances in which the record before the Minister includes evidence that information is located outside Canada that is so compelling that it would be unreasonable for the Minister to proceed otherwise than under s. 231.6” … .

However, he stated (at paras. 43, 45-46):

I am not persuaded that the evidence in this case is so compelling that it was unreasonable for the Minister to proceed otherwise than under s. 231.6 of the ITA. I agree with the Minister that a taxpayer cannot transform domestic-based information into foreign-based information merely by moving it outside the country. Furthermore, information in electronic form stored on servers outside Canada is in law capable of being located in Canada (eBay Canada …).

The Minister’s applications under s 231.7 of the ITA will afford Dr. Smith an opportunity to adduce evidence relevant to the location of the material, to equip the Court to decide whether a compliance order should be issued (Ghermezian at para 107). …

For the purposes of the present proceedings, whether the information or documents are located within or outside Canada does not affect the reasonableness of the requests. The information sought is rationally connected to the audit of Dr. Smith, and the requests were therefore reasonable.

The application for judicial review was dismissed.

The Friedmans, a married couple, who had each received Requests for Information under s. 231.1(1) (“RFIs”) that were addressed to them personally, appealed the Federal Court decision granting a compliance order against them under s. 231.7(1). They submitted that ss. 231.1(1) and 231.7(1) infringed their rights under s. 13 of the Charter in that those provisions did not prohibit use of the information gathered in any subsequent criminal proceedings and that the Federal Court failed to follow Lin which, in dealing with RFIs with essentially identical wording, found that compliance with the RFIs was not required because it was unclear whether the RFIs were directed to the taxpayers individually or to their related foreign entities.

In rejecting the second submission, Pelletier JA stated (at paras. 30-31) that any failure to follow “judicial comity,” i.e., the expectation “that judges will consider the decisions of their colleagues carefully and, if they choose to differ, will explain why … is not a basis for appellate intervention.”

In rejecting the first submission, he stated (at paras. 35, 39) that “courts should not decide constitutional cases in a factual vacuum” such as here, where there were “merely hypothetical possibilities which may or may not arise” (e.g., a subsequent criminal investigation commencing). He went on to find that, in any event, even though Jarvis (which “established a predominant purpose test to determine if inquiries by the Minister were intended to determine a taxpayer’s tax liability or a taxpayer’s criminal liability” (para. 41)) dealt explicitly only with ss. 7 and 8 of the Charter, and not s. 13 thereof, that test nonetheless appeared to be applicable here, where there was no criminal investigation.

The Minister sought an order pursuant to s. 231.7 requiring the respondent (“Atlas”) to provide a draft due diligence report (the “Report”) prepared by an accounting firm (“EYC”), that reviewed the tax attributes of a Canadian corporation (“LSI”) that subsequently was acquired by Atlas’ U.S. parent (“JMC”) and of a Canadian subsidiary (“LSC”) of LSI, as well as LSC’s material tax exposures resulting from its Canadian tax filings including risk of challenge by CRA. Shortly thereafter, JMC transferred a subsidiary of amalgamated LSI (“New LSI”) to Atlas, and an issue in a CRA audit of Atlas for that year was the valuation of a U.S. subsidiary of New LSI.

Southcott J referenced (at para. 28) “the low threshold of relevance applicable under s 231.1” and stated (also at para. 28) that:

[I]t is clear that the Report was prepared for purposes of the transaction that is under audit. As previously explained, the Minister need not demonstrate that the requested document is relevant to a specific issue under audit.

Furthermore, although the Report dealt with LSI Canadian companies, it “may be relevant to the valuation of the US shares that CRA is reviewing.” Accordingly, the low threshold under s. 231.1 for relevance was met.

In going on to find that the Report was not protected by disclosure on the basis of the BP case, Southcott J found (at paras 65 and 66):

… I agree with the Minister’s position that BP is to be read as precluding general and unrestricted access to TAWPs [tax accrual working papers] on a prospective basis, outside the context of an audit of particular issues. …

… Unlike in BP, the Minister’s request for access to the Report in the present case is made in the context of an active audit of particular issues. I have previously concluded that the information in the Report sought by the Minister meets the applicable threshold of relevance in that context. I therefore find that compelling Atlas to provide the Report would not offend the principle described in BP that a taxpayer is not required to self-audit.

In 2009, the French authorities obtained the Falciani List (on which an HSBC employee in Switzerland had copied account holder information) and pursuant to Art. 26 of the Canada-France Convention provided information to CRA showing inter alia that the taxpayer had a large HSBC account in Switzerland. However, the taxpayer had not reported the account, or any interest thereon, and CRA proceeded to send three request letters in 2015 and 2016 pursuant to s 231.1(1). The taxpayer ultimately responded, but without providing any information concerning any HSBC account in Switzerland. On November 8, 2016, the Minister applied under s 231.7(1) for a compliance order.

In granting the order and rejecting the taxpayer’s submission that the request letters were issued in connection with “a criminal investigation going on behind the scenes of which the [CRA] Auditor ha[d] no knowledge,” Russell J stated (at paras 50, 55, 58 and 59):

… Offshore accounts are not, per se, illegal and it is the duty of the Minister under the Act to inquire and ensure that those with offshore accounts are meeting their tax liabilities. … If the Respondent’s position were accepted, it would mean that, given the government’s intent to deal with offshore tax offenders, every Canadian taxpayer with an offshore bank account would be immune from compliance with the audit requests made under s 231.1(1) because this could lead to criminal proceedings at some time in the future. The governing jurisprudence makes it clear that possible future criminal proceedings do not excuse a taxpayer from compliance with a s 231.1(1) request. See Jarvis… .

It is … clear that, even if a CRA auditor has a suspicion that an offence may have occurred, a mere suspicion does not change the predominant purpose of an audit into a criminal investigation. See Jarvis…

… Given that the Auditor’s evidence is that the Respondent “has not reported [the] existence of any money, securities, or assets in HSBC Swiss account(s), nor any income earned therefrom,” it is certainly possible that CRA could have begun an investigation to establish the elements of criminal tax evasion, although there is no evidence that it has. … Assessing the totality of the circumstances … I conclude that the predominant purpose of the request letters is a civil tax compliance audit and that no adversarial relationship between the state and the Respondent exists. …

Ellingson … made it clear that the Jarvis test must be based upon evidence, and cannot be based upon the subjective suspicions of the taxpayer involved. …

The taxpayer applied to have a requirement issued to him under s. 231.1(1) set aside on the basis it was issued as part of a criminal investigation of him. Under Rule 312, he sought permission to supplement the record (containing only the materials before CRA in issuing the requirement) by filing a copy of the record in a different court file concerning an application made by the Minister against Citibank, N.A., for an order requiring the disclosure of certain information concerning a number of taxpayers resident in Canada and to cross-examine the two CRA employees who signed affidavits in that other file (on the grounds that this could help prove that the CRA had begun a criminal investigation).

Grammond J first noted (at para. 15):

…[C]ourt file no. T-919-16 … is an application for leave to impose a requirement on Citibank to disclose information regarding transactions involving Cayman National Bank and unnamed residents of Canada. It was granted on consent. It was supported by affidavits of two CRA employees, Mr. David Letkeman and Ms. Stephanie Henderson, [which] … describe how the CRA came to believe that the requirement could lead to the production of information regarding Canadian taxpayers’ undisclosed foreign assets and tax liability. … [I]nformation provided by Citibank as a result of this requirement brought Mr. Campbell’s situation to the attention of the CRA.

He went on to find that the affidavits in that other case did not show that the taxpayer was under criminal investigation, and that there was an insufficient basis for giving the taxpayer the right to cross-examine the two officials in the other case.

Campbell J allowed the Minister's s. 231.7 application to enforce her demand for unredacted copies of its tax accrual working papers (containing descriptions of issues for which it had exposure). The papers were compellable because they were "an important tax record in BP Canada's possession" (para. 25). Whatever policy ramifications flow from compelling the production of such papers are within the Minister's purview to manage, not the courts' (para. 29).

Neither did Campbell J see why there should be an exercise of Court discretion to quash the demand. The Minister's position had always been that such papers were compellable, and the restraint with which it typically applied that policy was not binding (paras. 11, 13).

Arguments that the taxpayer effectively was being "conscripted" to audit itself were unpersuasive, as the working papers had already been prepared for other (accounting) reasons (para. 24). Although the papers had been prepared for what now were statute-barred years, their content remained relevant to subsequent years (para. 32).

Finally, as to whether the demand was unfair, Campbell J adopted (at para. 47) a statement of the Minister that:

...If the CRA does not uncover the tax positions in time, the shareholders of BP win, and the taxpayers of Canada lose. If the tax position is discovered and challenged by the CRA, the matter can ultimately be resolved by the Tax Court of Canada as to the propriety.

The taxpayer had been convicted of over 30 GST-related offences. In the course of appealing the related reassessments, she moved, on Charter grounds, to exclude from evidence any information the Minister obtained from Requests for Information, arguing that the RFIs were made in the course of a criminal investigation.

The trial judge dismissed the taxpayer's motion, finding that the situation involved a concurrent criminal investigation and audit. Trudel JA further added (at para. 9):

The Judge's legal finding accords with Jarvis and with the self-assessment and the self-reporting nature of the income tax regime. Whether the CRA could properly use such documents to prosecute the appellant for criminal offences under the ETA is irrelevant to the current civil proceedings.

In any event, even if the taxpayer were correct that her rights were breached, it was "at best a technical breach" which did not call for a remedy under s. 24(2) of the Charter (para. 9).

The accused applied to exclude evidence collected from an audit on the basis that the audit had a criminal investigation purpose. Applying the predominant purpose test in Jarvis to dismiss the taxpayer's application, Marchand J noted that the mere fact that the auditor did not pass along the audit file to the Enforcement Division at the very earliest reasonable time (7 September 2010) did not mean that the Audit Division's primary purpose had changed to a criminal purpose before the file was passed along (16 December 2010).

The Court affirmed the trial judge's decision to exclude evidence obtained by CRA in the course of a pilot project to evaluate the adequacy and reliability of the point-of-sale systems of various business including that of the accused, including the warrantless seizure of accounting diskettes. The project was a randomly sampled study intended for policy research, and was not meant to investigate tax liabilities. CRA officials misrepresented their authority under the project in order to seize the diskettes. The Court found that this amounted to a warrantless seizure in violation of the taxpayer's Charter rights.

Hinkson J.A. also remarked (at para. 54) that the Supreme Court of Canada's requirement in Richardson, that the Minister exercise power under s. 231.2 only if the taxpayer's liability is a "subject of genuine and serious inquiry," also applies to s. 231.1.

After the CRA served the appellant with a requirement under s. 230(3) asking that it maintain "transmittal forms" showing the identities of (parent) donors to the appellant and the names of students (typically children of the parents) who received funding for their attendance at a university that was affiliated with the appellant, CRA requested donor lists from the appellant. As the Minister led unchallenged evidence that the information it sought identifying donors was necessary for determining whether the appellant was issuing receipts otherwise than in accordance with the Act (so that there would be grounds to revoke its registration), the Minister was entitled to the requested information due to the combined effect of ss.230(2)(a) and 231.1, without seeking judicial authorization under s. 231.2(2). This interpretation did not render s. 231.2 redundant, as s. 231.2 responded to the need for the Minister to seek information relating to unnamed persons from a third party record holder outside the context of a formal audit.

After applying a range of factors Noël J. concluded that the predominant purpose of letters and questionnaires was to further a criminal investigation and were not within the parameters of the audit functions contained in s. 231.1(1). The letters and questionnaires were quashed, and the Minister prohibited from taking any proceedings for the applicants' failure to respond.

An investigation by CCRA of the taxpayer was not transmuted into a criminal investigation until the auditor met with Special Investigations and referred the file to them for their consideration. Reilly J. noted (at p. 5219) that:

"The mere fact that the audit was provoked as a result of suspicion of non-compliance does not turn it into an investigation to determine penal liability."

He also noted (at p. 5220) that:

"Questions related to mens rea do not fall within the scope of s. 231.1(1)(d)."

CCRA was conducting an audit and not an investigation of the taxpayer up until the time of a three-hour meeting in which the taxpayer was questioned extensively about unidentified deposits and unreported income. Accordingly, evidence gathered prior to and during that meeting was properly obtained as part of the audit process and could be shared with Special Investigations, whereas evidence gathered subsequent to that meeting and prior to warning him that he was the subject of an investigation for the purposes of furthering an s. 239(1) prosecution, violated the taxpayer's Charter rights and would have to be reconsidered in light of s. 24(2) of the Charter at a new trial.

Where the predominant purpose of a particular inquiry is the determination of a penal liability (e.g., under s. 239 of the Act), CCRA officials may not have recourse to the inspection and requirement tools in ss. 231.1(1) and 231.2(1). In this regard, "enforcement" in s. 231.1(1) and 231.2(1) did not include prosecution of an s. 239 criminal offence. Here, the predominant purpose of an investigation by an auditor was not the determination of penal liability for the taxpayer, with the result that information obtained in the investigation was admissible for the purpose of an application for a search warrant. Accordingly, the warrant was validly issued.

The photocopying by a Revenue Canada auditor of notes made by an accountant in his interview with the taxpayer which the auditor obtained from an empty office at the time the accountant was out of town was not authorized by s. 231.1(1). Sharlow J.A. stated (at p. 5114) that "one might question whether an auditor can be said to have exercised his powers of investigation at a 'reasonable time' if he takes a document from an accountant's private office when he knows the accountant is out of town". Furthermore, because the taxpayer had a reasonable expectation of privacy (notwithstanding that "a taxpayer's expectation of privacy in an accountant's notes recording personal information are at the low end of the scale"), there was a breach of the taxpayer's rights under s. 8 of the Charter.

The use of s. 231.1 to obtain bank records and records of a solicitor who had acted for the accused breached the reasonable expectations of privacy of the accused. Bagnall J. found that the use of the evidence so obtained without judicial authorization was not permitted under s. 24(2) of the Charter.

After the taxpayer's file was referred to Special Investigations based on the initial auditor's suspicion that the taxpayer had not reported income, Special Investigations sent the file back to audit for further investigation, with the result that further information was obtained pursuant to s. 231.1(1). On the basis of the information so obtained, search warrants were obtained and executed.

Before finding that the evidence so obtained under s. 231.1(1) should be excluded under s. 24(2) of the Charter and that the search warrants (having been obtained as a consequence of the excluded evidence) had been correctly quashed by the judge below, LaForme J. stated (at p. 5330):

"Section 231.1(1) is designed as a regular audit tool to ensure compliance with the Act. It is not designed to gather evidence for the purpose of a criminal prosecution."

A Revenue Canada officer was authorized to examine and make copies of documents which the OPP had seized and detained pursuant to s. 446 of the Criminal Code, subject to Revenue Canada either obtaining the consent of the taxpayers or obtaining a proper search warrant under s. 231.3 of the Act.

An order was granted restraining the Department from taking further steps in the investigation of the affairs of the taxpayer and specifically from asking him questions. A S.231(4) authorization to enter and search had previously been quashed. To permit the Department to require answers to questions posed pursuant to S.231(1)(c) would have the effect of stultifying the quashing of the authorization - both the S.231(4) search and the S.231(1)(c) questions would seek the same information.

The accused argued that it was inappropriate for CRA to obtain a search warrant under s. 487 of the Criminal Code in respect of suspected offences under the Income Tax Act and Excise Tax Act, as both Acts have their own provisions for obtaining search warrants that (the accused argued) place more stringent requirements on obtaining a search warrant (ITA s. 231.3(1) and ETA s. 290). He argued that the specific procedures set out in those provisions "should not be ignored" in favour of more general procedures dealing with the same matter, and that CRA's policy of obtaining warrants under the Criminal Code instead of the ITA and ETA is a pervasive abuse of process.

Barrow J found no merit in the accused's submissions. The overriding of a general provision by a specific one occurs where the two provisions cannot "stand together," whereas here the provisions merely authorized warrants "somewhat differently" (para. 49).

As for the abuse of process argument, CRA's choice to invoke the Criminal Code procedure was appropriate. Barrow J stated (at para. 54):

[I]n this case the revenue authorities would have had to obtain two warrants, had they attempted one under the Income Tax Act and one under the Excise Tax Act, as opposed to a single warrant granted under the Criminal Code. Second, there is no basis to conclude that because the Income Tax Act and Excise Tax Act warrants can only be issued by a superior court judge, that the level of review applied by the issuing judicial officer is any different, never mind more rigorous, than the review carried out by any other judicial officer.

The seizure of 48 boxes of documents pursuant to s. 231(1)(d) was permissible given the complexity of the taxpayer's affairs. To insist that in all cases the determination of relevance be based upon the examination of the documents at the time of the search would be impractical.

S.231(1)(d) is ultra vires by virtue of s. 8 of the Charter because it permits seizure in advance of any judicial authorization. "The argument advanced by the appellant that immediate seizure may be necessary to prevent loss or destruction of potential evidence, is in my view without merit on the issue of the constitutionality of the section although it may conceivably, at least, justify warrantless seizures in special circumstances."

The procedure contemplated by S.231(1)(d) should not be regarded as interfering with the types of privacy interests protected by S.8 of the Charter, given the public interest in a reasonably efficient system of collecting taxes.

S.231(1)(d) (as opposed to S.231(4)) does not authorize an auditor to seize if he had formulated a belief of probable guilt prior to coming upon the incriminating records.

It was indicated, obiter, that S.231(1)(d) "embraces all the documents required to be retained by a taxpayer under S.230", rather than being limited to the seizure of documents relating to the taxation year in which there appears to have been a violation.

It was stated, obiter, that it is immaterial that there is a time lag between the noting of the violation and the seizure.