Section 231.6

Mr. Chad was the protector of three non-resident trusts and the president or former director of two non-resident companies. CRA sent a requirement pursuant to s. 231.1 to Chad to provide documents and answer questions respecting such entities, and then sent him a requirement pursuant to s. 231.2 to produce the information. In both cases, the trustee of the trusts refused to provide the information to Chad, and the director or lawyer for the two companies so refused on the grounds that doing so was not in the best interests of their shareholder (which were two of the respective trusts).

In rejecting Chad’s submission that the requested documents were “foreign-based documents” which could only be requested under s. 231.6(2), Favel J noted (at para. 31) that the “[c]ourts have yet to definitively rule on whether sections 231.1 and 231.2 apply to foreign-based information or documents,” but found that, as in the 2022 Ghermezian decision, the evidentiary record was lacking as to whether the mooted information was accessible from Canada. However, in dismissing the Minister’s application for a compliance order pursuant to s. 231.7, Favel J stated that he was satisfied, on a balance of probabilities, that Chad had made reasonable efforts to satisfy the requirements and that he did not possess and could not access the documents and information.

In the context of applications by the Minister for s. 231.7 compliance orders respecting CRA requests for various documents made pursuant to ss. 231.1(1) and 231.2(1), Southcott J, after noting (at para. 176) the taxpayers’ submission “that the Minister cannot compel the production of foreign-based information or documents, within the meaning of s 231.6, other than through s 231.6,” Southcott J accepted (at para. 180) the position of the Minister “that the Requirements oblige the Respondents to provide the documents and information in their power, possession and control, if accessible from Canada [emphasis in original]”, but found that the taxpayers had not met their burden of establishing that the requested information was not accessible from Canada.

CRA, which had been auditing the taxpayers -Dr. Smith, a physician and his Ontario professional corporation - learned of a USB key that included accounting data for Caymans corporations controlled by Dr. Smith. 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. 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 having indicated (at para. 23) 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,” Fothergill J rejected a submission that the request letters sought foreign-based information and that they should have been issued under s. 231.6, stating (at paras. 37, 43):

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 [the two offshore companies] are sufficient to establish that the requests for information respecting the two entities are rationally connected to the audit of Dr. Smith personally. ...

… 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. …[A] taxpayer cannot transform domestic-based information into foreign-based information merely by moving it outside the country.

He went on to note that, in dismissing the judicial review application, all he was deciding was that the request letters were not unreasonable - and that Dr. Smith would still have an opportunity (e.g., by adducing evidence relevant to the location of the material) “to equip the Court to decide whether a compliance order should be issued” in the subsequent hearing (para. 45).

Federal Court Rule 317 provides that “A party may request material relevant to an application that is in the possession of a tribunal [e.g., CRA] whose order is the subject of the application….” The taxpayer requested material relevant to its requested order that CRA requirements for information pursuant to ss. 231.1 and 231.6 be set aside on the basis that they were invalid or overly broad. CRA provided material, but in redacted form, and sought an order pursuant to s. 37 of the Canada Evidence Act to justify this redaction based on full disclosure being injurious to the public interest. The only support provided for this request was a certificate issued by the Director General of the International and Large Business Directorate baldly asserting that such disclosure could be used to circumvent ongoing audit operations.

Noël J essentially indicated that he would not be doing his job as a judge if he simply took CRA’s word for it rather than reviewing the unredacted material himself on an ex parte basis, and so ordered. He also stated that, consistently with s. 2(b) of the Charter, “open and transparent judicial proceedings are fundamental principles of the Canadian legal system,” and indicated that any redaction would need to be quite justifiable.

Before confirming the finding below that that the information sought of eBay in a s. 231.2 requirement was needed by the Minister to conduct a good faith audit of eBay “PowerSellers” resident in Canada to ensure that they were complying with their obligations under Canada’s tax laws, Evans JA noted that s. 231.6 was enacted in 1988 before the widespread availability of electronic documents, and when Parliament was likely concerned about how unduly onerous it could be for a person to be required to produce material located outside Canada, and in the possession of another person. He accordingly indicated that information stored in electronic form could be located at places other than the site of the servers on which it is stored, and thus in Canada, for the purposes of the Act.

Cullen J. rejected an argument that the demand for information may only be issued in the course of assessing or reassessing the taxpayer.

In the execution of a transfer pricing audit ("TPA"), the Minister served a s. 231.6(2) Requirement on the taxpayer relating to four corporate siblings in the Bahamas, which had charged fees to the taxpayer. The taxpayer's response to the Requirement omitted certain information, claiming that it was confidential or proprietary in nature, or that it would hurt the siblings' competitive advantage. The information withheld included organizational information about the siblings (such as minute books and personnel charts), the names of employees or external contractors that the sibling employed, and whether the siblings had provided services to other arm's length or non-arm's length customers.

Russell J dismissed the taxpayer's application for review under s. 231.6(5). The standard of review was reasonableness (paras. 15-18), and the Requirement was reasonable. Russel J stated (at paras. 79, 82):

The Minister seeks specific information related to those payments [to the siblings] to determine whether the services were performed in the Bahamas or Canada and, if in the Bahamas, how the services were provided, and to determine the appropriate transfer pricing methodology to be applied so that the Minister can ascertain whether the transfer price paid was an arms-length transfer. In my view, the information sought from the Applicant is necessary to make these determinations and to verify information that has already been provided.

...

The documents requested in the Requirement need to be both relevant and reasonable, but the cases say that the threshold is low... .

The taxpayer suggested that there were less invasive methods of getting the information, such as interviewing the taxpayer's controlling shareholder (who held 90% of the taxpayer's shares, directly and indirectly), but this would not give CRA the objective confirmation needed to complete the TPA (para. 84). As to whether providing the information would be costly or destroy the firms' competitive advantage, no evidence had been offered.

The financial statements of affiliated U.S. companies of the taxpayer (being a company to which the taxpayer paid advisory fees, and a parent company) were relevant to an audit of the Minister, and there was no evidence to suggest that the Minister was engaged in a "fishing trip". The taxpayer's application for judicial review was dismissed.

A requirement issued to the appellant to produce for the Agency's inspection the whole of its corporate records for two fiscal years (during which the appellant had employed one of its vessels in Canadian waters) was upheld. Although in enacting the reasonableness requirement in s. 231.6(5) "Parliament intended that a notice of requirement in respect of a foreign-based document must not only relate to a document which is relevant to the administration and enforcement of the Act but that it must also not be unreasonable" (p. 5354), here the requirement was not unreasonable in light of the Agency's wish to conduct an audit, which required it to be able to determine for itself that various books and records were not relevant to the appellant's Canadian tax liability.

After dismissing the taxpayer's application for review of a requirement based on its allegation that the requirement included information and documents which might have no link to the determination of its liability for Canadian taxes, Rouleau J. stated (at p. 6072) that "the test to be applied is not whether the information requested will be relevant in determining the applicant's Canadian tax liability, but rather whether the information is relevant to the administration of the Act".

The taxpayer failed to respond to a requirement to produce a range of foreign-based documents for its own reasons, or those of its parent, that were unrelated to the audit taking place.

After noting (at p. 924) that where paragraph 2(e) of the Bill of Rights (Canada) had been infringed, "the remedies that may be applied ... must be limited to that which is required in order to remedy a breach arising out of the specific facts of the case before the Court" rather than giving rise to a declaration of invalidity of the offending legislation, and after noting that there was no issue of the taxpayer here having reasonable cause for its failure to produce, Bowie T.C.J. made an order prohibiting the taxpayer from introducing any foreign-based information covered by the demand otherwise than as rebuttal evidence, or in cross-examination, and only with leave of the trial judge. The exception was needed to address concerns that if a blanket prohibition were made, a breach of the principles of fundamental justice might occur if the Crown adduced part of the evidence covered by a prohibition selectively.