James Richardson & Sons v. M.N.R., 84 DTC 6325, [1984] CTC 345, [1984] 1 SCR 614

Wilson, J:—The issue in this case is the scope of the Minister of National Revenue’s power to demand information under section 231 of the Income Tax Act, SC 1970-71-72, c 63 as amended. The parts of the section with which we are concerned read as follows:

231. . ..

(3) The Minister may, for any purposes related to the administration or enforcement of this Act, by registered letter or by a demand served personally, require from any person

(a) any information or additional information, including a return of income or a supplementary return, or

(b) production, or production on oath, of any books, letters, accounts, invoices, statements (financial or otherwise) or other documents,

within such reasonable time as may be stipulated herein.

(4) Where the Minister has reasonable and probable grounds to believe that a violation of this Act or a regulation has been committed or is likely to be committed, he may, with the approval of a judge of a superior or county court, which approval the judge is hereby empowered to give on ex parte application, authorize in writing any officer of the Department of National Revenue, together with such members of the Royal Canadian Mounted Police or other peace officers as he calls on to assist him and such other persons as may be named therein, to enter and search, if necessary by force, any building, receptacle or place for documents, books, records, papers or things that may afford evidence as to the violation of any provision of this Act or a regulation and to seize and take away any such documents, books, records, papers or things and retain them until they are produced in any court proceedings.

(5) An application to a judge under subsection (4) shall be supported by evidence on oath establishing the facts upon which the application is based.

1. The Facts

The events leading up to the demand for information from the appellant are relatively complex but the most relevant ones can be stated fairly simply. The appellant is a commodities futures market broker in Winnipeg. In October 1974 the Department of National Revenue decided that it was necessary to check on compliance with the Income Tax Act by traders in the commodities futures market. In June 1979, after the appellant had queried the Department’s legal authority to demand from it confidential information about its clients’ affairs but had nevertheless participated in a feasibility study, the Department requested the appellant’s magnetic tape file of their clients’ commodity monthly statements for 1977 so that it could process the information on a test basis. The Department guaranteed confidentiality of the data during the test period and undertook to advise the appellant of any subsequent intention to use the information in an income tax compliance project. It also agreed to treat other Canadian commodity brokers in a similar way by inspecting their files for use in any such project.

The appellant supplied the information but with clients’ account numbers only and no means of identifying them. In December 1979 the respondent requested the following information:

(a) a complete listing of office locations identifying each by the office number; and

(b) a complete listing of customers’ names and addresses, identifying each by account number.

The appellant refused to provide this additional information and in May 1980 the respondent served on the appellant a formal Requirement under paragraph 231(3)(a) of the Income Tax Act requiring that this information together with details of all monthly transactions in 1977 as used in the preparation of clients’ commodity statements, be delivered on magnetic tape to the Department of National Revenue. In October 1980 similar Requirements were made for the calendar years 1978 and 1979.

The validity of these Requirements was attacked by the appellant in certiorari and declaration proceedings in the Federal Court. These actions, which were consolidated at trial, were dismissed by the trial judge and an appeal to the Federal Court of Appeal was also dismissed.

2. The Federal Court: Trial Division

At trial Mr Justice Smith held that the demand for information was made for a purpose related to the administration of the Income Tax Act. The raising of money through income taxation was undoubtedly within subsection 91(3) of the Constitution Act, 1867 and “raising” included not only the imposition and levying of taxes but also the taking of whatever steps were required to ascertain who owed taxes and to collect those taxes. The Minister was seeking information to verify the accuracy of income tax returns and this was clearly related to the administration and enforcement of the Act.

The learned trial judge found that the Minister’s demand for information in this case represented a serious inquiry into a specific tax liability within the meaning of this Court’s decision in Canadian Bank of Commerce v Attorney General of Canada, [1962] SCR 729. A specific person or persons need not be named; it was sufficient if they were so described as to be readily identifiable. All the customers or clients of the appellant who had trading transactions in the commodity securities market during the three years in question represented an appropriately identifiable group.

The learned trial judge also dealt with submissions made by the appellant under paragraphs 1(a) and 2(e) of the Canadian Bill of Rights. He held that the Minister’s demand for information did not interfere with anyone’s right to the enjoyment of property under paragraph 12(a) nor threaten anyone with deprivation of that right. Moreover, the exception for due process of law would negative any such claim. As far as paragraph 2(e) was concerned, he held that the present proceedings were designed to ensure a fair hearing for the appellant. A conflict undoubtedly existed between the right of commodities futures traders to privacy concerning their securities transactions and the needs of the Department of National Revenue to obtain the information necessary to ascertain and collect income tax. The rights of the individual must, however, yield to the efficient operation of government where, as here, the situation was sufficiently serious to warrant it.

3. The Federal Court of Appeal

In the Federal Court of Appeal the appellant submitted, relying on the Canadian Bank of Commerce case, that a Requirement for information under subsection 231(3) was not for a purpose related to the administration or enforcement of the Act unless the purpose was to obtain information relevant to the tax liability of some specific person or persons whose tax liability was currently under investigation. It argued that the Requirements in the present case did not meet this test. A Requirement for information concerning all the customers of the appellant engaged in commodity trading was not, it submitted, a Requirement related to some specific person or persons within the meaning of the Canadian Bank of Commerce decision.

Mr Justice Le Dain, speaking for a unanimous Court, held that the judgment in the Canadian Bank of Commerce case presented no obstacle to the Minister in this case. The verification of compliance with the Income Tax Act by the commodity trading customers of the appellant was undoubtedly a purpose related to the administration and enforcement of the Act within the meaning of subsection 231(3), and subsection 231(3) was within the legislative authority of Parliament under subsection 91(3) of the Constitution Act, 1867. Moreover, the Department was engaged in a genuine and serious inquiry into the tax liability for some specific person or persons. Mr Justice Le Dain said:

The judgment in Canadian Bank of Commerce was based on the agreed fact that the Requirement in that case related to a genuine and serious inquiry into the tax liability of some specific person or persons, but I do not read the judgment as purporting to treat that as the only valid purpose under what is now section 231(3). In any event I am far from certain that the present case is essentially distinguishable from that on which the majority of the Supreme Court based their conclusion. In the majority opinion of Carwright J the words “some specific person or persons” are obviously understood as referring not to a named person but merely to existing identifiable persons. A reference to all of the commodity trading customers of the appellant comes within this meaning of the words.

Leave to appeal to this Court was granted and the following questions settled by Order of the Chief Justice:

1. Is Section 231(3) of the Income Tax Act SC 1970-71-72 c 63 as amended, intra vires the Parliament of Canada under the provisions of Section 91(3) of the Constitution Act, 1867?

2. Are the Demands made upon the Appellant, James Richardson & Sons, Limited under Section 231(3) of the Income Tax Act SC 1970-71-72, c 63 as amended, void under the provisions of the Canadian Charter of Rights and Freedoms!

3. Are the Demands made upon the Appellant, James Richardson & Sons, Limited under Section 231(3) of the Income Tax Act SC 1970-71-72, c 63 as amended, void under the provisions of the Canadian Bill of Rights?

The appellant appeals on four grounds, namely:

1. the Requirements are not authorized by subsection 231(3) of the Act;

2. subsection 231(3) of the Act is ultra vires the Parliament of Canada;

3. the Requirements are void under the provisions of the Charter of Rights and Freedoms', and

4. the Requirements are void under the provisions of the Canadian Bill of Rights.

If the appellant succeeds on the first ground as a matter of statutory interpretation then it is not necessary to consider the constitutional issues raised in the other three grounds.

The argument on the first ground proceeds as follows. The Requirements made in this case were for “information returns respecting a class of information”. They therefore fell within the ambit of sections 221(l)(d) and 233 of the Act. These sections provide:

221. (1) The Governor in Council may make information returns respecting any class of information required in connection with assessments under this Act,

233. Whether or not he has filed an information return as required by a regulation made under paragraph 221(l)(d), every person shall, on demand from the Minister, served personally or by registered mail, file with the Minister, within such reasonable time as may be stipulated in the demand, such prescribed information return as is designated therein.

Because paragraph 221(l)(d) when read in conjunction with section 233 confers an authority on the Minister to demand only such information as is prescribed by regulation, it either constitutes a particular rule within the sense contemplated in Pretty v Solly (1859), 53 ER 1032, which rule is to be set up against the more general and less restrictive rule of subsection 231(3), or else it constitutes an exception to subsection 231(3). Romilly, MR states the applicable principle in Pretty v Solly, (supra), as follows:

The rule is, that wherever there is a particular enactment and a general enactment in the same statute, and the latter, taken in its most comprehensive sense, would overrule the former, the particular enactment must be operative, and the general enactment must be taken to affect only the other parts of the statute to which it may properly apply.

Applying that principle in this case the appellant submits that subsection 231(3) only authorizes demands for information not contemplated under sections 221(l)(d) and 233. If the demand is one which falls within sections 221(l)(d) and 233 and requires the authority of a regulation, then it is excepted from the scope of subsection 231(3). The appellant further argues that there is a good policy reason for the exception in that subsection 231(3) is designed to confer wide powers on the Minister in order to facilitate investigations of specific taxpayers. These considerations do not apply to demands made to classes of persons for specific kinds of information required in connection with assessments generally.

The respondent counters these arguments by saying that what is required from the appellant is not the “information returns” mentioned in paragraph 221( l)(d). Nor have the demands for information in this case been made of a “class of persons” as paragraph 221(l)(d) requires. The respondent says that paragraph 221(l)(d) contemplates the filing of information returns by a general class of persons on a regular basis whereas subsection 231(3) is “part of the Department’s investigating tools to obtain information”. Such tools are vital, the respondent submits, to a self-assessment system. Nothing, he says, in either paragraph 221(l)(d) or section 233 prevents the respondent from requiring under subsection 231(3) information from a specific commodities broker regarding the tradings of a specific group of traders in commodities futures in respect of a specified period of time. The respondent submits that the case is squarely covered by the Court’s decision in the Canadian Bank of Commerce case, (supra).

The language of subsection 231(3) of the Income Tax Act is unquestionably very broad and on its face would cover any demand for information made to anyone having knowledge of someone else’s affairs relevant to that other person’s tax liability. It would, in other words, if construed broadly, authorize an exploratory sortie into any taxpayer’s affairs and require anyone having anything to contribute to the exploration to participate. It would not be necessary for the Minister to suspect non-compliance with the Act, let alone to have reasonable and probable grounds to believe that the Act was being violated as required in subsection 231(4). Provided the information sought had a bearing (or perhaps even could conceivably have a bearing) on a taxpayer’s tax liability it could be called for under the subsection.

The Canadian Bank of Commerce case, however, makes it clear that the subsection is not to be construed that broadly. It establishes through the majority judgment written by Mr Justice Cartwright as:

(a) the test of whether the Minister is acting for a purpose specified in the Act is an objective one and has to be decided on the proper interpretation of the subsection and its application to the circumstances disclosed;

(b) the obtaining of information relevant to the tax liability of some specific person or persons whose liability to tax is under investigation is a purpose related to the administration or enforcement of the Act;

(c) it is not necessary that the person from whom the information is sought be one whose liability to tax is under investigation;

(d) the fact that the giving of the information may disclose private transactions involving persons who are not under investigation and may not be liable to tax does not invalidate the Requirement.

The respondent acknowledges that neither the appellant nor any of its customers is a person whose tax liability is under investigation within the meaning of the Canadian Bank of Commerce case. It submits, however, that that is only one of the purposes contemplated by subsection 231(3). The purpose in this case is to verify the accuracy of income tax returns made by the appellant’s customers who were traders in commodities futures. This also, it submits, is a purpose related to the administration or enforcement of the Act.

I have some difficulty with the respondent’s submission in relation to the Canadian Bank of Commerce case. If, indeed, the ratio of that case is that a demand for information which meets the test of being related to a genuine and serious inquiry into the tax liability of some specific person or persons is a demand made for purposes of the administration or enforcement of the Act, how can it be said, consistent with that decision, that a demand which does not meet such a test is also for a purpose related to the administration or enforcement of the Act? If this is so, it was pointless for the Court in the Canadian Bank of Commerce case to make a genuine and serious inquiry into the tax liability of some specific person or persons a prerequisite of the validity of the Requirement in that case. Yet Mr Justice Cartwright makes it clear that his judgment is premised on that prerequisite being there. After referring to certain paragraphs in the Stated Case he states that it is common ground “that the Requirement addressed to the appellant relates to a genuine and serious inquiry into the tax liability of some specific person or persons” (p 738). He then makes the point that the fact that the answer to the Requirement may disclose private transactions involving a number of persons who are not under investigation and may not be liable to tax will not invalidate the Requirement. He reiterates the purpose of the Requirement at 739:

The purpose of the requirement, then, is to obtain information relevant to the tax liability of some specific person or persons whose liability to tax is under investigation; this is a purpose related to the administration or enforcement of the Act.

Accordingly, while I agree with Le Dain, J that the court in the Canadian Bank of Commerce case did not say that the purpose in that case, namely the obtaining of information relevant to someone’s tax liability, was the only purpose for which a Requirement could validly be made under subsection 231(3), it did nevertheless insist on a prerequisite to that particular purpose, namely that the someone’s tax liability be the subject of investigation, and it is that prerequisite which the appellant submits is missing in this case.

The respondent acknowledges that neither the appellant nor its customers are under investigation. It submits, however, that the Requirement is aimed at a specific class of taxpayers, namely clients of the appellant who trade on the commodities futures market. That may be so, but it does not in my view bring the Minister within the purview of subsection 231(3).

It seems to me that what the Minister is trying to do here, namely check generally on compliance with the statute by traders in the commodities futures market, cannot be done by conducting a “fishing expedition’’ in the affairs of one broker’s customers under subsection 231(3) of the Act. If the Minister seriously thinks that traders in the commodities futures market generally are not reporting their transactions properly for income tax purposes, then he has paragraph 221(l)(d) available to him. He can obtain a regulation under that subsection requiring all such traders to file returns of their transactions in the commodités futures market. Having obtained such a regulation, he is then in a position to demand such returns at large without regard to whether or not any specific person or persons are currently under investigation. The very presence of those provisions in the Act serves, in my view, to support the approach taken in the Canadian Bank of Commerce case that subsection 231(3) is only available to the Minister to obtain information relevant to the tax liability of some specific person or persons if the tax liability of such person or persons is the subject of a genuine and serious inquiry.

It seems to me that if the Minister wishes to conduct the kind of survey he clearly had in mind in this case, it is right and proper that he obtain a regulation authorizing it. The business implications for the appellant are serious. It agreed to cooperate on the basis that the Minister was conducting a test and that other commodity brokers would also be participating. If its customers were less than happy with their broker’s role as conduit to the tax department, its competitors would be in the same position. It now finds that this is not the case. If the tax liability of its customers or one or more of them were the subject of a genuine inquiry, then the Minister would clearly be entitled under subsection 231(3) to single out the appellant even although innocent taxpayers’ trading activities were disclosed in the process. But it cannot, in my opinion, be singled out otherwise. It cannot be compelled under subsection 231(3) to provide the random sample for a check on general compliance by the entire class. This is the purpose of sections 221(l)(d) and 233.

Having found that the Requirements are invalid under subsection 231(3) of the Act as a matter of statutory interpretation, it is unnecessary for me to consider whether or not they may also be invalid on the constitutional grounds alleged.

It would allow the appeals with costs both here and in the courts below and declare the Requirements directed to the appellant on May 8, 1980 and October 8, 1980 to be of no force and effect.