Citation: 2011 FC 1249
Ottawa, Ontario, November
1, 2011
PRESENT: The Honourable Madam Justice Tremblay-Lamer
Docket: T-1619-09
BETWEEN:
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THE MINISTER OF NATIONAL REVENUE
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Applicant
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and
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RBC LIFE INSURANCE COMPANY
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Respondent
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Docket: T-484-10
AND
BETWEEN:
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THE MINISTER OF NATIONAL REVENUE
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Applicant
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and
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INDUSTRIAL ALLIANCE PACIFIC INSURANCE AND FINANCIAL
SERVICES INC.
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Respondent
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Docket: T-485-10
AND
BETWEEN:
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LE MINISTRE DU REVENUE NATIONAL
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Applicant
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and
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INDUSTRIELLE ALLIANCE ASSURANCE ET
SERVICES FINANCIERS INC.
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Respondent
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Docket: T-879-10
AND
BETWEEN:
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THE MINISTER OF NATIONAL REVENUE
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Applicant
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and
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BMO LIFE ASSURANCE COMPANY
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Respondent
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REASONS FOR JUDGMENT AND
JUDGMENT
[1]
These
are four motions, brought by the respondents RBC Life Insurance Company,
Industrial Alliance Pacific Insurance and Financial Services Inc., Industrielle
Alliance Assurance et Services Financiers Inc. and BMO Life Assurance Company
[collectively the Insurers], to cancel ex parte orders of this Court
dated October 6, 2009, April 12, 2010 and June 7, 2010. The orders were issued
pursuant to section 231.2(3) of the Income Tax Act, RSC 1985, c 1 (5th
Supp) [the Act], and authorize the Minister of National Revenue to impose on
the Insurers requirements to produce certain information and documents.
[2]
For
the reasons that follow, the motions will be granted.
Part I – Background
Facts
[3]
On
October 6, 2009, Justice Yvon Pinard granted the Minister of National Revenue
[the Minister] ex parte authorization to issue the requirement to RBC
Life Insurance Company [RBCI]. The requirement, which was served on November 5,
2009, seeks “all information and documents relating to RBC Life Insurance
Company’s 10-8 plan holders,” including names and social insurance numbers,
business numbers, or trust numbers. The requirement was issued following claims
by the Minister that this information was required in order to verify that
these persons are in compliance with the Act. On November 19, 2009, RBCI moved
to challenge Justice Pinard’s order.
[4]
On
April 12, 2010, I granted two ex parte applications brought by the
Minister for authorization to issue similar requirements to Industrial Alliance
Pacific Insurance and Financial Services Inc. and Industrielle Alliance
Assurance et Services Financiers Inc. [collectively IA]. The first of these
requirements seeks “A listing of all loans outstanding […] contracted by individuals,
corporations and/or trusts” relating to IA’s 10-8 plan in a specified period,
including: names; policy numbers; social insurance numbers, business numbers or
trust numbers; amounts owing on any loans; the cash surrender value of their
policies; and the interest on the loans for each 10-8 plan holder. The second
requirement seeks “Une liste de tous les prêts […] souscrit par toute personne
physique, fiducie et/ou compagnie, faisant l’objet de la Stratégie 10-8” in a
specified period. On April 30, 2010, IA moved to challenge both of
my orders.
[5]
Justice
Richard Mosley issued an order authorizing a requirement to BMO Life Assurance
Company [BMO] on June 7, 2010. The requirement seeks “all information and
documents” in a specified period pertaining to BMO’s 10-8 plan holders. On July
14, 2010, BMO moved to challenge Justice Mosley’s order.
[6]
At
the same time that BMO was served with the requirement authorized by Justice
Mosley’s order, it was also served with a requirement issued without judicial
authorization which sought “all information and documents […] relating to BMO
Life Assurance Company’s (formerly AIG Life Insurance Company of Canada) 10-8
Investment Plans” during a specified period. This requirement was challenged by
way of an application for judicial review which BMO commenced on July 12, 2010.
Although the parties’ joint submissions address this application together with
the four motions described above, the application will be dealt with in
separate reasons.
[7]
All
of the requirements concern insurance leveraging strategies for high net worth
individuals referred to as “10-8 plans.” A 10-8 plan involves two essential
elements: a life insurance policy that includes an investment account, and a
loan which is secured by the life insurance policy in an amount equal to the
balance of the investment account. The term “10-8 plan” refers to the interest
rates applicable to these elements, as the policy-holder pays 10% interest on
the loan and receives an 8% return on the investment in the life insurance policy.
The 10-8 plan creates a tax benefit because the 8% interest paid to the client
is tax-exempt as part of a life insurance policy, and the 10% interest payable
on the loan may be tax-deductible if it is used to produce income.
[8]
Each
of the Insurers provided the Minister with information and documents relating
to their 10-8 plans, although BMO did not provide this information until after
it was served with the two requirements. Each of the Insurers also refused to
provide the Minister with names or other identifying information relating to
its 10-8 plan holders. The Minister therefore initiated the ex parte
applications described above to seek authorization to issue the various
requirements in an effort to obtain information relating to the identities of
10-8 plan holders. I note, however, that each of the requirements is
considerably more broad than merely seeking the identifies of the Insurers’
10-8 plan holders in a given period.
[9]
On
February 24, 2010, Prothonotary Martha Milczynski issued an order pursuant to
Rule 54 of the Federal Courts Rules requiring the Minister to produce
all relevant documents related to Justice Pinard’s order. Prior to Prothonotary
Milczynski’s order, the Minister had refused to produce anything other than
certain documents that RBCI had created and provided to the Minister, as well
as a news article and a publicly available presentation about 10-8 plans. The
Minister refused to disclose any other documents on the basis that they were
privileged or irrelevant, failing even to produce the documents to her counsel
for review. Prothonotary Milczynski disagreed, finding that “The Court, [sic]
and RBCI need to know all the facts that were within the Minister’s knowledge
at the time of the hearing. […] The information sought is relevant to the issue
of whether the Minister made full and frank disclosure at the time the ex
parte application was made.” Prothonotary Milczynski therefore ordered the
Minister to produce her file to RBCI and awarded RBCI its costs of the motion.
[10]
Following
Prothonotary Milczynski’s order, the Minister made further disclosure to RBCI.
However, the Minister continued to refuse to produce certain documents –
namely, documents surrounding an Advanced Income Tax Ruling Request [ATR] made
by another insurer regarding its 10-8 plan and internal discussions relating to
the consideration of the ATR by the General Anti-Avoidance Rule Committee [GAAR
Committee], as well as the questionnaire which the Minister had developed to
send to 10-8 plan holders. The Minister refused to produce these documents,
again claiming privilege and that they were not relevant to the motion.
[11]
An
ATR is a publicly available document issued by CRA. Generally, the purpose of
an ATR is to seek guidance from CRA as to how it will apply the provisions of
the Act in a specific context. This ATR, which was submitted by a third party
insurer in 2007, provided detailed information about the submitter’s proposed
10-8 plan and sought to determine whether the proposed plan complied with the
Act. In contrast to a technical interpretation in which CRA addresses a
hypothetical scenario, an ATR provides a specific and concrete scenario for the
CRA to consider.
[12]
This
particular ATR was considered by the GAAR Committee, a specialized committee
within CRA Rulings. The GAAR Committee assesses the potential application of
the GAAR, an exceptional provision that allows CRA and the Minister to address
abusive tax avoidance behaviour. GAAR can only be used as a last resort where
no other provisions of the Act apply. After examining the ATR, the GAAR
Committee concluded that the proposed 10-8 plan was likely in compliance with
the Act and did not believe that the GAAR could be successfully applied.
[13]
In
light of the Minister’s continued refusal to produce documents relating to the
GAAR Committee’s consideration of the ATR, the Insurers brought a second
disclosure motion. On January 13, 2011, Prothonotary Roza Aronovitch ordered
the Minister to produce the above described documents, finding that “The
Minister may wish to argue at the hearing on the merits that the documents
sought to be produced by way of the direction to attend are not relevant,
however, it is not open for argument at this juncture, as that determination
has already been made.”
[14]
Following
Prothonotary Aronovitch’s order, the Minister produced the documents in
question and from these documents a different picture emerges. For the reasons
set out below, these documents establish that the Court was not in a position
to appreciate the full context in which the Minister brought the ex parte
applications and the orders must therefore be cancelled.
[15]
The
four motions were consolidated along with BMO’s application on January 13,
2011. The hearing was based on a joint record and joint written submissions
from both parties. These reasons will address the four motions brought by the
Insurers.
Part II – The Evidence
[16]
The
evidence in each of the ex parte applications consisted of the following:
·
In the
RBCI application, an affidavit of Randy Jacobs, CRA officer, stating that “CRA
is seeking to verify the compliance with the obligations and duties under the Income
Tax Act of certain taxpayers who are clients of [RBCI] and who participate
in […] the ‘10-8 plan’” and that “The CRA is not aware of the identity of the
RBC Insurance policyholders who have participated in the [10-8 plan]. The
Minister seeks to determine whether the RBC Insurance policyholders who have
participated in the [10-8 plan] have complied with their duties and obligations
under the Income Tax [sic];”
·
In the IA applications, two
nearly identical affidavits of Michel Lévesque, CRA officer, both stating that “Depuis 2008, l’ARC a entrepris de
vérifier si les contribuables qui ont souscrit comme clients aux produits
généralement connus sous le nom de « programmes 10/8 » auprès de
compagnies d’assurance ont respecté quelque devoir ou obligation prévu par la Loi
de l’impôt sur le revenu”
and that “les informations recherchées et décrites
au paragraphe 11 de ma dénonciation serviront à vérifier si chacune des
personnes physiques,
fiducies ou compagnies ayant participé à la Stratégie 10/8 décrite aux
sous-paragraphes 9I, 9II, 9III A. à J. inclusivement ont respecté quelque
devoir ou obligations prévu par la LIR;”
·
And, in
the BMO application, an affidavit of Linda Szeto, CRA officer, stating that “I
am seeking to verify the compliance with the obligations and duties under the Income
Tax Act of certain taxpayers who are clients of BMO Life who participate in
the 10-8 program,” that “The CRA is currently examining the 10-8 program
offered by certain insurance companies, including BMO Life, to their
policyholders,” and that “In order to verify if the unknown policyholders […]
who have participated in the 10-8 program have complied with their duties and
obligations under the Income Tax Act, the Minister requires BMO Life to
provide [the information listed in the requirement].”
[17]
However,
a significant amount of additional evidence was disclosed following the orders
of Prothonotary Milczynski and Prothonotary Aronovitch.
[18]
The
following evidence was disclosed in response to Prothonotary Milczynski’s order:
·
A ruling
dated December 6, 2004 in response to an inquiry regarding the deductibility of
the interest paid on the loan, which concluded that “Apart from the issue of
reasonableness [of the interest rate], as it would seem that this type of
arrangement is not in accord with the purpose and spirit of the provisions in
the Act related to exempt insurance policies we have referred this matter to
the Department of Finance for their consideration;”
·
E-mail
correspondence between various individuals at the Canada Revenue Agency,
including the following statements:
o
While
discussing the strategy of using targeted audits to alert the insurance
industry to its concerns regarding 10-8 plans, “We should make sure we have
some technical basis supporting our concerns before we embark on this project,
otherwise we could look pretty bad. […] we better back up our concerns with real
effective and timely action” and that “Finance has been aware that there are
a number of issues with the policyholder legislation. About 8-9 years ago they
started to look into revamping policyholder tax policy (we attended the
meetings) but it didn’t get off the ground (too big a project) […] it looks
like policyholder reform in [sic] now being reconsidered.” [my emphasis]
o
Upon
learning that insurance governance bodies were receiving inquiries from
insurers seeking clarification as to the Canada Revenue Agency’s interest in
and concerns with 10-8 plans, “This is all good. In fact, I’m delighted.
Policyholder taxation is an area long overdue for attention;”
o
In
instructions to front-line auditors at the launch of the 10-8 plan audit
program, “You should put together all the facts. You must be able to answer the
following questions. You will notice that this does not require knowing the
names of the participants;” and
o
In an
update on the progress of the 10-8 plan audit project, “[redacted] did provide
the names of the participants and we chose 20 files and started a test audit.”
[19]
The
following additional evidence was disclosed following Prothonotary Aronovitch’s
order on the second disclosure motion:
·
A
memorandum from F. Lee Workman, manager of the Charitable and Financial
Institution Sectors, to the GAAR Committee which states the following:
o
“any loans
under the [collateral loan facility] will not be ‘policy loans’ as defined in
subsection 148(9), the assignment of the policy as security for the loans under
the [collateral loan facility] will not be a disposition of an interest in the
policy by virtue of paragraph (f) of the definition of ‘disposition’ in
subsection 148(9), and provided the loans to be advanced by the insurer to the
policyholder under the [collateral loan facility] will be borrowed money for
the purposes of paragraph 20(1)(c) the interest paid on the [loan] advances
will be deductible by the policyholder;”
o
“the only
manner in which the tax benefits to be realized the [sic] proposed transactions
might be challenged is by denying a portion of the interest the policyholder
claims under paragraph 20(1)(c) on the basis that the interest rate of 10% is
not reasonable;”
o
“the
exempt policy can reasonably be said to have been purchased primarily for
insurance purposes (and investment purposes to the extent permitted by the ‘exempt
policy’ rules);”
o
“The
entering into of the [collateral loan facility], in order to obtain a loan from
the insurer, can reasonably be said to have been undertaken by the
policyholder, primarily to obtain financing;”
o
“It is the
fact that the borrowing is at an annual rate of 10% that might be said to have
not been undertaken for a bona fide non-tax purpose as the rate is probably
higher than the policyholder would likely be willing to pay on a borrowing
[sic] from a bank where a policy has been assigned as collateral. The
reasonability of the 10% rate is not a GAAR issue however;”
o
“the
collateral assignment of the policy to the insurer as security for the loan is
an ordinary commercial transaction;”
o
“given
that whether a transaction or a series of transactions were arranged primarily
for a non-tax purpose is a question of fact, it may be difficult to convince a
court that the series of transactions is an avoidance transaction;”
o
“the
Department of Finance Explanatory Notes that were released with section 245,
state that ‘Subsection 245(3) does not permit the “re-characterization” of a
transaction for the purposes of determining whether or not it is an avoidance
transaction. In other words, it does not permit a transaction to be considered
an avoidance transaction because some alternative transaction that might have
achieved an equivalent result would have resulted in higher taxes.’”
o
“the fact
that the 8% rate of return being earned on the [collateral loan account]
balance will be tax deferred is consistent with the words, object, spirit and
purpose of section 12.2 and section 306 of the Regulations;”
o
“the
proposed series of transactions is not a misuse of the definition of ‘policy
loan’ nor an abuse of the scheme of the Act with respect to policy loans;”
o
“If the
loan in question is not a ‘policy loan’ at law, then it would be difficult to
argue that the proposed transactions are an abuse of the provisions of the Act
dealing with policy loans;” and
o
“we do not
believe that the GAAR can be successfully applied to redetermine the
implications of these transactions but it is our view that there are policy
concerns that should be considered with a view to proposing amendments.”
[My emphasis]
·
A memo
from Margaret McCreary, Insurance Specialist, to the Manager of the GAAR &
Technical Support Section stating that “Insurance policy tax legislation is out
of date and has not kept up with the innovations in insurance products. […] For
years, insurance companies took a conservative approach and tailored their
products to fit the intent, if not the exact wording, of the legislation. […]
the largest insurers are starting to lose a bit of their market share and they
are concerned that the designs of the new products being offered by their
competitors are no longer within the spirit of the legislation,” and concluding
that “a limited number of targeted audits will be extremely effective in
putting the industry on notice that CRA is concerned about the direction they
are headed;” and
·
Additional
email correspondence between individuals at the Canada Revenue Agency which
contains the following statements:
o
Following
a GAAR Committee meeting at which 10-8 plans were discussed, “The discussion
was interesting and the decision was that CRA would not provide a ruling. It
would send a message to the insurance industry that we are troubled with the
arrangement. Finance certainly was concerned by the 10/8 arrangement from a
policy perspective …” and “That response [to the ATR] is that we will not
provide a ruling, that both the CRA and Finance believe this product to be
contrary to tax policy with regard to exempt policies, it is not clear that the
10% interest meets the reasonable test in paragraph 20(1)(c) and we are leaving
the door open to the possible application of GAAR until we have audited a
specific case;”
o
In an
update regarding the audit strategy for dealing with 10-8 plans, “I said we
would be starting an audit blitz early next year on a number of insurers know
[sic] to be offering the product with the objective of obtaining sample contracts
to review the 20(1)(c) interest deductions and to consider the application of
GAAR;” [My emphasis]
Part III – Relevant
Statutory Provisions
[20]
These
motions concern section 231.2 of the Act:
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231.2
(3) On ex parte application by the Minister, a judge may, subject to such
conditions as the judge considers appropriate, authorize the Minister to
impose on a third party a requirement under subsection 231.2(1) relating to
an unnamed person or more than one unnamed person (in this section referred
to as the “group”) where the judge is satisfied by information on oath that
(a) the person or group is
ascertainable; and
(b) the requirement is made to
verify compliance by the person or persons in the group with any duty or
obligation under this Act.
[…]
(5)
Where an authorization is granted under subsection 231.2(3), a third party on
whom a notice is served under subsection 231.2(1) may, within 15 days after
the service of the notice, apply to the judge who granted the authorization
or, where the judge is unable to act, to another judge of the same court for
a review of the authorization.
(6)
On hearing an application under subsection 231.2(5), a judge may cancel the
authorization previously granted if the judge is not then satisfied that the
conditions in paragraphs 231.2(3)(a) and 231.2(3)(b) have been
met and the judge may confirm or vary the authorization if the judge is
satisfied that those conditions have been met.
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231.2
(3) Sur requête ex parte du ministre, un juge peut, aux conditions qu’il
estime indiquées, autoriser le ministre à exiger d’un tiers la fourniture de
renseignements ou production de documents prévue au paragraphe (1) concernant
une personne non désignée nommément ou plus d’une personne non désignée
nommément — appelée « groupe » au présent article —, s’il est convaincu, sur
dénonciation sous serment, de ce qui suit :
a) cette personne ou ce groupe est
identifiable;
b) la fourniture ou la production est
exigée pour vérifier si cette personne ou les personnes de ce groupe ont
respecté quelque devoir ou obligation prévu par la présente loi;
[…]
(5) Le
tiers à qui un avis est signifié ou envoyé conformément au paragraphe (1)
peut, dans les 15 jours suivant la date de signification ou d’envoi, demander
au juge qui a accordé l’autorisation prévue au paragraphe (3) ou, en cas
d’incapacité de ce juge, à un autre juge du même tribunal de réviser
l’autorisation.
(6) À
l’audition de la requête prévue au paragraphe (5), le juge peut annuler
l’autorisation accordée antérieurement s’il n’est pas convaincu de
l’existence des conditions prévues aux alinéas (3)a) et b). Il
peut la confirmer ou la modifier s’il est convaincu de leur existence.
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Part IV – Issues
[21]
There
are three issues before the Court on these motions:
1. Did the
Minister fail to make full and frank disclosure in the ex parte
applications?
2. Were the
requirements obtained for the purpose of verifying compliance with the Act?
3. Does section
231.2(3) of the Act unjustifiably infringe section 8 of the Charter of
Rights and Freedoms?
Part V – Discussion
1. Full and
Frank Disclosure
i. The law
[22]
Given
the ex parte nature of the applications, the Applicant had a duty to
make full and frank disclosure to the Court. It is well established that this
burden requires the party in an ex parte hearing to present all material
facts, even if those facts are adverse to its case.
[23]
This
Court was faced with a similar statutory provision in Canada
(Commissioner of Competition) v Labatt Brewing Co et al, 2008 FC 59,
323 FTR 115. In that context, Justice Anne Mactavish noted that, in ex parte
proceedings, the “normal checks and balances of the adversary system” are
absent, and that the Court is therefore “at the mercy” of the party seeking ex
parte relief (at paras 23 to 24). She also noted that “There is no situation
more fraught with potential injustice and abuse of the Court’s powers than an
application for an ex parte injunction” (Watson v Slavik, in Labatt,
above, at para 24). This potential injustice is the reason why the party
seeking ex parte relief “must inform the Court of any points of fact or
law known to it which favour the other side” (Friedland in Labatt,
above, at para 25).
[24]
As
Justice Mactavish noted in Labatt, above, this duty of full and frank
disclosure is crucial to the proper exercise of judicial discretion:
Section 11 of the Competition Act
provides for independent judicial oversight with respect to the extensive
investigative powers granted to the Commissioner under the Competition Act.
To this end, section 11 does not mandate that the Court act as a mere “rubber
stamp” […]
I agree that the Court must indeed be
satisfied that the two statutory conditions precedent to the granting of a
production order have been met […] However, in order to properly exercise the
discretion conferred on the Court by section 11 of the Competition Act,
and for the Court to be able to control its own processes, and to guard against
the abuse of those processes, the Court must also be fully apprised of the
relevant circumstances surrounding the request. [At paras 50-51]
[25]
My
colleague Justice Luc Martineau also considered a jeopardy order issued
pursuant to the Act in Canada (National Revenue) v Robarts, 2010 FC 875,
374 FTR 87. In that decision, Justice Martineau noted that:
In all ex parte matters the
applicant is obliged to draw to the attention of the Court all facts in issue,
even those which it considers unhelpful or inconvenient, and all relevant
caselaw. […] Indeed, full and frank disclosure requires that the Minister
disclose “what might reasonably be regarded as [known] weaknesses”. […]
While the omission [in the Minister’s
disclosure] was apparently made with no malicious intent, it severely
undermines the ex parte application that was made by the Minister. [At
paras 35 and 41]
[26]
The
Federal Court of Appeal considered the disclosure obligation in section 231.2
proceedings in R v Derakhshani, 2009 FCA 190, 2010 DTC 5043. In that
decision, the unanimous Court noted the importance of full and frank disclosure
to the judicial discretion captured in subsection 231.2(3):
It is useful to recall that the existence
of judicial discretion is essential to the constitutional validity of
this type of provision, which is comparable to a seizure even when used in a
regulatory (or even non-criminal) context […] It is this discretion, conferred
upon an independent judge, which protects individuals from the damaging use of
this kind of power and brings it in line with the requirements of section 8 of
the Canadian Charter of Rights and Freedoms […]
The fact that it may be possible to
obtain the information using other means does not exclude the possibility that
a requirement might be authorized, but that is information that must be
provided to the judge. A judge must not be left in the dark on such an
important point. [At paras 19 and 29, my emphasis]
[27]
It
seems to me that the most basic element of the duty to make full and frank
disclosure is the disclosure to the Court of any information that has already
been provided (see Labatt, above, at paras 93 and 94).
[28]
Pursuant
to Rule 399 of the Federal Courts Rules, the Court can quash an ex
parte order where it was issued based on “misleading, incomplete, or
incorrect” facts (see Canada
(Commissioner of Competition) v Air Canada, [2001] 1 FC
219, 186 FTR 48 at para 14). Although the ex parte applications were
brought under section 231.2(3) of the Act, Rule 399 nonetheless applies (see Air
Canada, above, at para 5).
[29]
However,
an order will not automatically be cancelled because of any breach of this
duty. An ex parte order will only be disturbed where non-disclosure is material
and must be such that, had the information been disclosed, it would have
affected the exercise of the ex parte judge’s discretion (see Labatt,
above, at paras 31 and 98).
[30]
The
Court retains the discretion to continue an ex parte order despite
flawed disclosure:
[I]t is important to keep in mind that
the reason for the disclosure requirement is firstly to deprive the person who
has not observed the rule of an advantage improperly obtained and secondly to
act as a deterrent to ensure that persons who make ex parte applications
realize that they have a duty of disclosure and that they appreciate the
consequences if they fail in that duty.
[…] In exercising its discretion, the
court should consider the extent of the culpability with regard to the
non-disclosure, and the importance and significance of the matters that were
not disclosed to the court to the outcome. [Sherwood Dash Inc v Woodview
Products Inc, [2005] OTC 1061, 2005 at paras 39-40]
ii. Parties’
Submissions
[31]
The
Insurers submit that the Minister failed to make full and frank disclosure in
the ex parte applications. She was required to present a balanced view
to the Court and to disclose any facts which could operate against her, citing
several decisions including Robarts, above, at para 35 and Labatt,
above, at paras 25-26.
[32]
Further,
the Minister cannot justify the lack of disclosure on the basis that the
information is immaterial,
The duty extends to placing before the
court all matters which are relevant to the court's assessment of the
application, and it is no answer to a complaint of non-disclosure that if the
relevant matters had been placed before the court, the decision would have been
the same. The test as to materiality is an objective one, and it is not for the
applicant or his advisers to decide the question; hence it is no excuse for the
applicant subsequently to say that he was genuinely unaware, or did not
believe, that the facts were relevant or important. [Steven Gee, Mareva
Injunctions and Anton Piller Relief, 3rd ed. (London: FT Law
& Tax, 1995) at p 98, in Labatt, above, at para 31]
[33]
The
Insurers also note that it is no excuse for a party to say that it did not
intend to mislead the Court with its flawed disclosure, citing R v Morelli,
2010 SCC 8, [2010] 1 S.C.R. 253 at para 59.
[34]
The
Insurers compare the orders under review to the power of the Commissioner of
Competition to compel disclosure with judicial authorization, noting that this
Court has held that,
[T]he Court must indeed be satisfied that
the two statutory conditions precedent to the granting of a production order
have been met – namely that there is a section 10 inquiry under way, and that
the respondent has information that is relevant to the inquiry – prior to
granting a production order under the Act. However, in order to properly
exercise the discretion conferred on the Court by section 11 of the Competition
Act, and for the Court to be able to control its own processes, and to
guard against the abuse of those processes, the Court must also be fully
apprised of the relevant circumstances surrounding the request. [Labatt,
above, at para 51]
[35]
Finally,
the Insurers argue that the Court’s discretion to continue the ex parte
orders despite the flawed disclosure is exceptional and limited, and that it
should not be exercised simply because the orders would probably have been
granted had the disclosure been complete, citing Sherwood Dash, above,
at paras 37-39.
[36]
Thus
the four ex parte orders must be cancelled because the Minister failed
to make full and frank disclosure. In particular, the Minister had a duty to
disclose the documents and emails surrounding the GAAR Committee’s
consideration of the ATR and the Canada Revenue Agency’s plan to audit 10-8
plan holders, as well as the significant volume of information about 10-8 plans
that had already been disclosed to the Minister before the ex parte
applications.
[37]
The
Minister, on the other hand, claims that the ex parte orders were sought
for the purpose of verifying whether the 10-8 plan holders are in compliance
with the Act, and that the GAAR Committee documents and internal discussions
are immaterial to this end.
[38]
The
Minister further submits that, in order for the ex parte orders to be
set aside, the Insurers must demonstrate that the disclosure made at the
hearing was “misleading, inaccurate or incomplete,” citing Labatt,
above, at para 34. She also claims that the Insurers must show that, but for
the lack of disclosure, the orders would not have been made, citing Re Papa,
2009 FC 49, [2009] 4 CTC 93 at paras 21-23. Therefore the Insurers have not met
this high burden and that I should therefore decline to exercise my discretion
to cancel the orders.
iii. Analysis
[39]
In
my opinion, the Minister fell short of her obligation to make full and frank
disclosure in two respects. First, she did not disclose the significant volume
of information that the Insurers had already provided to her before the ex
parte applications were commenced. These documents provided a great deal of
information about the Insurers’ 10-8 plans, and with the exception of the
identities and personal information of the Insurers’ 10-8 plan holders,
responded fully to the requirements for which the Minister sought ex parte
authorization.
[40]
The
second, and more troubling, omission is the Minister’s failure to disclose
internal documents and information suggesting that the 10-8 plans comply
with the letter of the Act, if not with its spirit. These documents – the
bulk of which were only disclosed to the Insurers after two separate motions –
are undoubtedly material and, had they been disclosed to the Court, could
certainly have affected the outcome of the ex parte applications.
[41]
More
specifically, the evidence disclosed following the Prothonotaries’ orders
include the following material facts which were not disclosed to the Court on
the ex parte applications:
a)
The fact
that the Department of Finance had refused to amend the Act to address the
outdated policyholder provisions;
b)
The ATR,
which provided a great deal of information regarding a specific 10-8 plan for
the express purpose of determining whether the plan complied with the Act;
c)
The fact
that the GAAR Committee had determined that the 10-8 plan likely complied with
the letter of the Act, if not with its spirit; and
d)
The
decision to “send a message to the industry” by refusing to answer the ATR and
to take measures to “chill” 10-8 plan business, in part by undertaking an
“audit blitz”.
[42]
The
fact that the Minister decided to undertake an “audit blitz” to “send a message
to the insurance industry” is clearly relevant to the balancing exercise that
the Court has to undertake in deciding whether or not the orders should be
granted. For the Court to be able to control its own processes and to guard
against any abuses, it must be fully apprised of all relevance circumstances
surrounding the request (see Labatt, above, at paras 47 and 51 to 52).
[43]
Although
subsection 231.2(6) of the Act does not explicitly state that the Court can
cancel an authorization previously issued based on a lack of disclosure, I find
that Rule 399 of the Federal Courts Rules gives me the inherent power to
do so (see Air Canada, above, at para 5). The Court must retain the
authority to control its own processes and to remedy any abuse that results
from an ex parte order granted based on incomplete or misleading
disclosure.
[44]
I
note as well that, had the Minister disclosed these material facts on the ex
parte applications, the orders might still have been granted. However, I
would have had many questions for the Minister about the information she had
already received and CRA’s position on the 10-8 plans and her goal in auditing
10-8 plan holders. As was the case in Derakhshani, above, the evidence
omitted from the ex parte applications does not exclude the possibility
that the requirements might be authorized, but the information must be before
the judge. Otherwise the ex parte applications become a rubber stamp
exercise and the Court cannot effectively exercise its discretion.
[45]
I
am satisfied that this information was material and that, because of its
omission from the ex parte applications, the Court was not in a position
to make an informed decision. As a result, the orders must be cancelled.
2. Purpose of
the Requirements
i. The law
[46]
Section
231.2(3)(b) requires that the Minister’s purpose in seeking to issue a
requirement concerning unnamed persons be to “verify compliance by the person
or persons in the group with any duty or obligation under this Act.” This
purpose requirement is one of two conditions of which the presiding judge must
be satisfied in order for the authorization to be granted, the other condition
being that the group must be ascertainable.
[47]
The
purpose requirement in subsection 231.2(3)(b) of the Act has not been
the subject of much adjudication. It appears that this dearth of judicial
consideration results from the Minister’s broad audit powers under the Act:
Accordingly,
the Minister of National Revenue must be given broad powers in supervising this
regulatory scheme to audit taxpayers' returns and inspect all records which may
be relevant to the preparation of these returns. The Minister must be
capable of exercising these powers whether or not he has reasonable grounds for
believing that a particular taxpayer has breached the Act. Often it will
be impossible to determine from the face of the return whether any impropriety
has occurred in its preparation. A spot check or a system of random
monitoring may be the only way in which the integrity of the tax system can be
maintained. [McKinlay, above, at para 36]
[48]
The most direct
ruling on the purpose requirement in subsection 231.2(3)(b) comes from
Justice Johanne Gauthier in Minister of National Revenue v Greater Montréal
Real Estate Board, 2006 FC 1069, 303 FTR 29: “The language
of the Act is clear. The information and documents requested must be for the
purpose of verifying whether the persons being investigated have complied with
some duties or obligations set out in the Act. The courts have held that the
information must be “relevant” to the inquiry” (at para 61).
[49]
In
Nadler Estate v Canada (Attorney General), 2005 FC 935, [2005] 4 CTC 7,
Justice Johanne Gauthier noted that “The Act does not require that the third
party from whom the information is sought be given any details as to the
purpose of the Requirement” (at para 9) and was satisfied that the Requirement
at issue was valid because “The Requirement properly indicates the name of the
taxpayer concerned, refers to the appropriate enabling provision and gives a
description of the information required which is sufficient to enable
Canada-Israel Securities Ltd. to prepare its response” (at para 9).
[50]
Similarly,
I held in Ministre du Revenu national v Banque Toronto Dominion, 2004 FC
169, 253 FTR 90 that:
It is not the function of a financial
institution to which the requirement is sent to decide on the relevance of the
information sought under that requirement. It noted [sic] that the procedure
created under subsections 231.2(2) and (3) of the I.T.A. has the twofold
function of requiring the Canada Customs and Revenue Agency to justify the
obtaining of the information required when the requirement relates to unnamed
persons and allowing the financial institution to which the requirement is sent
to comply with its obligations to its clients. [At para 15]
[51]
However,
the Minister may have more than one purpose in issuing requirements. Where a
secondary purpose such as the audit of a named taxpayer is sufficiently
connected to the enforcement purpose relating to the unnamed persons,
subsection 231.2(3)(b) is still satisfied (see Whitewater Golf Club Inc v
Minister of National Revenue, 2009 FC 739, [2009] 6 CTC 51 at paras 15 to 16).
ii. Parties’
Submissions
[52]
The
Insurers submit that the requirements were issued for an improper purpose:
namely, a fishing expedition intended to chill their 10-8 plan business. They claim
that the Minister failed to establish in the ex parte applications that
the requirements were necessary to verify compliance with the Act and note that
the Minister has not alleged any specific breach of the Act.
[53]
The
Insurers argue that the Minister was required to act in good faith in
exercising her powers under section 231.2 of the Act, citing Greater
Montréal Real Estate Board, above, at para 48.
[54]
Further,
section 231.2(3) requires the Minister to show that the requirements are necessary
to ensure compliance, again citing Greater Montréal Real Estate Board,
above. They claim that the requirements were not actually necessary to verify
that the 10-8 plans were in compliance with the Act, and that they had already
provided enough information to allow the Minister to determine that their 10-8
plans comply with the Act without conducting any audits.
[55]
The
Minister submits that nothing in the record contradicts the evidence in the ex
parte applications that the requirements are needed to conduct targeted
audits of 10-8 plan holders and ensure their compliance with the Act. She is
not required to justify her decision to audit, and that an audit program that
targets 10-8 plan holders is not evidence of bad faith.
iii. Analysis
[56]
As
stated above, I am satisfied that the orders must be quashed solely because of
the incomplete disclosure. However, I will make the following comments about
the question of the Minister’s true purpose in issuing the requirements since
the issue was fully argued before me.
[57]
There
is no merit to the Insurers’ claim that the Minister was required to identify a
specific section of the Act that she believed had been breached. The Supreme
Court held in McKinlay, above, that “The Minister must be capable of
exercising these [audit] powers whether or not he has reasonable grounds for
believing that a particular taxpayer has breached the Act. Often it will be
impossible to determine from the face of the return whether any impropriety has
occurred in its preparation” (at para 36). The Minister was not, therefore,
required to give more detail as to the purpose of the Requirements as long as
the information is “relevant” to the verification of compliance with a duty of
obligation under the Act. Subsection 231.2(3) does not require the Minister to
show that there are reasonable grounds to believe that there is failure to
comply with a provision of the Act.
[58]
At
the hearing, the Insurer’s conceded that the Minister had a valid audit purpose
in issuing the requirements, but argued that this valid purpose was extraneous
to her primary goal, which was to chill their 10-8 plan business. I agree.
[59]
I
do not believe that the Minister’s central purpose in issuing the requirements
is sufficiently tied to her valid audit purpose. Contrary to the Minister’s pretension,
I did find evidence that the targeted audit of specific 10-8 plan holders was
not only done to test the reasonableness of the 10% payable interest rate or
the possible application of the GAAR but to send a message to the industry.
I am not satisfied that the Minister’s attempt to “send a message” is a valid
enforcement purpose such that subsection 231.2(3)(b) of the Act is
satisfied or that this goal is sufficiently connected to the Minister’s valid
audit purpose.
[60]
Moreover,
I am not satisfied that the requirements are actually necessary for the
Minister to verify compliance with the Act. The only evidence in the ex
parte applications to the effect that the requirements were necessary
consisted of bald assertions by the Minister’s affiants, who apparently were
not apprised of the context in which the applications were brought. Not only
have the Insurers provided the Minister with a substantial amount of
information, but RBCI has also provided her with the identities of certain of
its 10-8 plan holders. Of course, it is not the role of the Court to question
the Minister’s decision to audit someone (see Greater Montréal Real Estate
Board, above, at para 28). However the Minister cannot pretend that she is
unable to audit any of the Insurers’ 10-8 plan holders or to otherwise
determine whether the 10-8 plans comply with the Act because that is simply not
the case. Further, the ATR, although made by another insurer, provided
sufficient concrete information to allow the Minister to make a determination –
and, in fact, she determined that the 10-8 plan likely complies with the Act.
[61]
The
Minister therefore was already in a position to assess the 10-8 plans and their
compliance with the Act. Again, this begs the question of her true purpose in
bringing the ex parte applications.
[62]
If,
as the Minister’s delegates claimed in the internal emails, “Policyholder
taxation is an area long overdue for attention,” then the manner in which it
should receive this attention is through legislative amendment. It is a misuse
of the Minsiter’s powers – powers which the Courts have repeatedly called
“intrusive” – to use section 231.2 to pursue policy objectives rather than to
enforce tax obligations. It was not open to the Minister to seek ex parte
authorization under the pretence of verifying compliance with the Act when her
true purpose was to achieve through audits what the Department of Finance
refused to do through legislative amendment.
3. Constitutionality
of Section 231.2(3) of the Act
[63]
The
Charter issue is raised in the specific context of these motions and is
intertwined with the first two issues. In light of my above conclusion that ex
parte orders must be cancelled, it is unnecessary for me to address this issue.
Part VI – Conclusion
[64]
As
a result of the incomplete disclosure in the ex parte motions, these
motions are allowed and the ex parte orders are cancelled with costs.
JUDGMENT
THIS COURT ORDERS
that
the motions are allowed and the ex parte orders are cancelled with costs.
“Danièle
Tremblay-Lamer”
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