Artistic Ideas Inc. v. Canada (Customs and Revenue Agency), 2004 FC 573

                                                                                                                      Date: 20040416

                                                                                                                 Docket: T-1141-02

                                                                                                            Citation: 2004 FC 573

Ottawa, Ontario, this 16^th day of April, 2004

PRESENT: THE HONOURABLE MADAM JUSTICE SNIDER

BETWEEN:

                                                    ARTISTIC IDEAS INC.

                                                                                                                                Applicant

                                                                   - and -

                              CANADA CUSTOMS AND REVENUE AGENCY

                                                                                                                            Respondent

                                      REASONS FOR ORDER AND ORDER

SNIDER J.

[1]                Artistic Ideas Inc. (the "Applicant"), as the sales agent for two American art galleries, arranges the sale of artwork to individual Canadian taxpayers (the "Donors") who normally donate these to registered charities (the "Charities"). The Donors obtain a tax benefit from such donations, based on the difference between the appraised value of the works of art and what the Donors paid for them. These transactions are sometimes referred to as "art flips".

[2]        In the summer of 2001, the Tax Avoidance Section of the Canada Customs and Revenue Agency (the "CCRA") began an audit of the Applicant. On June 19, 2002, Ms. Karen Nourse, Tax Avoidance Officer, on behalf of the CCRA, served a requirement (the "Requirement") on the Applicant to provide certain documents pursuant to subsection 231.2(1) of the Income Tax Act, R.S.C. 1985 c. 1 (5^th Supp.), as amended (the "ITA"), including the names of the Donors and the Charities. The CCRA is the delegate of the Minister of National Revenue (the "Minister") for purposes of the ITA. The Applicant agreed to provide the CCRA with all of the requested information except for the names and addresses of the Donors and Charities.

[3]         During the same time frame that the audit of the Applicant was ongoing, Tax Avoidance Headquarters in Ottawa commenced a broad investigation, known as the "Art Project", into art flips. The Art Project is a national program of CCRA established for the purpose of identifying and reassessing all donors involved in art flips. That would include the Donors described above.

[4]         The Applicant seeks an order striking the portion of the Requirement that requires the Applicant to provide the names and addresses of Donors and Charities without prior judicial authorization.

Issue

[5]         This application raises one issue:

Is the Minister, using the authority of subsection 231.2(1) of the ITA, entitled to the names of the Donors and Charities without first obtaining the authorization of a judge pursuant to subsections 231.2(2) and 231.2(3)?

[6]         For purposes of this application, this issue can be subdivided as follows:

1.         Is the audit of the Applicant a genuine and serious inquiry into its tax liability?

2.          If so, the requested information possibly relevant to the inquiry into the tax liability of the Applicant?

3.          If so, in spite of a valid audit of the Applicant and the possible relevance of the names of the Donors and Charities to the audit of the Applicant, is the Minister nevertheless only entitled to such information by obtaining judicial authorization pursuant to subsections 231.2(2) and (3)?

Relevant Statutory Provisions and Regulations

[7]         Section 231.2 of the ITA states:

Analysis

Is the audit a genuine and serious inquiry into the Applicant's tax liability?

[8]         For a purpose related to the administration and enforcement of the ITA, the Minister has broad powers, pursuant to subsection 231.2(1), to require any person to produce any information or document, even where such information concerns an unnamed person not under investigation (James Richardson & Sons, [1984] 1 S.C.R. 614">Limited v. Minister of National Revenue,[1984] 1 S.C.R. 614). The case of Tower v. Canada (Minister of National Revenue), [2003] F.C.J. No. 1153 (C.A.)(QL), reversing [2002] F.C.J. No. 1215 (T.D.)(QL) is the most recent decision of the Federal Court of Appeal on the application of subsection 231.2(1). Justice Malone, writing for a unanimous Court of Appeal, had the following to say on the general scope of the provision in issue (at paragraph 29):

A number of cases have dealt with the scope of subsection 231.2(1) (see R. v. McKinlay Transport, supra; James Richardson & Sons v. Minister of National Revenue, supra; AGT [1984] 1 S.C.R. 614">Limited v. The Attorney General of Canada, supra; andR. v. Jarvis, 2002 D.T.C. 7547 (S.C.C.) at paragraph 51). The relevant principles from these authorities establish that the determination of a taxpayer's tax liability is a purpose related to the administration and enforcement of the Act. A requirement is valid if the requested information may be relevant in the determination of the tax liability of the named taxpayer. This is a low threshold. Subsection 231.2(1) gives the Minister a broader authority to obtain information than would be the case if, for example, the Minister were conducting pre-trial examinations for discovery in the context of an income tax appeal.

[9]         However, to prevent the Minister from conducting a "fishing expedition", the broad powers of subsection 231.2(1) can only be exercised in the course of a genuine and serious inquiry into the tax liability of a named individual (Richardson, supra at 615). If the audit of the Applicant is not genuine and serious, the Minister is not entitled to any of the information in the Requirement.

[10]       The Applicant submits that the audit into its tax liability is not a genuine or serious inquiry but, in fact, a pretext for obtaining the names of Donors and Charities, as part of the Art Project. In support of this assertion, the Applicant, relying on its interpretation of the evidence given by the Minister's delegate, Ms. Nourse, mainly during the cross-examination on her affidavit, concludes as follows:

·           Ms. Nourse's job within the CCRA is to deal with tax shelters, not conduct audits;

·           her work regarding the Applicant was conducted as part of the national Art Project of the CCRA;

·           if she found the names of Donors in the course of the audit, she would recommend that they be reassessed;

·            tax returns of all 13 Donors who were identified through a GST audit of the Applicant have been reassessed; and

·           upon reviewing the information provided during the audits of the 13 identified Donors, Ms. Nourse found little value in the full, unredacted documents.

[11]       Based on these conclusions, in the Applicant's view, it is obvious that the audit of the Applicant is not bona fides; that the predominant purpose of requesting the names of the Donors and Charities is to conduct a reassessment of those persons.

[12]       There is no question that the goal of the Art Project is to identify and reassess all taxpayers who donated to charities through the use of art flips. That is the essence of the Art Project. The nature of this CCRA project of CCRA is not in dispute. It also was not disputed by the Respondent that any Donors identified through the disclosure of the names currently being withheld by the Applicant will subsequently be reassessed. However, the Respondent asserts that, notwithstanding the relationship between the Art Project and the Applicant, the audit of the Applicant is a genuine and serious inquiry.

[13]       I have carefully read the affidavits of Ms. Nourse, the CCRA employee responsible for the audit of the Applicant, and the transcripts of Ms. Nourse's examination and cross-examination. Throughout, Ms. Nourse affirms that the Applicant, independent of the national Art Project, is the subject of an audit by the CCRA. The Applicant became the subject of an audit when, during the course of a GST audit of the Applicant commenced in May 2000, it was learned that the Applicant filed an amended income-tax return for its taxation year that ended on January 31, 1999. In the amended return, the Applicant altered the way in which it reported its revenue. This triggered an income tax audit for the years ended January 31, 1999, January 31, 2000 and January 31, 2001, as they were all filed in the same way. During the audit, concerns about reported expenses also emerged.

[14]       Although there is a connection, as admitted by Ms. Nourse, between the Applicant and the Art Project, promoters of art flips, such as the Applicant, are not generally being pursued as part of the Art Project. Ms. Nourse testified that the Applicant's file "...is a file that has been selected for audit as any other file would have been selected for audit". Ms. Nourse suggested in cross-examination that the Applicant at some point did begin to interest those involved in the Art Project. Given the Applicant's central role in art flip transactions, this interest or connection is understandable. However, in my view, this does not negate the genuine and serious concerns that gave rise to the audit in the first place.

[15]       For these reasons, I conclude that the audit of the Applicant is a genuine and serious inquiry into its tax liability.

Are the names of the Donors and Charities possibly relevant to the Applicant's audit?

[16]       As stated in Tower, supra at paragraph 29, the test for whether information is required for an audit is very low. The Respondent need only satisfy me that the names of the Donors and Charities may be relevant.

[17]       The Applicant submits that the unredacted records are irrelevant to its audit. However, there is no need for me to make a final determination of relevance. It is sufficient that the documents may be relevant to the genuine and serious inquiry into the liability of the Applicant ®. v. McKinlay Transport Ltd., [1990] 1 S.C.R. 627 at 650; AGT Ltd. v. Canada (Attorney General), [1996] 3 F.C. 505 (T.D.), aff'd [1997] 2 F.C. 878 at 889 (C.A.), leave to appeal dismissed, [1997] S.C.C.A. No. 314 (QL); Fraser Milner Casgrain LLP v. Minister of National Revenue, 2002 D.T.C. 7310 at 7314 (F.C.T.D.)). The same test applies to the names of the Donors and Charities; it is sufficient that the names may be relevant to the inquiry into the tax liability of the Applicant.

[18]       The Applicant points out that Ms. Nourse made no use of the documents that she has already obtained through the audit of 13 Donors named through other means. This, the Applicant appears to be arguing, is evidence that the names of the Donors are not needed for any purpose other than to commence an audit of them. I put little weight on the fact that she has made little use of the documents that she has already obtained from the 13 Donors. In my view, failure to follow up on these documents is not conclusive evidence that the Donor names may not be relevant to the Applicant's audit. If the Minister can provide a rational use to which such information could be put related to the audit of the Applicant, then what has been done or not done thus far in the audit is not determinative.

[19]       Ms. Nourse states in her affidavit, and I accept, that the documents requested by her are routinely requested for corporate audits to verify the revenue and expenses of the taxpayer and the existence and nature of the business activity in which a taxpayer claims to be engaged. Having the names of the Donors and Charities with whom the Applicant has had dealings would enable the Minister to verify, by consulting with these third parties, that the transactions reported by the Applicant did in fact take place. Further, Ms. Nourse's concerns about the accuracy of redacted documents is understandable. She cannot know what information has been redacted by the Applicant, and only the originals will provide her with a full and accurate picture of the Applicant's business dealings.

[20]       In conclusion on this point, I am satisfied that the names of the Donors and Charities are information that may be relevant to the audit of the Applicant.

[21]       One minor point that arises is whether Ms. Nourse should allow an independent third party (such as a retired judge) to confirm the integrity of the redacted documents. Such an offer made by the Applicant has been refused by the Respondent. The Applicant submits that this should meet the needs of Ms. Nourse. For the reasons above, I do not agree. However, even if I did, I see no authority in the ITA or elsewhere for the delegation of the verification of documents.

Is judicial authorization pursuant to subsection 231.2(2) required for disclosure of the names of the Donors and charities?

[22]       Having accepted that the Applicant is not conducting a "fishing expedition" in respect of the Applicant; that she is making a genuine and serious inquiry into the tax liability of a named taxpayer; and that the names of the Donors and Charities may be relevant to assessing the tax liability of the Applicant (Fraser Milner Casgrain LLP, supra at 7314), the question becomes, to what extent, if any, does subsection 231.2(2) of the ITA limit the Minister's powers under subsection (1)?

[23]       In the context of a valid audit into the affairs of a named taxpayer, a Requirement is not invalid merely because it results in the disclosure of private transactions involving persons who are not under investigation and may not be liable to tax (see Canadian Bank of Commerce v. Attorney General of Canada (1962), 35 D.L.R. (2d) 49 at 54; Richardson, supra; and R. v. McKinlay Transport, supra at paragraph 16).

[24]       In contrast to a situation that requires disclosure of third party information from a taxpayer under audit is the case where the attention of the tax authorities is on unnamed persons but not on the person served with the Requirement. In Richardson, supra, the Supreme Court determined that the Minister was engaging in a "fishing expedition" where the Minister sought information concerning unnamed persons outside of a genuine and serious inquiry into the tax liability of any named individual. Concerns articulated by the Supreme Court in Richardson, supra prompted the addition of subsection 231.2(2) to the ITA (Minister of National Revenue v. Sand Exploration Ltd., [1995] F.C.J. No. 780 at paragraph 15 (T.D.)(QL)).

[25]       Subsections 231.2(2) and (3) allow the Minister to obtain information about unnamed persons under investigation, but only if the Minister first obtains the authorization of a judge. The intent of these provisions is to prevent the Minister from gathering information where she does not reveal the specific taxpayer whose liability is under scrutiny to a person who is not himself under investigation by the Minister (Sand Exploration, supra; Pacific Network Services Ltd. v. Canada (Minister of National Revenue), 2002 D.T.C. 7585 at paragraph 52 (F.C.T.D.). This concern is fundamentally about the Minister's intrusion on the privacy of the person on whom the Minister imposes a requirement (Pacific Network Services,supra at paragraph 46; Canadian Forest Products Ltd. v. Minister of National Revenue, 1996 D.T.C. 6506 at 6508 (F.C.T.D.); Sand Exploration, supra at 145; Bisaillon v. Canada, [1999] F.C.J. No. 1477 at paragraph 3 (C.A.)(QL); AGT, supra at 890 paragraph 24 (F.C.A.); McKinlay Transport, supra at 649e-650b; Richardson,supra at 622f-j, 625g-626a; Del Zotto v. Canada (Minister of National Revenue), 1997 D.T.C. 5328 at 5341 (F.C.A.) (Per Strayer J.A. dissenting), reversed 1999 D.T.C. 5029 (S.C.C.)). Such authorization may be given if the judge is satisfied that the person or group is ascertainable and the Requirement is made to verify compliance with the ITA by the persons in the group (s. 231.2(3)).

[26]       Thus, we have the bookends:

·           if the focus of the audit is on a named taxpayer and information is being requested that would identify persons who are not the subject of an investigation, such information, including the names of previously unnamed persons, may be disclosed without judicial authorization; but

·           if the focus of the investigation is the unnamed persons and the information is requested from a person not under investigation (such as an accounting firm), prior judicial authorization is required.

[27]       But, what happens when the Requirement is served on a person who is both the subject of a genuine audit and the holder of the names of other persons who are also under the CCRA's magnifying glass? On the one hand, the CCRA may need the information regarding unnamed persons to verify statutory compliance by the named person of interest. Without the information, the CCRA may not be able to obtain a complete picture of the transactions that may give rise to tax liabilities; the Minister's delegates will not be able to contact parties to confirm the validity and status of contractual arrangements. Arguably, the broad intent of s. 231.2(1) could be thwarted. However, on the other hand, the information sought will also be used in the investigation of the unnamed persons - the very type of "mischief" that Richardson, supra was concerned with.

[28]       To a certain extent, the Federal Court of Appeal addressed this question in Tower, supra. The applications judge in that case considered the right to redact the names of persons from information to be provided pursuant to a valid requirement. He stated that BDO Dunwoody, who had been served with the Requirement, had "the right to redact the documents to expunge that person's name before the document or information is submitted". The Federal Court of Appeal disagreed, stating as follows (at para 23 to 25):

The record before the Applications Judge contains no evidence that there was any third party information in any of the documents that were the subject of the Requirements. Dunwoody's proposal to redact third party information was based solely on speculation as to a potential future problem. Therefore, the Applications Judge erred in stating that Dunwoody has a right of redaction with respect to the documents that are the subject of the Requirements. Rather, what he should have concluded is that Dunwoody had failed to establish any factual basis for asserting a right of redaction (assuming, without deciding, that such a right may exist)

That is sufficient to dispose of the redaction issue in this case. I recognize that this resolution of the matter leaves unanswered theoretical questions. For example, it is debatable whether there is a right of redaction at all with respect to documents that fall within the scope of a valid requirement under subsection 231.2(1). In this regard, there is jurisprudence from the Supreme Court of Canada that supports the proposition that a requirement is not invalid merely because it results in the disclosure of private transactions involving persons who are not under investigation and may not be liable to tax (see Canadian Bank of Commerce v. Attorney General of Canada (1962), 35 D.L.R. (2d) 49 at 54; James Richardson & Sons v. Minister of National Revenue, 9 D.L.R. (4th) 1 at 7; and R. v. McKinlay Transport, [1990] 1 S.C.R. 627 at paragraph 16.)

If a right of redaction exists in theory, there is an issue as to who ought to determine whether the right should be exercised in a particular case, the person to whom the requirement is directed, or the Minister, or the Court. If a dispute should arise in future about the right to redact a document that is within the scope of a valid requirement but contains third party information that for some reason the Minister ought not to have, I have no doubt that the parties will find a way to have the issues debated in an appropriate forum. Meanwhile, I prefer to express no opinion on issues that do not arise in this case.

[29]       What can be extracted from this decision? Firstly, I note that a right of redaction, if it exists, should only be considered on the basis of a factual background. There is also a clear statement that a right of redaction does not arise simply because disclosure would result in the disclosure of information involving persons who are not under investigation. The question of whether a right of redaction ever arises was left open. Specifically, the decision in Tower, supra does not address the situation where there is evidence that the unnamed persons are also under investigation.

[30]       Once we have, as we do here, a valid audit of the party on whom the Requirement was served, the Federal Court of Appeal in Tower,supra has left me with two questions to answer:

1.          Is there a theoretical right to withhold or redact the names of unnamed persons?

2.          Has the Applicant established a factual basis for asserting the right of redaction?

[31]       In my view, the answer to the first of these questions is found in the inclusion of the words "subject to subsection (2)" in subsection 213.2(1). Although subsection 231.2(1) allows broad and unfettered disclosure, the power of the Minister is, in effect, limited by the judicial authorization provision in subsection 231.2(2). There is nothing in section 231.2 that prevents a person from being both a taxpayer subject to audit and a person subject to the unnamed persons obligations of subsections 231.2(2) and (3). If the Minister is seeking information that qualifies as information or documents "relating to one or more unnamed persons", judicial authorization is required for that aspect of the Requirement and the names may be withheld until such authorization is obtained.

[32]       This conclusion does not, in my view, unduly impede the Minister from carrying out her statutory mandate. As stated by Justice Rothstein in Sand, supra at 18, "There is no absolute prohibition from obtaining the names of taxpayers from third parties [any person] and indeed section 231.2 now provides a procedure for obtaining such information". Judicial authorization can be sought and obtained if the information is needed for the investigation into the unnamed persons and that information then used for the investigation into both the original audit target and the unnamed persons. Thus, there is a right to redact the names of unnamed persons until and unless authorization is obtained in accordance with subsections 213.2(2) and (3).

[33]       However, the more critical and determinative question is the second. Has the Applicant established a factual basis for asserting the right? In my view, there must be clear evidence that the unnamed persons are to be investigated. That evidence must go beyond a mere speculation that these persons may be of interest to the tax authorities. Only in the face of such evidence, should the broad powers of the Minister be curtailed.

[34]       What do we have in this case? Aside from her interest in the Applicant, Ms. Nourse stated in her affidavit that, during the course of her audit of the Applicant, she learned of the names of some of its Donors. Upon learning these names, she recommended that they be reassessed for their tax liability. If the Requirement in question is upheld by this Court and the original unredacted documents-containing the names of more Donors and Charities-are provided to Ms. Nourse, there is no doubt that these newly-identified Donors will be reassessed for engaging in art flips. The Minister does not hide or deny her interest in obtaining the names of the Donors and Charities and in recommending that the Donors be reassessed. Thus, there is, in this particular situation, a factual basis for asserting a right of redaction in respect of the Donors.

[35]       There is, however, no clear evidence with respect to any potential audit of the Charities. In the absence of such evidence, disclosure of the names of the Charities is, in my view, a valid part of the Requirement without prior judicial authorization.

[36]       Neither party to this application was able to refer me to any case directly on point, although both, helpfully, cited a number of cases that considered the provisions in question. The following is a brief summary of a few of those cases, how the Courts dealt with the ITA provisions and how they differ from the case before me.

Cases where named party not the target of the audit

In some of the cases referred to, the party on whom the Requirement was served was not the person under audit or investigation. In those situations, which were the kind specifically contemplated by subsection 231.2(2), judicial authorization was needed for disclosure of information related to the unnamed taxpayers. The cases of Sand, supra; Canadian Forest Products Ltd., supra, Allen A. Paquette v. Minister of National Revenue, 1992 D.T.C. 6394 (F.C.T.D.); Thomas G. Andison v. Minister of National Revenue, 1995 D.T.C. 5058 (F.C.T.D.) are in this category and are not relevant to the case before me.

Pacific Network Services Ltd.

In Pacific Network Services Ltd. v. Canada (Minister of National Revenue), 2002 D.T.C. 7585 (F.C.T.D.), the Court held that the Minister was not required to obtain prior judicial authorization for a requirement in which the names of the applicant corporation's shareholders and officers was sought. There was nothing in that case that indicated that these persons were under investigation. On that basis, this case can be distinguished.

Capital Vision, Inc.

In Capital Vision, Inc. v. Canada (Minister of National Revenue), [2002] F.C.J. No. 1797 (T.D.) (QL), the Court held that the Minister was required to obtain prior judicial authorization for a requirement seeking the disclosure of names of unnamed persons from the applicant, Capital Vision. However, the basis of the Court's decision appears to have been that the audit of Capital Vision was not genuine. Once again, this case is not applicable to the facts before me.

Bernick

In Bernick v. R., 2002 D.T.C. 7167, the Ontario Superior Court of Justice held that no prior judicial authorization was required concerning information sought about unnamed persons. In that case, however, neither the tax liability nor the conduct of the unnamed persons was of interest to the Minister.

Van Egmond

Finally, in R. v. Van Egmond, [2002] B.C.J. No. 715 (Q.L.), the British Columbia Court of Appeal held that the Minister need not obtain prior judicial authorization for a requirement concerning information about unnamed persons whose tax liability was under investigation. The applicant was an accountant and the information sought concerned unnamed clients. The Court reasoned that subsection 231.2(2) was not triggered because the information about the applicant's clients was sought in the course of a valid audit of the applicant. The context of this decision was a criminal investigation of the applicant, where a stronger case could be argued for the disclosure of names.

[37]       In summary, having reviewed these cases, I am satisfied that requiring prior judicial authorization for the disclosure of the names of the Donors is not at odds with the existing jurisprudence.

Conclusion

[38]       Responding to the issues raised by this application, my conclusions are as follows:

1.         The audit of the Applicant is a genuine and serious inquiry into its tax liability.

2.          The requested names of the Donors and Charities may be relevant to the inquiry into the tax liability of the Applicant.

3(a)       In spite of the valid audit of the Applicant and the possible relevance of the names of the Donors to the audit of the Applicant, the Minister is only entitled to demand disclosure of the names and addresses of the Donors by obtaining prior judicial authorization pursuant to subsections 231.2(2) and (3).

3(b)       The Requirement as it relates to disclosure of the names and addresses of the Charities is valid pursuant to subsection 231(1) and no judicial authorization is necessary.

[39]       This conclusion relates solely to the names and addresses of the Donors and Charities. The Applicant did not dispute the validity of any other portion of the Requirement and, indeed, has already offered to provide this information. Accordingly, I would sever that part of the Requirement that seeks the names and addresses of the Donors from the balance of the Requirement (Paquette, supra).

                                                                 ORDER

THIS COURT ORDERS THAT:

1.          The Requirement, insofar as it purports to require the Applicant to provide the names and addresses of the Donors without prior judicial authorization pursuant to subsection 231.2(2) of the Income Tax Act, is set aside.

2.          Costs are to be assessed in favour of the Applicant.

      "Judith A. Snider"

     Judge

                                                       FEDERAL COURT

                      NAMES OF COUNSEL AND SOLICITORS OF RECORD

DOCKET:                                    T-1141-02

STYLE OF CAUSE:                    ARTISTIC IDEAS INC. v. CANADA CUSTOMS

AND REVENUE AGENCY

PLACE OF HEARING:              Toronto, Ontario

DATE OF HEARING:                March 31, 2004

REASONS FOR ORDER                                               

AND ORDER BY:                      The Honourable Madam Justice Snider

DATED:                                       April 16, 2004

APPEARANCES:

Mr. William I. Innes

Mr. R. Brendan Bissell                                                         FOR THE APPLICANT

Mr. Arnold Bornstein                                                           FOR THE RESPONDENT

SOLICITORS OF RECORD:

Fraser Milner Casgrain LLP

Toronto, Ontario                                                                 FOR THE APPLICANT

Mr. Morris Rosenberg         

Deputy Attorney General of Canada                                    FOR THE RESPONDENT