Date: 20090721
Docket: T-1369-08
Citation: 2009 FC
739
Ottawa, Ontario, July 21, 2009
PRESENT: The Honourable Mr. Justice Martineau
BETWEEN:
WHITEWATER
GOLF CLUB INC.
Applicant
and
MINISTER
OF NATIONAL REVENUE
Respondent
REASONS FOR JUDGMENT AND JUDGMENT
[1]
By order dated July 24th, 2008, issued ex parte
in Ottawa, Ontario, pursuant to subsection 231.2(3) of the Income Tax Act,
R.S.C. 1985, c.1 (5th Supplement), as amended (the ITA), and
paragraph 289(3) of the Excise Tax Act, R.S.C., 1985, c. E-15 (the
ETA), I authorized the Minister of National Revenue (the Minister) to impose on
the applicant, Whitewater Golf Club Inc. (Whitewater), a requirement that it
provides the Minister with certain information and documents relating to a
group of unnamed persons (the authorization).
[2]
The required information is with regard to Whitewater’s November
30, 2003 through November 30, 2005 taxation years, and includes: the names and
addresses of persons or corporations to whom Whitewater supplied goods or
services; sales journals, sales invoices or other supporting documentation; any
and all accounting documents under Whitewater’s control or in its possession
concerning monies received with regard to the sale of goods or services; any
and all documentation concerning monies received from the sale of goods or
services to customers (members) including all bank statements, bank deposit
books, and records of monies received from customers (members).
[3]
The authorization and the notice to the respondent were served
upon Whitewater’s representative on July 31, 2008. Before me is an application
by Whitewater for a review of the authorization pursuant to subsections
231.2(5) and (6) of the ITA and paragraph 289(5) of the ETA. Furthermore, Whitewater
is seeking an order dismissing the Minister’s originating application (T‑1099-08).
For the reasons that follow, the application for review will be dismissed.
[4]
The
Canadian income tax system is a self-reporting and self-assessing system (R.
v. McKinlay Transport Ltd., [1990] 1 S.C.R. 627) (McKinlay Tranport).
However, the Minister is given significant statutory powers to enable him to
identify incidents of non-compliance and to take corrective action. In this
regard, it bears mentioning that taxpayers have a very low expectation of
privacy in their business records relevant to the determination of their tax
liability: McKinlay Transport, above and Redeemer Foundation v.
Canada (National Revenue), [2008] S.C.R. 643, (Redeemer) at para.
25.
[5]
The powers
of the Minister include a number of tools that permit the Minister to compel
the production of information the Minister considers necessary to fulfil his
mandate. One of those tools is found in subsection 231.2(1) of the ITA, and it
permits the Minister, in certain circumstances, to compel the production of
information about unnamed persons if the Minister first obtains the approval of
a judge (defined in section 231 to mean a judge of the Federal Court or a judge
of the superior court of the relevant province or territory). It reads in
relevant part as follows:
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231.2
(1) Notwithstanding any other provision of this Act, the Minister may,
subject to subsection (2), for any purpose related to the administration or
enforcement of this Act (including the collection of any amount payable under
this Act by any person), […] by notice served personally or by registered or
certified mail, require that any person provide, within such reasonable time
as is stipulated in the notice,
(a)
any information or additional information, including a return of income or a
supplementary return; or
(b)
any document.
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231.2
(1) Malgré les autres dispositions de la présente loi, le ministre peut, sous
réserve du paragraphe (2) et pour l’application ou l’exécution de la présente
loi (y compris la perception d’un montant payable par une personne en vertu
de la présente loi), […] par avis signifié à personne ou envoyé par courrier
recommandé ou certifié, exiger d’une personne, dans le délai raisonnable que
précise l’avis :
a)
qu’elle fournisse tout renseignement ou tout renseignement supplémentaire, y
compris une déclaration de revenu ou une déclaration supplémentaire;
b)
qu’elle produise des documents.
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[6]
Recourse
to subsection 231.2(2) is made when the Minister wishes to verify whether an
ascertainable class of persons has complied with the ITA and information
relevant to that question is accessible by someone who has no statutory
obligation to provide it to the Minister in the form of an information return
or in the course of the Minister’s examination of the person’s own tax affairs.
Subsection 231.2(2) reads as follows:
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231.2
(2) The Minister shall not impose on any person (in this section referred to
as a “third party”) a requirement under subsection 231.2(1) to provide
information or any document relating to one or more unnamed persons unless
the Minister first obtains the authorization of a judge under subsection
231.2(3).
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231.2
(2) Le ministre ne peut exiger de quiconque — appelé « tiers » au présent
article — la fourniture de renseignements ou production de documents prévue
au paragraphe (1) concernant une ou plusieurs personnes non désignées
nommément, sans y être au préalable autorisé par un juge en vertu du
paragraphe (3).
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[7]
The
procedure to be followed when the Minister wishes to seek judicial
authorization to compel the production of information about unnamed persons is
set out in subsections 231.2(3) to (6). If the application is successful
and the Minister acts on the authorization, the third party has an opportunity
to apply to the same judge, or a judge of the same court, for a review of the
authorization. That review may result in the authorization being cancelled,
confirmed or varied. Subsections 231.2(3) to (6) read as follows:
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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.
(4)
Where an authorization is granted under subsection 231.2(3), it shall be
served together with the notice referred to in subsection 231.2(1).
(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.
(4)
L’autorisation accordée en vertu du paragraphe (3) doit être jointe à l’avis
visé au paragraphe (1).
(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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[8]
At issue
in the present proceedings is the Minister’s compliance with the second
condition for a judicial authorization under subsection 231.2(3) of the ITA
that “the requirement is made to verify compliance by the person or persons in
the group with any duty or obligation under this Act”. Thus, the applicant
submits that in the course of the audit being performed by the Canada Revenue
Agency (CRA), the Minister requested the names of its corporate members in
furtherance of that audit and not for the purpose of reviewing the compliance
by said members with the provisions of the ITA or the ETA. The applicant further
submits that the Minister, in making the ex parte application, did not
provide full disclosure of all material facts and evidence it relied on in the
material used to support its application.
[9]
The CRA is
conducting a full compliance audit of the applicant for income tax and GST/HST
purposes. As part of this audit the CRA requested a copy of the financial
statements, specifically working papers from the accountant and a copy of the
electronic books and records of Whitewater. By exchange of correspondence
during the months of December 2006 and January 2007 the applicant’s
counsel informed CRA that the applicant would only be providing paper copies of
the records requested due to the fact that the electronic records contained the
names of members of Whitewater. A letter, dated November 2007, from the Minister’s
counsel, Mr. MacPhee, to the applicant’s counsel stated: “I have spoken with my
client on this matter, and they have confirmed that Whitewater Golf Club Inc.
is the only party under audit, and the records sought are necessary to properly
complete their audit.”
[10]
Nonetheless,
the Minister acknowledges that CRA’s position on how to proceed on this matter
changed somewhat from the time the information in issue was first sought.
Although it was initially the position of the CRA audit that the members’ names
would only be used as part of the audit of Whitewater, the CRA later amended
its position on this matter and assured the Court that the unnamed persons
being sought would also be investigated to ensure compliance with the ITA
and the ETA. This change of position was clearly set forth in the
Minister’s originating application (T-1099-08).
[11]
The
applicant submits that the Minister’s assertion, following which the
information is now sought to verify compliance with the legislation in
question, is not bona fide and that this position was only adopted to
bring it within the requirements of the ITA to obtain the authorization,
in breach of the Minister’s obligation to conduct a tax audit in good faith and
to act judiciously in the exercise of its audit powers M.N.R. v. Greater
Montréal Real Estate Board, 2007 FCA 346 , [2007] F.C.J. No. 1477 F.C.A. at
para. 48).
[12]
The
Minister submits that at the outset of this audit the CRA was provided with
“screener’s comments” giving direction as to how to conduct the CRA audit. Based
on said comments as well as CRA’s review of this matter, it was determined that
one of the purposes of the Whitewater audit was also to ensure the compliance
of corporate members with regards to the limitation of the deductibility of
golf membership by these corporate members.
[13]
Nonetheless,
the applicant further submits that while referred to by Ms. Mary Davies in her
affidavit sworn on May 21, 2008 filed in support of the Minister’s ex parte
initial application, the screener’s comments were never filed as exhibits and
thus the Minister failed to provide full disclosure of all material facts and
evidence it relied on to support its application.
[14]
The grounds of
review of an authorization granted under subsection 231.2(3) of the ITA
and paragraph 289(3) of the ETA have previously been stated. Thus, this
Court will vary or cancel the authorization previously granted only if it is
not satisfied that the conditions in subsections 231.2(3)(a) and 231.2(3)(b)
have been met.
[15]
The recent decision of the Supreme Court in Redeemer further
confirmed at para. 27 that:
[I]f an organization's charitable
program is not valid, then both the charity and any of its donors who claim tax
credits are non‑compliant. The CRA has a valid interest in investigating
both. The same would be true of any other relationship involving reciprocal tax
treatment. […]
[16]
The authorization at issue will be confirmed, as the Court is satisfied
that the requirement is imposed in good faith by the Minister in order to
verify compliance by Whitewater Gold Club members with their duties and
obligations under the ITA. Moreover, the applicant has provided no
compelling rationale for this Court to vary the authorization, and I see no
sound reason for restricting today the requirement to corporate members since
non-corporate members may have also claimed non-allowable deductions or GST
refunds.
[17]
The applicant has provided no objective evidence to support its
allegation of bad faith. The Minister’s change of position regarding the audit
of the Whitewater members themselves, which resulted in the Minister seeking
the authorization at issue, is not a sufficient ground by itself to annul the
authorization. Indeed, this change of position was clearly stated in the
material filed in support of the ex parte application. The case at hand is precisely that of a
relationship involving reciprocal tax treatment as referred to in Redeemer.
It appears to me that the Minister took the more prudent approach of seeking
judicial authorization and followed the suggestion previously made by
applicant’s counsel that judicial authorization be obtained.
[18]
In
conclusion, the applicant’s submissions regarding the Minister’s failure
to fully disclose the material in support of which the Whitewater members are
not being audited has no legal or reasonable basis. Furthermore, there is no
obligation under the ITA regarding the nature of the particular evidence
that has to be filed in support of an application ex parte for an
authorization. There was certainly no obligation in this case to produce
protected material with the affidavit of Mary Davies. The only conditions to be
satisfied are those set forth in subsections 231.2(3)(a) and 231.2(3)(b) of the
ITA which have clearly been met.
Again, there is sufficient proof on the record that the
information was sought by the Minister to ensure the member’s compliance under
paragraph 18(1)(l) of the ITA. At the hearing of this application, other
valid grounds to verify compliance, such as GST refunds, were also provided by
Minister’s counsel. Finally, the records of members exist and the applicant
cannot simply refuse their access on the ground that it is not obliged by law
to maintain such records.
[19]
The
application of Whitewater will be dismissed and the authorization confirmed. Costs
will be in favour of the respondent.
JUDGMENT
THIS COURT ORDERS AND ADJUDGES
that the application to review the authorization is dismissed with
costs in favour of the respondent.
“Luc
Martineau”
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