Inappropriate scope of s. 231.9 rule (pp. 7-10)
- Where the taxpayer refuses to provide information on the basis of solicitor-client privilege and the Minister nonetheless issues a notice of non-compliance (NNC), this could pressure the taxpayer into waiving privilege rather than undertaking the onerous NNC dispute process – suggesting that since a compelled waiver is not valid, the production of documents resulting from the NNC’s issuance would likely constitute an unreasonable search or seizure contrary to s. 8 of the Charter.
- Even if s. 231.9(6) or (9) authorizes the Minister or the Federal Court, on an appeal under s. 231.9(4) or (8), to evaluate the legality of the underlying requirement under s. 221.1, 231.2 or 231.6 (a “Requirement”) or whether the taxpayer was required to comply with it, evaluation of the legality of the Requirement or of the taxpayer’s s. 7 or 8 Charter right to refuse to comply with it are questions of law “’that are of fundamental importance and broad applicability’, with significant legal consequences for the justice system as a whole or for other institutions of government”, subject to review on a standard of correctness (Vavilov, at paras. 59-62).
- This requirement for a review of correctness clashes with s. 231.9(9), which contemplates the Federal Court reviewing whether any CRA decision to reject a privilege claim in relation to a document covered by a NNC was reasonable, a review which generally would be limited to considering that decision in light of the material before the CRA decision maker – which, crucially, would not include the document for which privilege was claimed.
- In contrast, the Federal Court’s review under s. 231.7 of any compliance order sought by the Minister of a document for which the taxpayer claimed privilege would be applied under a correctness standard (likely including a review of the document) – so that there could be a situation (representing an affront to the rule of law) in which taxpayer was penalized under s. 231.9 for what was subsequently established not to be a failure.
- Regarding the requirement in s. 231.9(6) for the Minister to vacate a NNC where the taxpayer had “done everything reasonably necessary to comply with each [relevant] requirement,” a taxpayer taking reasonable steps to comply with a requirement should not be subjected to the s. 231.9(12) penalty merely because the Minister, with the benefit of hindsight, points to alternative actions which the taxpayer might have taken.
- For example, if CRA issues a Requirement (with a 30-day deadline) asking for a copy of a share purchase agreement concluded 30 years earlier (relevant to the ACB of shares) and the taxpayer, believing that such agreement would be at an off-site storage site, searches such records and does not locate the agreement and so reports to CRA, who then issues a NNC, it might be inappropriate in the circumstances for the Minister to then determine that the taxpayer did not do everything reasonably necessary because it did not request a copy of the agreement from the law firm which assisted on the original purchase.
Potentially disproportionate, and therefore penal nature (contrary to s. 11 of the Charter) of the s. 231.7(6) penalty (pp. 11-13)
- A penalty that is “out of proportion to the amount required to achieve regulatory purposes” may constitute a true penal consequence engaging the criminal procedural protections of s.11 of the Charter (Guindon, at para. 77).
- To illustrate the disproportionate nature of the automatic penalty under s. 231.7(6), consider a corporation which provided 95 out of 100 documents requested regarding an audit of three taxation years, and claimed solicitor-client privilege for the other 5 documents and, in connection with CRA seeking a compliance order, the Federal Court determines that there was insufficient evidence to establish that two of the documents were privileged: even though the corporation was substantially compliant, it is subjected to the penalty of 10% of its tax for the three years.
-
To provide another example, where CRA obtains a compliance order regarding the refusal of an insurance company, with annual taxes of $100M to provide information relating to a potential dispute (involving, say, $1M in taxes) between a client and CRA, on the grounds that CRA had failed to obtain a judicial authorization pursuant to s. 231.2(2), the resulting penalty of $10M is grossly disproportionate to the conduct of the insurance company, and is substantially higher than the maximum fine (of $25,000) that could be imposed under s. 238 for wilfully failing to comply with the same statutory provision, given the bona fide nature of the objection and the disconnect between the magnitude of the penalty and the tax in dispute.
-
Where the threat of penalties compels production of documents which CRA is not entitled to obtain, the demand therefor constitutes an unreasonable search and seizure contrary to section 8 of the Charter.
-
Entities which have no taxes to pay, such as partnerships and most trusts, would not be subject to the penalty, potentially representing disproportionality going the other way.
Inappropriate scope of tolling (pp. 14-17)
The revised version of s. 231.8 would generally expand the circumstances in which the running of the normal reassessment period for a taxpayer was suspended (“tolling”) for notices of non-compliance (“NNCs”) or compliance procedures regarding a person who does not deal at arm’s length with the taxpayer “in respect of the taxation year of the taxpayer.” In this regard:
- It is unclear how the quoted phrase is to be applied as a connecting factor;
- It is unclear how to apply the test of a factually non-arm’ length relationship given that this test is generally applied in relation to a particular transaction;
- Furthermore, the normal reassessment period is not stopped when the NNC is vacated by the Minister but is stopped for the period of time it takes for the Federal Court to vacate the NNC; there should be no such tolling if the Court vacates the NNC.
Procedural protections under the parallel IRC rule (pp. 5-6)
- Although the IRS has the power to summon various persons including taxpayers, officers, employees or third parties to provide testimony under oath (26 USC §7602(a)(2)), in contrast to s. 231.45 there are also various procedural protections to protect witnesses rights including the right to request that proceedings be recorded and the right to be represented by counsel – and a summons may not be issued while a matter is under criminal investigation.
Email this Content