The Joint Committee explains why the sledgehammer approach of Finance to encouraging compliance with requirements for information is unconstitutional

S. 231.9(1) (included in August 2024 draft legislation) allows the Minister to send or serve a person with a notice of non-compliance (NNC) regarding a s. 231.1. 231.2 or 231.6 requirement (a “Requirement”). The recipient may, within 90 days of receipt, request the Minister (pursuant to s. 231.9(4)) to review the NNC. Pursuant to s. 231.9(6) the Minister must vacate the NNC if she determines that it was “unreasonable” to issue the NNC or that the person had, prior to the issuance of the NNC, done everything reasonably necessary to comply with each relevant Requirement. If the NNC is instead confirmed, the person may apply (pursuant to s. 231.9(8)) for judicial review of such decision, and the Federal Court may (pursuant to s. 231.9(9)(b)) vary or vacate the NNC if it determines that the Minister’s decision “was not reasonable.”

Concerns expressed by the Joint Committee regarding s. 231.9 include:

• Where the taxpayer refuses to provide information on the basis of solicitor-client privilege and the Minister nonetheless issues a 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 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.

Draft s. 231.7(6) provides for the automatic imposition of a penalty against a person where the Federal Court has issued a compliance order under s. 231.7(1), equal to 10% of the aggregate amount of tax payable by the taxpayer for each year in respect of which the compliance order was issued (provided that such tax is at least $50,000.) Concerns expressed include:

• 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 of the insurance company 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.
• 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.

Neal Armstrong. Summaries of Joint Committee, "Submission regarding proposed audit powers in Budget 2024 included in the August 2024 Draft Legislation", 11 September 2024 Joint Committee Submission under s. 231.41, s. 231.9(6), s. 231.7(6), and s. 231.8(1).