Merchant (2000) Ltd. v. Canada (Attorney General), docket T-1406-98

Date: 20000629

Docket: T-1406-98

Ottawa, Ontario this 29th day of June, 2000

PRESENT:      THE HONOURABLE MR. JUSTICE JOHN A. O"KEEFE

BETWEEN:

MERCHANT (2000) LTD.

Applicant

- and -

ATTORNEY GENERAL FOR CANADA

Respondent

REASONS FOR ORDER AND ORDER

O"KEEFE J.

[1]      This is an application for judicial review by Merchant (2000) Ltd. ("applicant") in respect of a requirement imposed by Revenue Canada by way of a letter to the applicant dated June 12, 1998 from Marianne Fitzgerald of Revenue Canada, pursuant to subsection 230(3) of the Income Tax Act , R.S.C. 1985, c. 1 (5th Supp.), as amended ("Act"). The applicant makes application for an Order quashing or amending the said requirement which reads in part as follows:

Section 230 of the Act reads in part as follows:

Where a person has failed to keep adequate records and books of account for the purposes of this Act, the Minister may require the person to keep such records and books of account as the Minister may specify and that person shall thereafter keep records and books of account as so required.

In accordance with the authority contained in subsection 230(3), quoted above, you are hereby required to keep the following books and records in connection with your business:

- A Balance Sheet as at December 31, 1997 and annually thereafter.

- A General Ledger which contains the year to year transactions of the corporation.

- A Receipts and Disbursements journal which details the sources and applications of funds for the corporation and totals them for proper inclusion in the General Ledger.

- Records of accounts receivable which detail outstanding loan balances and accrued interest payments which are due.

- Bank statements and cancelled cheques for all company accounts.

- Statements and transaction records for all company investment accounts.

- Proper vouchers to support all expenditures.

Vouchers must show:

(a)      A full description of the goods and services purchased including, where applicable, quantity and price;

(b)      Date of purchase;

(c)      The name and address of the recipient of the payment;

(d)      The signature of the recipient either on the voucher or on the receipt form if the payment is made in cash or kind.

[2]      The applicant is a Saskatchewan corporation incorporated on February 3, 1983.

The company has no employees and it holds various loans, stock portfolios and shares in real estate development ventures. Its income is composed of mainly management fees, rental income, interest income and capital gains. The company has five directors: Mr. Merchant (the applicant"s affiant), his wife and their three children.

[3]      The applicant has filed income tax returns for at least the last 15 years. In recent

years, the adequacy of the records from which its income is determined has been the subject of disagreement and discord between the applicant and representatives of Revenue Canada.

[4]      The applicant produces income each year but does not prepare a balance sheet or

keep a general ledger. According to Mr. Merchant, the applicant is a small company and the costs associated with implementing the respondent"s directions would be $10,000 to $15,000 per year.

[5]      According to the Attorney General for Canada ("respondent"), Revenue Canada"s

representatives were presented with a bag of cheques drawn on different bank accounts.

[6]      The applicant claims that there are six sources of record keeping available to

Revenue Canada:

     1.      The files maintained by the company.

     2.      The annual list of the files with an annual list of the economic activity.

     3.      The cheques which go through Wood Gundy.

4.      The records of Roberts Properties Inc. in connection with all the business dealings where the applicant is a partner with Roberts Properties Inc.

     5.      The working papers and documents of Ron Ziegler.

     6.      The tax returns.

Issue

    

[7]      Could Revenue Canada issue the requirement it did to the applicant?

Law

[8]      Subsection 230(1) and (3) of the Income Tax Act reads:

230: Records and Books. (1) Every person carrying on business and every person who is required, by or pursuant to this Act, to pay or collect taxes or other amounts shall keep records and books of account (including an annual inventory kept in prescribed manner) at the person"s place of business or residence in Canada or at such other place as may be designated by the Minister, in such form and containing such information as will enable the taxes payable under this Act or the taxes or other amounts that should have been deducted, withheld or collected to be determined. . . . (3) Minister"s requirement to keep records, etc. Where a person has failed to keep adequate records and books of account for the purposes of this Act, the Minister may require the person to keep such records and books of account as the Minister may specify and that person shall thereafter keep records and books of account as so required.

230: Livres de comptes et registres. (1) Quiconque exploite une entreprise et quiconque est obligé, par ou selon la présente loi, de payer ou de percevoir des impôts ou autres montants doit tenir des registres et des livres de comptes (y compris un inventaire annuel, selon les modalités réglementaires) à son lieu d"affaires ou de résidence au Canada ou à tout autre lieu que le ministre peut désigner, dans la forme et renfermant les renseignements qui permettent d"établir le montant des impôts payables en vertu de la présente loi, ou des impôts ou autres sommes qui auraient dû être déduites, retenues ou perçues. . . . (3) Ordre du ministre quant à la tenue des registres. Le ministre peut enjoindre à une personne qui n"a pas tenu les registres et livres de comptes voulus pour l"application de la présente loi de tenir ceux qu"il spécifie et cette personne doit, dès lors, tenir les registres et livres de comptes qui sont ainsi exigés d"elle.

[9]      If the Court is going to review the decision of the Minister pursuant to subsection

230(3) of the Act, what standard of review should apply? I am of the view that the Minister"s decision with respect to his jurisdiction should be reviewed on a standard of correctness. The Minister only has jurisdiction to issue a requirement under subsection 230(3) of the Act if the taxpayer "has failed to keep adequate records and books of account for the purpose of this Act". This determination as to whether the taxpayer has failed to keep adequate records and books of account for the purpose of the Act will dictate whether the Minister has authority to issue the requirement pursuant to subsection 230(3) of the Act. Beetz J. spoke about the approach to use to determine whether, in this case, the Minister has jurisdiction to require the taxpayer to keep certain records in UES, Local 298 v. Bibeault [1988] 2 S.C.R. 1048 at pages 1088-89:

However, by limiting the concept of the preliminary or collateral question and by introducing the doctrine of the patently unreasonable interpretation, this Court has signalled the development of a new approach to determining jurisdictional questions.

The formalistic analysis of the preliminary or collateral question theory is giving way to a pragmatic and functional analysis, hitherto associated with the concept of the patently unreasonable error. At first sight it may appear that the functional analysis applied to cases of patently unreasonable error is not suitable for cases in which an error is alleged in respect of a legislative provision limiting a tribunal"s jurisdiction. The difference between these two types of error is clear: only a patently unreasonable error results in an excess of jurisdiction when the question at issue is within the tribunal"s jurisdiction, whereas in the case of a legislative provision limiting the tribunal"s jurisdiction, a simple error will result in a loss of jurisdiction. It is nevertheless true that the first step in the analysis necessary in the concept of a "patently unreasonable" error involves determining the jurisdiction of the administrative tribunal. At this stage, the Court examines not only the wording of the enactment conferring jurisdiction on the administrative tribunal, but the purpose of the statute creating the tribunal, the reason for its existence, the area of expertise of its members and the nature of the problem before the tribunal. At this initial stage a pragmatic or functional analysis is just as suited to a case in which an error is alleged in the interpretation of a provision limiting the administrative tribunal"s jurisdiction: in a case where a patently unreasonable error is alleged on a question within the jurisdiction of the tribunal, as in a case where simple error is alleged regarding a provision limiting that jurisdiction, the first step involves determining the tribunal"s jurisdiction.

[10]      This approach has been followed by the Supreme Court of Canada in Canada

(Attorney General) v. P.S.A.C. [1991] 1 S.C.R. 614.

[11]      The evidence before me with respect to the issue of whether the applicant "has

failed to keep adequate records and books of account for the purpose of this Act" is primarily the evidence of Steven Kendell Button whose affidavit sworn to on September 11, 1998 contains 55 paragraphs. The Court also had before it, the letter from Marianne Fitzgerald dated June 12, 1998 which required the applicant to keep certain records pursuant to subsection 230(3) of the Act.

[12]      The word "adequate" is not defined in the Act but the New Shorter Oxford

English Dictionary, Thumb Index Edition, defines adequate:

1 Equal in magnitude or strength; 2 Commensurate in fitness; sufficient, satisfactory. b Barely sufficient. 3 Logic. Of an idea or concept: fully and clearly representing its object.

[13]      In the context of subsection 230(3), I would take adequate as "sufficient" to

enable the taxes payable under the Act to be determined.

[14]      I have reviewed the affidavit of Mr. Button and I cannot find in the affidavit, any

statement that the applicant "failed to keep adequate records and books of account for the purposes of this Act". Instead, the affidavit deals in many instances with the difficulty the auditor had in locating information. Ms. Fitzgerald, in her letter of June 12, 1998, states she relied on the report of the auditor (Mr. Button) to form her opinion that the records are inadequate for the purposes of the Act. The Court was not informed by way of evidence of the qualifications of Ms. Fitzgerald. What is her expertise with books and records? Does she have the experience and qualifications to come to that conclusion? She had to have before her, facts that established the taxpayer failed to keep adequate records for the purposes of the Act. The Court was not informed of the basis, that is the facts, on which she came to her conclusion. What was in the report given to her by the auditor? Based on this alone, the Court has no objective evidence upon which to decide that the records and books of account were inadequate. The Court does not know whether she considered the facts outlined in Mr. Button"s affidavit. It is therefore my opinion that no factual basis has been provided to the Court that the applicant failed to keep adequate records and books of account for the purposes of the Act and therefore, the respondent did not have the jurisdiction to issue or have issued to the applicant, the request contained in the letter of June 12, 1998.

[15]      I have also reviewed the other documents and material filed on this application

and it would appear to me that in many cases, the auditor was able to trace the trail of transactions. For example, in paragraph 42 of his affidavit, he was able to account for a $35.47 expense and the failure to report recovered damages in the amount of $760.

[16]      In my opinion, what is absent in this application is evidence that the "records and

books of account" are not adequate. Faced with this lack of evidence, I cannot conclude that the respondent was correct in assuming jurisdiction to have the requirement issued.

[17]      I would therefore allow the application for judicial review because the jurisdiction

of the respondent to issue or have issued the requirement contained in the June 12, 1998 letter has not been established by the evidence.

[18]      In the alternative, if I am in error with respect to the jurisdiction of the respondent

to issue or have the letter of June 12, 1998 issued, I will now address the standard of review to be applied to the respondent"s action. I agree with the position put forward by the Minister"s counsel in written submissions at paragraph 18 where he stated:

18. The standard of review of any matter under the ITA where the Minister exercises discretion was addressed by Federal Court of Appeal in Barron v. M.N.R., which dealt with the refusal by the Minister to permit the taxpayer to reopen statute-barred years to claim business losses. Pratte, J.A., for the Court, stated:

Before saying why we think that these findings are wrong, it may be useful to recall that subsection 152(4.2) of the Income Tax Act confers a discretion on the Minister and that, when an application for judicial review is directed against a decision made in the exercise of a discretion, the reviewing court is not called upon to exercise the discretion conferred on the person who made the decision. The court may intervene and set aside the discretionary decision under review only if that decision was made in bad faith, if its author clearly ignored some relevant facts or took into consideration irrelevant facts or if the decision is contrary to law.

Barron v. M.N.R. 97 DTC 5121 at p. 5122

[19]      The respondent or his designates deal with the issue of ascertaining the amount of

income taxes owing by a taxpayer on a daily basis and once it has been established that the Minister has the jurisdiction to require a taxpayer to keep certain records and books of account as specified by the Minister, then it is not the role of this Court to intervene and substitute its opinion for that of the Minister as to what records and books of account should be kept by the taxpayer. This, of course, would not be true if the Minister took the action based on bad faith, ignored some relevant facts or took irrelevant facts into consideration or if the action taken was contrary to law.

[20]      Having stated the above, I would have in the alternative, denied the application

for judicial review, if I had decided that the respondent had jurisdiction to issue or have issued the letter (requirement), as the respondent did not do any of the things that would cause or allow this Court to intervene and substitute its conclusions for those of the Minister.

[21]      There shall be no order for costs, as I am of the opinion that with the paucity

of judicial authority on this section, costs should not be awarded.

ORDER

[22]      IT IS ORDERED that the application for judicial review is allowed.

[23]      IT IS FURTHER ORDERED that there shall be no order for costs.

"John A. O"Keefe"

J.F.C.C.

Ottawa, Ontario

June 29, 2000