Date: 20110221
Docket: T-248-11
Citation: 2011 FC 209
Vancouver, British
Columbia,
February 21, 2011
PRESENT: The Honourable Mr. Justice Shore
BETWEEN:
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THE MINISTER OF NATIONAL REVENUE
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Applicant
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and
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LORDCO PARTS LTD.
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Respondent
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REASONS FOR ORDER AND ORDER
I. Introduction
[1]
This
is an application brought pursuant to subsection 231.2(3) of the Income Tax
Act for
an order authorizing the Minister of National Revenue to impose on the respondent,
Lordco Parts Ltd., a requirement to produce information and documents relating
to certain persons whose identities are unknown to the Minister. The Minister
seeks the identity of these persons to verify their compliance with the Income
Tax Act. For the reasons specified below, the Court is in accord with the
position of the Minister.
[2]
This
application is made without notice as permitted by subsection 231.2(3)
of the Income Tax Act.
II. Background
[3]
Lordco
Parts Ltd. is a company incorporated pursuant to the laws of British Columbia, having a registered
and records office at 22866
Dewdney Trunk Road,
Maple Ridge, British
Columbia.
Lordco is a distributor and retailer of automotive parts and accessories (Affidavit
of B. Wong at para. 5).
[4]
In
2008, the CRA completed a corporate business audit of Lordco with respect to
its 2005 and 2006 taxation years. In the course of the corporate business
audit, CRA noted that Lordco had established an incentive program which
includes a bi-annual promotional cruise for its customers. The bi-annual
cruises are organised and hosted by Lordco. Concerns were raised regarding the
reporting and taxation of any of the benefits arising from these bi-annual
cruises for those individuals who participated in the cruises (Affidavit of B.
Wong at paras. 6 and 7).
[5]
In
July 2009, CRA commenced an employer compliance audit for Lordco with respect
to the 2006 and 2007 calendar years. The employer compliance audit was
expanded to include the 2008 and 2009 calendar years in January 2011 (Affidavit
of B. Wong at paras. 8 and 20).
[6]
The
employer compliance audit included the consideration of the issue of whether
individuals received and reported a taxable benefit on their 2007 and/or 2009
returns for the non-business portion of the cruises, organized and hosted by
Lordco, which took place in 2007 and 2009 in furtherance of its incentive
program (Affidavit of B. Wong at para. 8 and 23).
A. Lordco’s
Cruise in 2007
[7]
Based
on information obtained by CRA regarding the promotional cruise organized and hosted
by Lordco in 2007, the cruise promotion operates generally as follows: Lordco
customers earn rebates based on the volume of their purchases of Lordco
products. A customer may purchase tickets for the promotional cruise with
these rebates. If the value of the customer’s rebates were not sufficient to
cover the price of the cruise, Lordco permitted the customer to pay the balance
of the price with cash (Affidavit of B. Wong at para. 10).
[8]
Customers
were permitted to purchase tickets for the 2007 cruise with customer rebates
earned between November 1, 2005 and June 30, 2007. As many of these customers
were companies, not specific individuals, the companies nominated individual
employees to attend the cruise as representatives (Affidavit of B. Wong at para.
11).
[9]
Based
on a review of the 2007 cruise itinerary, CRA determined that 30% of the cruise
was for business purposes while 70% of the cruise was for non-business. As
such, an individual attending the 2007 cruise may have had obligations to
report a taxable benefit under the Income Tax Act with respect to the
non-business portion of the cruise (Affidavit of B. Wong at para. 12).
[10]
CRA
takes the position that Lordco was required to issue and file T4A slips for
individuals who attended the cruise because it was the primary payer for the
2007 cruise through the rebates. T4A slips are issued by a payer to an
individual who has received what is commonly referred to as “other income”,
such as lump-sum payments, research grants, and non-cash gift benefits. CRA uses
the T4A slips to verify that the individual has properly reported the taxable
benefit on his or her tax return. Lordco failed to issue and file T4A slips for
the individuals who attended the 2007 cruise (Affidavit of B. Wong at para. 13).
[11]
CRA
wishes to verify whether the individuals attending the 2007 cruise reported the
taxable benefit relating to the non-business portion of the cruise. In order to
do so CRA must identify the individual taxpayers who attended the 2007 cruise.
As Lordco did not issue any T4A slips for the cruise, CRA cannot identify these
individuals to begin the process of verifying whether they received a taxable
benefit and properly reported it so that CRA may accurately determine the
amount of tax payable (Affidavit of B. Wong at para. 14).
[12]
On
August 10, 2010, CRA issued a named requirement to provide information and
documents under subsection 231.2(1) of the Income Tax Act seeking, among
other things, a list of individuals who attended the 2007 cruise along
with the companies they represented, the individuals’ addresses and the
registration forms (Affidavit of B. Wong at para. 17).
[13]
By
letter dated September 9, 2010, Lordco declined to provide the names,
addresses, and registration forms of the individuals who attended the cruise. Citing
subsection 231.2(2) of the Income Tax Act, Lordco asserted that the
requirement could not compel such information as the information sought for the
individuals related to unnamed persons (Affidavit of B. Wong at para. 18).
[14]
Lordco
did provide with its letter a list of the companies which purchased cruise
packages (the Reconciliation List). The Reconciliation List shows that 516
companies purchased cruise packages and that a total of 1059 cruise packages
were sold (Affidavit of B. Wong at para. 19).
B. Lordco’s Cruise in
2009
[15]
The
CRA auditor, Mr. Bernie Wong, was advised by Lordco’s controller, Mr. Rick
Sayers, that Lordco also organized and conducted a cruise in 2009 further to
its bi-annual travel incentive promotion (Affidavit of B. Wong at para. 21).
[16]
Lordco’s
cruise in 2009 was organized in a similar manner as the 2007 cruise in that
customers purchased cruise tickets with rebates earned from Lordco. Based on
the cruise in 2007, the companies which purchased cruise tickets for 2009 may
have nominated individuals to attend the cruise as representatives. As
such, an individual who attended the 2009 cruise may have obligations to report
a taxable benefit under the Income Tax Act with respect to any non-business
portion of the cruise (Affidavit of B. Wong at para. 22).
[17]
To
verify Lordco’s tax obligations with respect to 2009, Mr. Wong requested
information and documents from Lordco with respect to the 2009 cruise in order
to verify whether Lordco was required to issue T4A slips to individuals who
attended the 2009 cruise, and if so, whether the individuals who attended the
cruise received and reported a taxable benefit on their 2009 tax return (Affidavit
of B. Wong at para. 23).
[18]
Mr.
Sayers responded on behalf of Lordco, to the request for the information by
letter dated February 8, 2011. With respect to the 2009 cruise information, Mr.
Sayers advised that “as with prior years, I am unable to supply a list of the
actual attendees as we consider this third party information” (Affidavit of B.
Wong at para. 25).
[19]
CRA
does not know the identities of the individuals who attended the cruises. CRA
is unable to complete the employer compliance audit and verify whether the
individuals who attended the cruises have any tax obligations arising under the
tax legislation, and the amount of that obligation. As well, CRA is unable to
issue information slips to the individuals who attended the cruises on behalf
of Lordco, if required (Affidavit of B. Wong at para. 26).
[20]
Lordco
organized the cruises and in doing so, received information about each
individual who attended the cruise by way of the registration forms. Lordco
would also have information regarding the company customer each individual
attended on behalf of. As such, obtaining the list of individuals who attended the
2007 and 2009 cruises from Lordco appears to be the most efficient and
reasonable way of identifying these individuals (Affidavit of B. Wong at para.
27).
[21]
The
CRA seeks to determine if the unnamed persons, that is, the unidentified
individuals who attended the cruises, are complying with their duties and
obligations under the Income Tax Act. The CRA specifically seeks to
identify the individuals who attended the cruise, and verify that such
individuals correctly reported for tax purposes any taxable benefit gained on
the cruises and paid the required taxes that may have arisen. Once the
individuals are identified, the CRA intends to issue T4A slips to the
individuals showing the amount of the cruise as a taxable benefit (Affidavit of
B. Wong at para. 28).
[22]
Therefore,
to determine whether the individuals who attended the cruises have complied
with their obligations under the Income Tax Act, the CRA seeks judicial
authorization to send a requirement to provide information and documents
relating to unnamed persons to Lordco, pursuant to subsection 231.2(2) of the
ITA, for the following information and documents:
a.
A list of the names
of the individuals who attended the 2007 cruise along with the company that
they represented.
b.
A list of the
addresses of the individuals who attended the 2007 cruise.
c.
The registration
forms for the individuals who attended the 2007 cruise.
d.
A list of the names
of the individual who attended the 2009 cruise along with the company that they
represented.
e.
A list of the
addresses of the individuals who attended the 2009 cruise.
f.
The registration
forms for the individuals who attended the 2009 cruise.
(Affidavit of B. Wong at para. 31)
[23]
The CRA intends to
address the requirement to the attention of Mr. Sayers who is the controller
for Lordco (Affidavit of B. Wong at Exhibit “I”).
[24]
The
individuals are an identifiable group because the information and documents
sought are limited to those individuals who attended the cruises hosted and
organized by Lordco in 2007 and 2009 (Affidavit of B. Wong at para. 32).
[25]
As
the 2007 cruise relates to the 2007 taxation year, any reassessments issued to
the individuals who attended the cruise may be statute-barred as early as the
end of February 2011 (Affidavit of B. Wong at para. 33).
[26]
The
documents and information sought by the CRA in the unnamed requirement are not
for the purposes of any criminal investigation (Affidavit of B. Wong at para.
35).
III. Issue
[27]
The
only point in issue is whether the evidence proffered by the Minister satisfies
the criteria set out in subsection 231.2(3) of the Income Tax Act such
that an order be granted imposing on the respondent, Lordco Parts Ltd., a
notice to produce information and documents in the form sought by the Minister.
IV. Analysis
A. The statutory framework
[28]
The
Canadian income tax system is a self-reporting and self-assessing system that
depends on the honesty and integrity of taxpayers for its success.
However, situations occur where this self-reporting system is contravened to
avoid paying their full share of tax as required under the Income Tax Act
by failing to comply with the rules set out in the Act.
[29]
The
Minister has the task of administering and enforcing the Act and has been given
broad powers to carry out this mandate. One of the provisions enacted by Parliament
to assist the Minister is section 231.2 of the Income Tax Act.
[30]
Subsection
231.2(1) of the Act provides that the Minister may, for any purpose related to
the administration or enforcement of the Act, require a person to
provide any information or additional information or any documents to the
Minster within a reasonable time from the service of a written notice requiring
the same. Such a notice is colloquially known as a “requirement to provide
information and documents” or an “RFI”.
[31]
In R.
v. McKinlay Transport Ltd., the Supreme Court of Canada held that
subsection 231.2(1) of the Income Tax Act provides the “least intrusive
means by which effective monitoring of compliance with the Income Tax
Act can be effected”.
The Court upheld the constitutionality of requirements for information and
documents, holding that such requirements did not violate section 8 of the Charter
of Rights and Freedoms.
[32]
The
obtaining of information relevant to the tax liability of some specific person
or persons whose tax liability is under review by the Minister is recognized as
a purpose related to the administration or enforcement of the Income Tax Act.
[33]
The
Minister is also permitted to request from a third party information and
documents relating to one or more persons unknown to him through the issuance
of a requirement; however,
the Minister must first seek and obtain the authorization of a judge before he
may issue the requirement. The
Act allows the Minister to make the application for the judicial authorization
on a without notice basis.
[34]
Subsection
231.2(3) of the Income Tax Act sets out two criteria that are to be satisfied
before a judge may authorize the Minister to impose on a third party a
requirement relating to one or more unnamed persons. First, pursuant to
subsections 231.2(3)(a) of the Income Tax Act, the judge is to be
satisfied on the evidence that the person or group is ascertainable. Second,
pursuant to subsections 231.2(3)(b) of the Income Tax Act, the judge is
to be satisfied on the evidence that the requirement is made to verify
compliance by the person or persons in the group with any duty or obligation
under the Act.
[35]
The
Minister’s application is to be granted if the judge is satisfied that the
information or documents are required for a tax audit conducted in good faith.
[36]
Where
judicial authorization is granted, the Minister is required by subsections
231.2(4) of the Income Tax Act to serve the order together with the
requirement upon the respondent.
[37]
Pursuant
to subsections 231.2(5) of the Income Tax Act, the respondent may apply
to the court for a review of the authorization within 15 days of service of the
notice. Subsections 231.2(6) of the Income Tax Act permit the court to
cancel, confirm, or vary the authorization upon review.
B. Statutory conditions
for judicial authorization are met
[38]
It
is submitted that the evidence presented by the Minister on this application
satisfies the two criteria necessary for judicial authorization allowing the
Minister to issue an unnamed person requirement:
a. the person or group
referred to is ascertainable; and
b. the requirement is made
to verify compliance by persons in the group with any duty or obligation under
the Act.
C. The person or
group is ascertainable
[39]
The
Minister is attempting to ascertain the identity of the group of unnamed
persons who attended the 2007 and/or 2009 cruise organized and hosted by
Lordco.
[40]
The
group of unnamed persons is ascertainable because each member of the group was
an individual who attended the 2007 and/or 2009 cruise organized and hosted by
Lordco.
[41]
As
such, the group of unnamed persons is finite and is ascertainable.
[42]
The
Minister has ascertained a group of taxpayers, which the CRA is unable to
identify, in order to verify their income, particularly with respect to taxable
benefits, and ensure the accuracy of the amount of tax payable.
[43]
The
Minister needs the information and documents sought in the requirement to be
imposed upon the respondent to permit the Minister to identify the unnamed
persons who comprise this group. Upon identifying these persons, the Minister
intends to verify that the each person has complied with their obligations
under the Income Tax Act for the 2007 and/or 2009 calendar year.
[44]
As
such, the information and documents are required in good faith for the purpose
of verifying compliance by the unnamed persons with their respective
obligations under the Income Tax Act.
ORDER
THIS COURT
ORDERS that
1.
The
Minister be authorized to impose on the respondent, Lordco Parts Ltd., a
requirement to provide information and documents under subsection 231.2(1) of
the Income Tax Act in the form attached to this Order as Appendix “A”
(the Requirement);
2.
The
Minister serve the Requirement and a copy this Order on the respondent at his
registered and records office, namely 22866 Dewdney Trunk Road, Maple Ridge, BC, V2K 3K6. The
Requirement shall be addressed to the respondent’s controller, Rick Sayers.
3.
The
respondent may, within 15 days after the service of the Order apply to have
this Order reviewed and possibly varied or reversed pursuant to subsections
231.2(5) and 231.2(6) of the Income Tax Act which state:
231.2(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.
231.2(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.
“Michel M.J. Shore”
APPENDIX “A”
HAND DELIVERY
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Lordco Parts Ltd
22866 Dewdney
Trunk Road
Maple Ridge, B.C.
V2X 3K6
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Surrey, BC V3T 5E1
Contact: Bernie Wong
Employer Compliance Audit 461-01
Telephone: (604) 862-1871
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Fax: (604) 587-2754
Attention:
Rick Sayers, Controller
February
21, 2011
Dear
Sir:
Re: Requirement to
provide information and documents issued pursuant to the order of the Federal
Court of Canada pronounced February 21, 2010 [Docket number T-248-11]
Pursuant to paragraphs 231.2(1)(a) and (b) of
the Income Tax Act, for purposes related to the administration or
enforcement of the Act, you are required to provide the following
information and documents:
1. Within fifteen (15) days
from the date of service of this Requirement:
a. A list of the names of
each individual who attended Lordco Parts Ltd.’s cruise that took place from
September 19-29, 2007, including the following information for each individual:
i. the
address of each individual; and
ii the
name of the company represented by each individual.
b. The registration form
for each individual who attended the 2007 cruise.
2. Within thirty (30) days
from the date of service of this Requirement:
a. A list of the names of
each individual who attended Lordco Parts Ltd.’s cruise that took place in
2009, including the following information for each individual:
i. the
address of each individual; and
ii the
name of the company represented by each individual.
b. The registration form
for each individual who attended the 2009 cruise.
Subsection 238(1) of the
Income Tax Act provides that a person who fails to comply with this
Requirement is guilty of an offence and is liable on summary conviction to a
fine of not less than $1,000, and not more than $25,000 or both the fine and
imprisonment not exceeding twelve months. In addition to the criminal penalties
resulting from subsection 238(1) of the Income Tax Act for failure to
comply with this requirement, subsection 231.7(1) of the Income Tax Act
allows the Canada Revenue Agency to request a specific compliance order from
the Court in the event of non compliance. Failure to comply with that specific
compliance order could lead to a finding of contempt of Court.
The
documents and information required are to be forwarded to the undersigned at
the Canada Revenue Agency, Burnaby Fraser Tax Services Office, c/o 9755 King George
Boulevard, Surrey, British
Columbia,
V3T 5E1
Attention: Bernie Wong, Section 461-01. Photostatic or certified copies
of the documents will be sufficient.
Yours
truly,
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Isabel Shannon, Manager Revenue
Collections, Burnaby
Fraser Tax Services Office,
An officer authorized pursuant to subsection 220(2.01)
of the Income Tax Act to exercise powers or perform duties of the
Minister under Section 231.2 of the Income Tax Act.
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Served
personally on________________________
Position___________________________________
Date____________________
Time_____________
Officer
executing service_____________________
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