Montreal Aluminium Processing Inc. And Albert Klein v. Attorney General of Canada and Minister of National Revenue, [1991] 2 CTC 70, 91 DTC 5424

Joyal, J.:—The defendants have brought this motion pursuant to Rule 419 of the Federal Court Rules to have the statement of claim in the present action struck out, on the ground that it discloses no reasonable cause of action.

The facts, as recited in the statement of claim, are straightforward. On November 30, 1990, the plaintiff company, Montreal Aluminium Processing Ltd., received an informal request from the defendant Minister for information and documents pertaining to specified bank account transactions, the nature of the company's business, and its relationship with other named companies and their principal shareholders.

This information was never provided and as a result, on March 4, 1991, the company's president, Philip Klein, received notice of a requirement for information and production of documents ( the "requirement") pursuant to subsection 231.2(1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act").

According to the statement of claim, the requirement was issued after the United States' Secretary of the Treasury requested information from the Minister concerning the plaintiff company pursuant to Article XXVII of the Canada- United States Tax Convention, 1980 ( the "Convention").

The plaintiffs then filed their statement of claim on April 3, 1991, in which they sought a declaration that the requirement issued to them had no legal force or effect because:

(1) the requirement would deprive a person of his right to liberty and security of the person, which is guaranteed by section 7 of the Canadian Charter of Rights and Freedoms, Part I of the Constitution Act, 1982 being Schedule B of the Canada Act, 1982 (U.K.), 1982, c. 11;

(2) there was no express or implied authority in the Canada-U.S. Tax Convention Act, 1984 (the “Tax Convention Act’, S.C. 1984, c. 20), when read with the Convention, for the legal compulsion of information or production of documents sought by the U.S. Secretary of the Treasury;

(3) paragraph 3 of Article XXVII of the Convention provided that Article XXVII should not be construed as imposing an obligation on Canada to carry out administrative measures at variance with the laws or administrative practice of Canada or the United States; and

(4) the requirement was not duly made under the Convention because the information was sought for use in connection with a Grand Jury investiga tion into alleged violations, not only of U.S. tax laws, but also of other U.S. laws.

At the hearing of the motion, however, counsel for the plaintiffs did not seriously pursue the first argument concerning the alleged breach of section 7 of the Charter.

Arguments in Support of Motion to Strike

Essentially, defendants' counsel argued that the Convention has become part of domestic law, and that pursuant to subsection 3(2) of the Tax Convention Act, in the event of any inconsistency between the provisions of that Act or the Convention and the provisions of any other law, the provisions of that Act and the Convention prevail to the extent of the inconsistency.

Counsel also relied on the judgment of the Supreme Court in McKinlay Transport Ltd. v. Canada, [1990] 2 C.T.C. 103; 90 D.T.C. 6243 to show that a request for information under section 231.2 (formerly subsection 231(3)) of the Income Tax Act does not constitute an unreasonable search or seizure, but is lawful.

Counsel for the Crown submitted that section 231.2 should be read in light of Art. XXVII of the Convention, particularly paragraph 2 of that Article, which permits, and indeed mandates, the Contracting State receiving a request to obtain the information in the same manner as if its own taxation laws were involved.

Thus, he concluded, the combined effect of the Convention and the Tax Convention Act, which incorporates the Convention into domestic law, is to authorize the defendant to issue requirements under section 231.2 for purposes of U.S. tax law enforcement. Therefore, counsel argued that the statement of claim ought to be struck out pursuant to Rule 419 as disclosing no reasonable cause of action.

Plaintiffs Reply

Counsel for the plaintiff strenuously contended that contrary to Crown counsel's belief, there was in fact no legislative authority for the requirement issued to the plaintiff. First of all, he submitted, the requirement attacked in the present action cannot be supported as an exercise of the power conferred upon the Minister by subsection 231.2(1) of the Income Tax Act. No other provision exists expressly conferring this power upon the Minister.

Furthermore, Article XXVII of the Convention simply provides that Canada shall use those means already available to it to obtain information. The Article does not stipulate that if a certain power is lacking under current domestic law then Canada shall proceed to enact new legislation compelling disclosure of information from Canadian residents, for purposes of the administration and enforcement of U.S. taxation laws.

Counsel then referred to paragraph 3 of Article XXVII, which states that the Article shall not be construed as imposing an obligation on either Contracting State to supply information not obtainable under the law of that State. He also argued that the Tax Convention Act itself does not alter domestic law or give the Minister the power to issue an otherwise invalid requirement for information, in order to enforce compliance with U.S. taxation laws.

Finally, counsel for the plaintiff submitted that even if such a power was created by the Tax Convention Act, it would have to be limited to information related to the domestic laws of the U.S. concerning taxes and that the information requested in this case extended to matters beyond compliance with tax laws. He also argued that the requirement was not issued pursuant to the Tax Convention Act, but rather was an ultra vires attempt by the Minister to exercise his powers under section 231.2 of the Income Tax Act.

Thus, counsel concluded that it was far from being plain and obvious that the statement of claim did not disclose a reasonable cause of action.

Powers of Minister Pursuant to Convention and Domestic Laws

Perhaps the starting point to a proper consideration of these legal issues should be an examination of the relevant provisions of the Convention, the Tax Convention Act and the Income Tax Act.

Article XXVII of the Convention reads in full as follows:

Article XXVII Exchange of Information

1. The competent authorities of the Contracting States shall exchange such information as is necessary for carrying out the provisions of this Convention or of the domestic laws of the Contracting States concerning taxes covered by the Convention insofar as the taxation thereunder is not contrary to the Convention. The exchange of information is not restricted by Article I (Personal Scope). Any information received by a Contracting State shall be treated as secret in the same manner as information obtained under the taxation laws of that State and shall be disclosed to persons or authorities (including courts and administrative bodies) involved in the assessment or collection of, the administration and enforcement in respect of, or the determination of appeals in relation to, the taxes covered by the Convention. Such persons or authorities shall use the information only for such purposes. They may disclose the information in public court proceedings or in judicial decisions.

2. If information is requested by a Contracting State in accordance with this Article, the other Contracting State shall endeavour to obtain the information to which the request relates in the same way as if its own taxation was involved notwithstanding the fact that the other State does not, at that time, need such information. If specifically requested by the competent authority of a Contracting State, the competent authority of the other Contracting State shall endeavour to provide information under this Article in the form requested, such as depositions of witnesses and copies of unedited original documents (including books, papers, statements, records, accounts or writings), to the same extent such depositions and documents can be obtained under the laws and administrative practices of that other State with respect to its own taxes.

3. In no case shall the provisions of paragraphs 1 and 2 be construed so as to impose on a Contracting State the obligation:

(a) To carry out administrative measures at variance with the laws and administrative practice of that or of the other Contracting State;

(b) To supply information which is not obtainable under the laws or in the normal course of the administration of that or of the other Contracting State; or

(c) To supply information which would disclose any trade, business, industrial, commercial or professional secret or trade process, or information the disclosure of which would be contrary to public policy (ordre public).

4. Notwithstanding the provisions of Article 11 ( Taxes Covered), for the purposes of this Article the Convention shall apply:

(a) In the case of Canada, to all taxes imposed by the Government of Canada on estates and gifts and under the Income Tax Act; and

(b) In the case of the United States, to all taxes imposed under the Internal Revenue Code.

As indicated above, the Convention was incorporated into Canada's domestic law by virtue of the Tax Convention Act. This Act is very short, consisting only of four sections. Section 3 is the relevant provision for the purpose of this action:

3. (1) The Convention is approved and declared to have the force of law in Canada during such period as, by its terms, the Convention is in force.

(2) In the event of any inconsistency between the provisions of this Act, or the Convention, and the provisions of any other law, the provisions of this Act and the Convention prevail to the extent of the inconsistency.

(3) The Minister of National Revenue may make such regulations as are necessary for the purpose of carrying out the Convention or for giving effect to any of the provisions thereof.

Finally, subsection 231.2(1) of the Income Tax Act is the provision which actually authorizes the Minister to issue a requirement for information:

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, 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.

Analysis

With all due respect for the able arguments put forth by counsel for the plaintiff, I believe that section 231.2 of the Income Tax Act, when read in conjunction with Article XXVII of the Convention and section 3 of the Tax Convention Act, does give the Minister the power to issue a requirement for information sought by U.S. authorities in connection with their own taxation matters.

Forgetting the argument concerning section 7 of the Charter, the first point alleged in the statement of claim is that there is no express or implied authority in the Tax Convention Act or the Convention for the legal compulsion of information and documents, which are sought by the U.S. Secretary of the Treasury. This argument, although ably put by counsel for the plaintiff, cannot stand up to any reasonable interpretation of the effect of the Convention and the Tax Convention Act,

Subsection 231.2(1) authorizes the Minister to serve a requirement on any person for information or production of documents "for any purpose relating to the administration or enforcement of this Act". If our analysis were to stop here, then clearly the plaintiffs would have good cause to contest the validity of the requirement issued to Philip Klein on March 4, 1991. On the face of it, the requirement was for the purposes of the U.S. Internal Revenue Code, and not for the purposes of the Income Tax Act.

However, if we proceed to examine Article XXVII of the Convention, paragraph 2 makes it quite clear that if information is requested by a Contracting State (in this case the U.S.), then the other Contracting State (i.e., Canada) “shall endeavour to obtain the information to which the request relates in the same way as if its own taxation was involved . . .”. In other words, if the U.S. Secretary of the Treasury requests information from Canadian authorities, then the Minister of National Revenue is to obtain the information in exactly the same manner as if taxes under the Canadian Income Tax Act were involved. In my view, then, Article XXVII clearly foresees that the Minister will exercise his power under section 231.2 of the Income Tax Act to issue a requirement in these circumstances.

However, as counsel for the plaintiff correctly pointed out, a treaty to which Canada is a signatory does not automatically become incorporated into our domestic law. Treaty obligations entailing an alteration of domestic law require

legislative action: A.-G. Canada v. A.-G. Ontario (Labour Conventions), [1937] A.C. 326 at 347-48.

In this particular case, a statute was enacted. Section 3 of the Tax Convention Act clearly states that the Convention has the force of law in Canada. More than this, however, the Convention is even said to prevail over other domestic law to the extent of any inconsistencies. The result, to my mind, is that the Minister does have the power to issue a requirement under section 231.2 in respect of information and documents requested by U.S. authorities for tax purposes, in the same way he does with respect to information and documents required for Canadian tax purposes.

Essentially, the Convention provides that the Minister can take information otherwise obtainable for purposes of administration and enforcement of Canadian taxation law and pass that information along to American authorities for the additional purpose of administration and enforcement of U.S. taxation law. Article XXVII of the Convention broadens the purposes for which information and documents obtained under section 231.2 of the Income Tax Act may be used. Since Article XXVII has the force of law in Canada by virtue of the Tax Convention Act, the Minister has express legal authority to issue a requirement under section 231.2 for purposes of the administration and enforcement of U.S. taxation law.

I suppose a different approach would be to say that to the extent section 231.2 limits the use of such requirements to the administration and enforcement of Canadian taxation law, it is inconsistent with Article XXVII of the Convention and by virtue of subsection 3(2) of the Tax Convention Act, the latter provision must prevail. In any event, whatever the theoretical viewpoint adopted, the practical consequences are the same.

Counsel for the plaintiff argued that the Minister could have made regulations under subsection 3(3) of the Tax Convention Act specifically regarding the issuance of requirements for information and documents, when a request Originates from the U.S. Because no such regulations were made, counsel argued that the Minister's authority to issue such requirements was limited to those concerning the administration and enforcement of Canadian taxation law, as section 231.2 states itself.

I believe the better view is that the Minister simply did not perceive any need to enact such regulations, when by the combined force of section 231.2 of the Income Tax Act, Article XXVII of the Convention and subsection 3(2) of the Tax Convention Act, he already possessed the power to issue requirements for information relating to the administration and enforcement of U.S. taxation laws. The wording of the Tax Convention Act and of the Convention in this regard seems so clear to me that I do not feel the need to say anything further on this point.

The plaintiffs, in their statement of claim, also refer to paragraph 3 of Article XXVII, which provides that that Article is not to be construed as imposing an obligation on Canada to carry out administrative measures at variance with the laws or administrative practice of Canada or the United States. Therefore, even supposing the Minister does have the power to issue a requirement in the present case pursuant to section 231.2 of the Income Tax Act, he is prevented from doing so by virtue of Article XXVII, paragraph 3.

According to counsel for the plaintiff, the compulsory acquisition of the information and documents sought would be at variance with both Canadian and U.S. law and administrative practice because the U.S. Secretary of the Treasury wants the information for use in connection with Grand Jury proceedings not solely related to the violation of U.S. tax laws.

Counsel for the plaintiffs specifically sets out the U.S. law position in paragraph 6(a) of the statement of claim and establishes that such law is a question of fact, which for purposes of a Rule 419(1)(a) motion, must be assumed to be true. Paragraph 6(a) states that:

. . . the information and documents required by the requirement was information sought for use in connection with a United States Grand Jury investigation into alleged violations of United States laws other than tax laws as well as alleged violations of United States tax laws and such information, not only does not fall within paragraph 1 of Article XXVII but, is not information obtainable compulsorily under the laws, or in the normal course of the administration, of the United States and the Requirement thereof is at variance with the laws and administrative practice of the United States;

[Emphasis added].

Counsel argues that as a consequence, the whole situation is at variance with the laws and administrative practice in each jurisdiction.

First of all, with respect to Canadian law, I believe the Supreme Court of Canada recently made it clear in McKinlay Transport Ltd., supra, that a requirement for information and documents issued pursuant to section 231.2 does not constitute an unreasonable search or seizure within the meaning of section 8 of the Charter, but is perhaps the less intrusive means possible to ensure that taxpayers are complying with the Income Tax Act. The effectiveness of our tax system depends upon the honesty of taxpayers in reporting all of their income and the only viable means of ensuring that taxpayers remain honest is this sort of random check. Madam Justice Wilson also pointed out in McKinlay Transport that a taxpayer's privacy interest with respect to such documents vis-à-vis the Minister of Revenue is relatively low.

It has also been decided by the Supreme Court that a corporation cannot be a witness within the meaning of paragraph 11(c) of the Charter and thus, officers and employees of a corporation, including an officer who is a directing mind of the corporation, are compellable witnesses at the instance of the Crown where the corporation is accused of a criminal offence: The Queen v. Amway Corp., [1989] 1 S.C.R. 21; 56 D.L.R. (4th) 309; [1989] 1 C.T.C. 255 at 260 et seq. (S.C.R. 31-32, 37, 40; D.L.R. 317 et seq.) per Sopinka, J.

Finally, in A.-G. Quebec v. Irwin Toy Ltd., [1989] 1 S.C.R. 927; 58 D.L.R. (4th) 577, the Supreme Court found that a corporation cannot avail itself of the protection offered by section 7 of the Charter (at 1002-1003 (D.L.R. 632)). It cannot be seriously argued that the requirement is addressed to Philip Klein in his personal capacity. The questions asked by the Minister are obviously related to the corporate plaintiff.

It must also be remembered that Article XXVII of the Convention itself is a law of Canada. This Article prevents information provided by the Minister to U.S. authorities from being used otherwise than in connection with the administration and enforcement of U.S. taxation laws. There is no reason to presume that the information will be used otherwise than in accordance with the Convention, to which both Canada and the U.S. have bound themselves. Therefore, I fail to see how the exchange of the information sought will violate any Canadian law or administrative practice.

As to the U.S. position, the fact disclosed in paragraph 6(a) of the statement of claim is that such information is not obtainable by reason of the Grand Jury inquiry. If that is so, the information would not be admissible for that purpose and would only therefore be admissible for tax law purposes which, after all, is the main thrust and purpose of the Convention.

Furthermore, I must refer again to the terms of Article XXVII of the Convention itself. This Article clearly indicates that U.S. tax authorities possess a means of obtaining information from American residents regarding tax administration and enforcement matters, which is similar to our procedure under section 231.2.

Also, it is clear upon reading paragraph 1 of Article XXVII, that the information received by the U.S. is to be treated as secret and is to be used only for the purpose of administering and enforcing taxes covered by the Convention. That undertaking, mutually binding on the Contracting States, is of a nature to suggest mutual respect of it. I conclude therefore that although an investigation may also be carried out with respect to alleged violations of other U.S. laws, this Court has no reason to believe that the information provided to the Secretary of the Treasury will be used otherwise than in accordance with the terms of Article XXVII of the Convention, pursuant to which the information is given.

Upon this finding, I should conclude that the plaintiff's statement of claim discloses no reasonable cause of action and must be struck. The defendant's motion is therefore allowed, with costs.

Defendant's motion allowed.