Section 231.1

Subsection 231.1(1) - Inspections

Cases

Canada (National Revenue) v. Atlas Tube Canada ULC, 2018 FC 1086

required disclosure of an EY tax due diligence report discussing uncertain tax filing positions of a target

The Minister sought an order pursuant to s. 231.7 requiring the respondent (“Atlas”) to provide a draft due diligence report (the “Report”) prepared by an accounting firm (“EYC”), that reviewed the tax attributes of a Canadian corporation (“LSI”) that subsequently was acquired by Atlas’ U.S. parent (“JMC”) and of a Canadian subsidiary (“LSC”) of LSI, as well as LSC’s material tax exposures resulting from its Canadian tax filings including risk of challenge by CRA. Shortly thereafter, JMC transferred a subsidiary of amalgamated LSI (“New LSI”) to Atlas, and an issue in a CRA audit of Atlas for that year was the valuation of a U.S. subsidiary of New LSI.

Southcott J referenced (at para. 28) “the low threshold of relevance applicable under s 231.1” and stated (also at para. 28) that:

[I]t is clear that the Report was prepared for purposes of the transaction that is under audit. As previously explained, the Minister need not demonstrate that the requested document is relevant to a specific issue under audit.

Furthermore, although the Report dealt with LSI Canadian companies, it “may be relevant to the valuation of the US shares that CRA is reviewing.” Accordingly, the low threshold under s. 231.1 for relevance was met.

In going on to find that the Report was not protected by disclosure on the basis of the BP case, Southcott J found (at paras 65 and 66):

… I agree with the Minister’s position that BP is to be read as precluding general and unrestricted access to TAWPs [tax accrual working papers] on a prospective basis, outside the context of an audit of particular issues. …

… Unlike in BP, the Minister’s request for access to the Report in the present case is made in the context of an active audit of particular issues. I have previously concluded that the information in the Report sought by the Minister meets the applicable threshold of relevance in that context. I therefore find that compelling Atlas to provide the Report would not offend the principle described in BP that a taxpayer is not required to self-audit.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 231.7 - Subsection 231.7(1) low threshold of relevance was met 274
Tax Topics - Income Tax Act - Section 232 - Subsection 232(1) - Solicitor-Client Privilege predominant purpose of due diligence report was to aid a business decision 307

Canada (National Revenue) v. Stankovic, 2018 FC 462

a taxpayer with an unreported Swiss bank account was not yet under criminal investigation

In 2009, the French authorities obtained the Falciani List (on which an HSBC employee in Switzerland had copied account holder information) and pursuant to Art. 26 of the Canada-France Convention provided information to CRA showing inter alia that the taxpayer had a large HSBC account in Switzerland. However, the taxpayer had not reported the account, or any interest thereon, and CRA proceeded to send three request letters in 2015 and 2016 pursuant to s 231.1(1). The taxpayer ultimately responded, but without providing any information concerning any HSBC account in Switzerland. On November 8, 2016, the Minister applied under s 231.7(1) for a compliance order.

In granting the order and rejecting the taxpayer’s submission that the request letters were issued in connection with “a criminal investigation going on behind the scenes of which the [CRA] Auditor ha[d] no knowledge,” Russell J stated (at paras 50, 55, 58 and 59):

… Offshore accounts are not, per se, illegal and it is the duty of the Minister under the Act to inquire and ensure that those with offshore accounts are meeting their tax liabilities. … If the Respondent’s position were accepted, it would mean that, given the government’s intent to deal with offshore tax offenders, every Canadian taxpayer with an offshore bank account would be immune from compliance with the audit requests made under s 231.1(1) because this could lead to criminal proceedings at some time in the future. The governing jurisprudence makes it clear that possible future criminal proceedings do not excuse a taxpayer from compliance with a s 231.1(1) request. See Jarvis… .

It is … clear that, even if a CRA auditor has a suspicion that an offence may have occurred, a mere suspicion does not change the predominant purpose of an audit into a criminal investigation. See Jarvis…

… Given that the Auditor’s evidence is that the Respondent “has not reported [the] existence of any money, securities, or assets in HSBC Swiss account(s), nor any income earned therefrom,” it is certainly possible that CRA could have begun an investigation to establish the elements of criminal tax evasion, although there is no evidence that it has. … Assessing the totality of the circumstances … I conclude that the predominant purpose of the request letters is a civil tax compliance audit and that no adversarial relationship between the state and the Respondent exists. …

Ellingson … made it clear that the Jarvis test must be based upon evidence, and cannot be based upon the subjective suspicions of the taxpayer involved. …

Locations of other summaries Wordcount
Tax Topics - Other Legislation/Constitution - Charter (Constitution Act, 1982) - Section 7 use of stolen data provided by French tax authorities did not violate taxpayer's Charter rights 182
Tax Topics - General Concepts - Stare Decisis Quebec CA decision relied upon 32
Tax Topics - Income Tax Act - Section 231.7 - Subsection 231.7(1) mere suspicion of criminal activity did not oust s. 231.1 188

Campbell v. Canada (Attorney General), 2018 FC 412

a foreign bank consented to provide information respecting foreign transactions of Canadian residents pursuant to a CRA requirement

The taxpayer applied to have a requirement issued to him under s. 231.1(1) set aside on the basis it was issued as part of a criminal investigation of him. Under Rule 312, he sought permission to supplement the record (containing only the materials before CRA in issuing the requirement) by filing a copy of the record in a different court file concerning an application made by the Minister against Citibank, N.A., for an order requiring the disclosure of certain information concerning a number of taxpayers resident in Canada and to cross-examine the two CRA employees who signed affidavits in that other file (on the grounds that this could help prove that the CRA had begun a criminal investigation).

Grammond J first noted (at para. 15):

…[C]ourt file no. T-919-16 … is an application for leave to impose a requirement on Citibank to disclose information regarding transactions involving Cayman National Bank and unnamed residents of Canada. It was granted on consent. It was supported by affidavits of two CRA employees, Mr. David Letkeman and Ms. Stephanie Henderson, [which] … describe how the CRA came to believe that the requirement could lead to the production of information regarding Canadian taxpayers’ undisclosed foreign assets and tax liability. … [I]nformation provided by Citibank as a result of this requirement brought Mr. Campbell’s situation to the attention of the CRA.

He went on to find that the affidavits in that other case did not show that the taxpayer was under criminal investigation, and that there was an insufficient basis for giving the taxpayer the right to cross-examine the two officials in the other case.

Canada (National Revenue) v. BP Canada Energy Company, 2015 DTC 5077 [at 5958], 2015 FC 714, rev'd 2017 FCA 61

Minister may compel the disclosure of tax accrual working papers

Campbell J allowed the Minister's s. 231.7 application to enforce her demand for unredacted copies of its tax accrual working papers (containing descriptions of issues for which it had exposure). The papers were compellable because they were "an important tax record in BP Canada's possession" (para. 25). Whatever policy ramifications flow from compelling the production of such papers are within the Minister's purview to manage, not the courts' (para. 29).

Neither did Campbell J see why there should be an exercise of Court discretion to quash the demand. The Minister's position had always been that such papers were compellable, and the restraint with which it typically applied that policy was not binding (paras. 11, 13).

Arguments that the taxpayer effectively was being "conscripted" to audit itself were unpersuasive, as the working papers had already been prepared for other (accounting) reasons (para. 24). Although the papers had been prepared for what now were statute-barred years, their content remained relevant to subsequent years (para. 32).

Finally, as to whether the demand was unfair, Campbell J adopted (at para. 47) a statement of the Minister that:

...If the CRA does not uncover the tax positions in time, the shareholders of BP win, and the taxpayers of Canada lose. If the tax position is discovered and challenged by the CRA, the matter can ultimately be resolved by the Tax Court of Canada as to the propriety.

Piersanti v. Canada, 2014 FCA 243

propriety of evidence collection for criminal purposes is irrelevant to its admissibility in tax appeals

The taxpayer had been convicted of over 30 GST-related offences. In the course of appealing the related reassessments, she moved, on Charter grounds, to exclude from evidence any information the Minister obtained from Requests for Information, arguing that the RFIs were made in the course of a criminal investigation.

The trial judge dismissed the taxpayer's motion, finding that the situation involved a concurrent criminal investigation and audit. Trudel JA further added (at para. 9):

The Judge's legal finding accords with Jarvis and with the self-assessment and the self-reporting nature of the income tax regime. Whether the CRA could properly use such documents to prosecute the appellant for criminal offences under the ETA is irrelevant to the current civil proceedings.

In any event, even if the taxpayer were correct that her rights were breached, it was "at best a technical breach" which did not call for a remedy under s. 24(2) of the Charter (para. 9).

Locations of other summaries Wordcount
Tax Topics - Other Legislation/Constitution - Charter (Constitution Act, 1982) - Section 8 propriety of evidence collection for criminal purposes is irrelevant to its admissibility in tax appeals 151
Tax Topics - Excise Tax Act - Section 289 propriety of evidence collection for criminal purposes is irrelevant to its admissibility in tax appeals 151

R. v. Posteraro, 2014 DTC 5040 [at 6734], 2014 BCPC 31

discovery of arguably incriminating evidence in audit does not automatically mean the investigation now has a criminal purpose

The accused applied to exclude evidence collected from an audit on the basis that the audit had a criminal investigation purpose. Applying the predominant purpose test in Jarvis to dismiss the taxpayer's application, Marchand J noted that the mere fact that the auditor did not pass along the audit file to the Enforcement Division at the very earliest reasonable time (7 September 2010) did not mean that the Audit Division's primary purpose had changed to a criminal purpose before the file was passed along (16 December 2010).

R v. He, 2012 DTC 5129 [at 7234], 2012 BCCA 318

The Court affirmed the trial judge's decision to exclude evidence obtained by CRA in the course of a pilot project to evaluate the adequacy and reliability of the point-of-sale systems of various business including that of the accused, including the warrantless seizure of accounting diskettes. The project was a randomly sampled study intended for policy research, and was not meant to investigate tax liabilities. CRA officials misrepresented their authority under the project in order to seize the diskettes. The Court found that this amounted to a warrantless seizure in violation of the taxpayer's Charter rights.

Hinkson J.A. also remarked (at para. 54) that the Supreme Court of Canada's requirement in Richardson, that the Minister exercise power under s. 231.2 only if the taxpayer's liability is a "subject of genuine and serious inquiry," also applies to s. 231.1.

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 288 - Subsection 288(1) 169

Redeemer Foundation v. Canada (National Revenue), 2008 DTC 6474, 2008 SCC 46, [2008] 2 S.C.R. 643

After the CRA served the appellant with a requirement under s. 230(3) asking that it maintain "transmittal forms" showing the identities of (parent) donors to the appellant and the names of students (typically children of the parents) who received funding for their attendance at a university that was affiliated with the appellant, CRA requested donor lists from the appellant. As the Minister led unchallenged evidence that the information it sought identifying donors was necessary for determining whether the appellant was issuing receipts otherwise than in accordance with the Act (so that there would be grounds to revoke its registration), the Minister was entitled to the requested information due to the combined effect of ss.230(2)(a) and 231.1, without seeking judicial authorization under s. 231.2(2). This interpretation did not render s. 231.2 redundant, as s. 231.2 responded to the need for the Minister to seek information relating to unnamed persons from a third party record holder outside the context of a formal audit.

Stanfield v. Canada (Minister of National Revenue), 2005 DTC 5454, 2005 FC 1010

After applying a range of factors Noël J. concluded that the predominant purpose of letters and questionnaires was to further a criminal investigation and were not within the parameters of the audit functions contained in s. 231.1(1). The letters and questionnaires were quashed, and the Minister prohibited from taking any proceedings for the applicants' failure to respond.

R. v. Dial Drugstores Ltd., 2003 DTC 5206 (Ont. Sup. Ct. J.)

An investigation by CCRA of the taxpayer was not transmuted into a criminal investigation until the auditor met with Special Investigations and referred the file to them for their consideration. Reilly J. noted (at p. 5219) that:

"The mere fact that the audit was provoked as a result of suspicion of non-compliance does not turn it into an investigation to determine penal liability."

He also noted (at p. 5220) that:

"Questions related to mens rea do not fall within the scope of s. 231.1(1)(d)."

R. v. Ling, 2002 DTC 7566, 2002 SCC 74, [2002] 3 S.C.R. 814

CCRA was conducting an audit and not an investigation of the taxpayer up until the time of a three-hour meeting in which the taxpayer was questioned extensively about unidentified deposits and unreported income. Accordingly, evidence gathered prior to and during that meeting was properly obtained as part of the audit process and could be shared with Special Investigations, whereas evidence gathered subsequent to that meeting and prior to warning him that he was the subject of an investigation for the purposes of furthering an s. 239(1) prosecution, violated the taxpayer's Charter rights and would have to be reconsidered in light of s. 24(2) of the Charter at a new trial.

R. v. Jarvis, 2002 DTC 7547, 2002 SCC 73, [2002] 3 S.C.R. 757

cannot use audit powers if CRA predominant purpose is to establish criminal liability

Where the predominant purpose of a particular inquiry is the determination of a penal liability (e.g., under s. 239 of the Act), CCRA officials may not have recourse to the inspection and requirement tools in ss.231.1(1) and 231.2(1). In this regard, "enforcement" in s. 231.1(1) and 231.2(1) did not include prosecution of an s. 239 criminal offence. Here, the predominant purpose of an investigation by an auditor was not the determination of penal liability for the taxpayer, with the result that information obtained in the investigation was admissible for the purpose of an application for a search warrant. Accordingly, the warrant was validly issued.

Words and Phrases
enforcement

The Queen v. Norwood, 2001 DTC 5111 (FCA)

The photocopying by a Revenue Canada auditor of notes made by an accountant in his interview with the taxpayer which the auditor obtained from an empty office at the time the accountant was out of town was not authorized by s. 231.1(1). Sharlow J.A. stated (at p. 5114) that "one might question whether an auditor can be said to have exercised his powers of investigation at a 'reasonable time' if he takes a document from an accountant's private office when he knows the accountant is out of town". Furthermore, because the taxpayer had a reasonable expectation of privacy (notwithstanding that "a taxpayer's expectation of privacy in an accountant's notes recording personal information are at the low end of the scale"), there was a breach of the taxpayer's rights under s. 8 of the Charter.

Locations of other summaries Wordcount
Tax Topics - Other Legislation/Constitution - Charter (Constitution Act, 1982) - Section 8 surreptitious photocopying 162

The Queen v. Kloster, 98 DTC 6258 (Prov. Ct. B.C.)

The use of s. 231.1 to obtain bank records and records of a solicitor who had acted for the accused breached the reasonable expectations of privacy of the accused. Bagnall J. found that the use of the evidence so obtained without judicial authorization was not permitted under s. 24(2) of the Charter.

Locations of other summaries Wordcount
Tax Topics - Other Legislation/Constitution - Charter (Constitution Act, 1982) - Section 8 taking of bank records breached privacy 50

The Queen v. Norway Insulation Inc., 95 DTC 5328 (Ont. C.J. (G.D.))

After the taxpayer's file was referred to Special Investigations based on the initial auditor's suspicion that the taxpayer had not reported income, Special Investigations sent the file back to audit for further investigation, with the result that further information was obtained pursuant to s. 231.1(1). On the basis of the information so obtained, search warrants were obtained and executed.

Before finding that the evidence so obtained under s. 231.1(1) should be excluded under s. 24(2) of the Charter and that the search warrants (having been obtained as a consequence of the excluded evidence) had been correctly quashed by the judge below, LaForme J. stated (at p. 5330):

"Section 231.1(1) is designed as a regular audit tool to ensure compliance with the Act. It is not designed to gather evidence for the purpose of a criminal prosecution."

R. v. Rosenberg, 87 DTC 5189, [1987] 1 CTC 385 (S.C.O.)

A Revenue Canada officer was authorized to examine and make copies of documents which the OPP had seized and detained pursuant to s. 446 of the Criminal Code, subject to Revenue Canada either obtaining the consent of the taxpayers or obtaining a proper search warrant under s. 231.3 of the Act.

Lipsey v. MNR, 84 DTC 6192, [1984] CTC 208 (FCTD)

An order was granted restraining the Department from taking further steps in the investigation of the affairs of the taxpayer and specifically from asking him questions. A S.231(4) authorization to enter and search had previously been quashed. To permit the Department to require answers to questions posed pursuant to S.231(1)(c) would have the effect of stultifying the quashing of the authorization - both the S.231(4) search and the S.231(1)(c) questions would seek the same information.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Evidence 46

See Also

R. v. BT Céramiques Inc., 2017 QCCS 4262

mere suspicion of tax (GST) evasion insufficient to render a penal investigation

Jarvis found that where the predominant purpose of a particular inquiry is the determination of a penal liability (e.g., under s. 239 of the ITA), CRA officials may not have recourse to the inspection and requirement tools in the ITA. In reversing the decision of the Court of Quebec to invalidate evidence obtained in a search and seizure of a Quebec registrant (BT Céramiques), which was believed to have fraudulently claimed input tax credits and corrupted CRA officials, Payette JCS stated:.

When it commenced the audit, the CRA only had suspicions that BT Céramiques was engaged in tax evasion and that a “grand patron” in the CRA was assisting it. …

[T]he judge contrasted “auditing” and “investigation” … without noting that the audit powers themselves constitute powers of investigation, and without pausing to determine if the objective of the steps she described was to establish penal liability of the respondents.

Locations of other summaries Wordcount
Tax Topics - Other Legislation/Constitution - Charter (Constitution Act, 1982) - Section 8 mere suspicion of tax evasion and corrupting CRA officials is insufficient to invalidate audit information 521

R v. Lombardo, 2011 DTC 5065 [at 5733] (B.C. Prov. Ct.)

The audit division of CRA commenced an audit of the accused after a leader in the CRA special enforcement division brought to their attention a reported judgment, arising out of child support proceedings, in which the B.C. Supreme Court had made a finding that the accused had manipulated his restaurant's point-of-sale system so as to conceal income. After an auditor had accessed various accounting records of the accused's business purportedly pursuant to CRA's civil audit powers, further information was collected pursuant to search warrants and production orders.

At the time of the commencement of the audit, CRA had reasonable grounds to conclude that an offence had been committed. Yee J. held in this voir dire proceeding that the evidence obtained directly or derivatively by the use of the audit powers, including the data obtained by search warrants and production orders, was inadmissible pursuant to ss. 7, 8 and 24(2) of the Charter, as its admission would bring the administration of justice into disrepute.

Mommersteeg and Giffen v. The Queen, 96 DTC 1011 (TCC)

A polite oral request made to a travel agency by a Revenue Canada auditor for access to their frequent flyer program records did not contain the "element of compulsion, communicated by notice in writing" contemplated by s. 231.2(1), nor was the auditor's visit to the travel agency the exercise of a right or power conferred by s. 231.1.

O'Reilly v. Commissioners of the State Bank of Victoria (No.2), 83 ATC 4156 (HC)

S.263 of the Income Tax Assessment Act 1936, which provided that a revenue officer "shall at all times have full and free access to all buildings, places, books, documents and other papers for any of the purposes of this Act", was not complied with where an officer of a bank refused to unlock a vault containing records of various customers. It was noted, however, that a restrictive interpretation should be given to S.263 in light of the existence of another section (similar to S.231(3) of the Canadian Act) in which the granting to the Commissioner of the power to require persons to furnish information was accompanied by the granting of procedural protections to those persons, such as a requirement that there be notice in writing.

Administrative Policy

27 February 2019 CTF Corporate Management Tax Conference, Q.7

must be a valid business reason (communicated to taxpayer) for requiring information

Although s. 231.1 uses the word “any,” judges have imposed a reasonableness test.

CRA decided not to appeal the BP decision to the Supreme Court because it would effectively have been asking for absolute authority. Headquarters clarified to field auditors that there must be a valid business reason for seeking information, and that reason should be communicated to the taxpayer.

27 November 2018 CTF Roundtable Q. 11, 2018-0779971C6 - Record Retention Policy Guideline

in some circumstances CRA considers that it can require a taxpayer to disclose its uncertain tax positions

What is CRA’s approach to requesting taxpayer records, particularly a taxpayer’s analysis of its tax risks, and is CRA updating its published position?

CRA indicated that it can seek the production of tax accrual working papers, provided that the request for such records is relevant to specific risks or items under audit, and it uses restraint in seeking the information. Factors that may be considered are the taxpayer’s past level of compliance and the existence of large unexplained tax reserves.

While CRA officials may, in certain circumstances, request a list of what the taxpayer considers to be its uncertain tax positions, CRA officials should first perform research and analysis in forming the basis of their reassessment. Provided all relevant facts and transactions are included in the taxpayer’s uncertain tax positions, exclusions of the related advice and analysis may be accommodated. Where the criteria in the revised Communiqué (which will be posted on the Canada website) are met, CRA retains the right to certain tax positions as outlined in Atlas Tube. CRA recognizes the principle in BP that taxpayers are not required to self-audit.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 232 - Subsection 232(1) - Solicitor-Client Privilege solicitor-client privilege does not extend to list of uncertain tax positions 105

24 May 2018 CTF Seminar - Preventing, Navigating, and Resolving Tax Disputes under “Managing Tax Risk, The Ins and Outs of Reporting and Compliance” (Gordon Parr)

CRA will still demand tax accrual working papers from difficult taxpayers with large unexplained tax reserves

Gordon Parr (Director) indicated that, partly in response to the BP decision, CRA is currently updating its internal communiqué with respect to obtaining information from taxpayers, registrants and third parties. The communiqué will outline that CRA officials can seek the production of tax accrual working papers, provided that the request for such records is relevant to a specific risk issue or item under audit and the CRA official is using a certain level of restraint in seeking this information.

Tax accrual working papers may be sought where there are identified unresolved tax issues and there is a higher risk of non-compliance. Factors that may be considered include the level of non-compliance, large unexplained tax reserves, and potential tax at risk. The taxpayer’s list of uncertain tax positions that relates to tax reserves in the taxpayer’s financial statements is considered to be part of the taxpayer’s books and records and is not a privileged document unless otherwise demonstrated.

While CRA officials may, in certain circumstances, request the list of what the taxpayer has determined to be its uncertain tax positions, in considering the structures and transactions outlined, CRA officials should perform their own research and analysis in forming the basis of any potential reassessment. Provided that all of the relevant facts of the transactions are included in their uncertain tax positions, exclusions of the advisors’ analysis of the legal and tax effects of the transactions may be considered.

23 February 2016 Toronto Centre Tax Professionals Seminar under “Access to Accountants' Working Papers”

external working papers requested where no direct information and high risk

In request for comments on the BP case and CRA’s policies respecting seeking access to the working papers of accounting firms, CRA stated orally:

[A]uditors should attempt to collect the information from the most direct source, and in the least intrusive manner. So if the source documentation is available in the taxpayer's books and records, and there's open and transparent disclosure of the uncertain tax positions, there's a level of cooperation and mutual trust, and the CRA is getting the information it needs to determine whether taxable income is understated or the tax balance is overstated…then generally we wouldn't request access to the taxpayer's or the accountant's working papers. But, where we can't get that direct information, in those situations where there is a high risk issue we will request that information. The request has to be relevant to the outstanding issues… .

90 C.R. - Q62

It is RC's general practice to request accountants to produce specific working papers for examination where they can reasonably be considered an extension of the client's records.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 231.2 47

86 C.R. - Q.29

Documents potentially covered by s. 231.1(1) include internal auditor reports and accountants' working papers.

81 C.R. - Q10

Where the auditors' working papers contain closing or balancing adjustments that are relevant to the tax returns, these working papers are considered an extension of the clients records for purposes of the tax audit. Working papers respecting tax planning matters should be able to withstand RC's scrutiny.

79 C.R. - Q34

RC does not routinely request audit files from accountants for inspection.

Paragraph 231.1(1)(a)

Cases

Canada (National Revenue) v. Lin, 2019 FC 646

low threshold of relevance - but auditees must be specified

Three individuals whom CRA suspected of not disclosing offshore assets received letters requesting the filing of T1135s and requesting information, which CRA considered to be within its powers to request information under s. 231.1(1). In dismissing the Crown’s application for a compliance order under s. 231.7, Boswell J noted:

[T]he Letters are addressed to both the individuals and their connected entities. The entities are not specified, and it is not clear who is being audited - the individual Respondents or unnamed entities.

The Court must be satisfied that the person against whom a compliance order is sought is one who was required under section 231.1 or 231.2 to provide the access, assistance, information or document sought by the Minister. Because it is not at all clear whether the Letter was directed to the Respondents individually or their connected entities, the first requirement of section 231.7 … for obtaining a compliance order has not been satisfied … .

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 231.7 - Subsection 231.7(1) CRA request for an information-request compliance order dismissed because it was unclear which entities were covered 358

Canada (National Revenue) v. Cameco Corporation, 2019 FCA 67

Minister cannot under s. 231.1(1) compel oral answers to its questions other than for aid in auditing taxpayer books and records

The respondent (“Cameco”) had appealed transfer-pricing assessments to the Tax Court. CRA then audited subsequent years, where essentially the same issues arose, and applied to the Federal Court for an order pursuant to s. 231.7(1) compelling Cameco to submit 25 listed employees of it and subsidiaries to CRA interviews. The Federal Court dismissed this application.

In dismissing the Crown’s appeal of such dismissal, Rennie JA noted that, under s. 231.1(1)(d) “[t]he obligation to assist is in aid of the inspection, search, examination or review of records” (para. 22), whereas here the Minister, rather than seeking “to compel answers as to the taxpayer’s knowledge of their provenance and location,” sought “oral answers to oral questions” in order “to facilitate her understanding of Cameco's potential tax liability (paras. 13-14).

The Crown submitted (as summarized at para. 7) that in s. 231.1(1)(a):

“inspect, audit or examine” are broad and encompass, on their own, the authority to ask questions of a taxpayer or employees of a taxpayer, including the employees of its overseas subsidiaries, and to require that they be answered orally.

In rejecting this submission, Rennie JA indicated (at para. 18) that the word “audit” in this phrase took its colour from “inspect” and “examine,” which were directed to “the book and records” of the taxpayer, that “[o]ral examination is not the ordinary meaning of the word audit” (para. 19), that if the requirement to answer questions were implied in s. 232.1(1)(a) “then the obligation in paragraph (d) and the express power to compel answers, would be unnecessary” (para. 23) and that under 1986 amendments to what now is s. 231.1(1) (at para. 32) “that sought ‘to provide clear limits to Revenue Canada’s enforcement powers’”:

The elimination of the word “orally” from the duty to answer all proper questions “relating to the audit” as well as the elimination of the obligation to give answers under oath or by statutory declaration is telling. (para. 33)

Words and Phrases
audit
Locations of other summaries Wordcount
Tax Topics - Statutory Interpretation - Ejusdem Generis 3rd word in phrase was limited by focus of other 2 words 126
Tax Topics - Statutory Interpretation - Redundancy/reading in words CRA’s broad interpretation of s. 231.1(1)(a) would render s. 231.1(1)(d) redundant 152
Tax Topics - Statutory Interpretation - Interpretation Act - Subsection 45(2) interpretation informed by legislative amendment narrowing the wording 54

Administrative Policy

31 May 2019, Statement from the Canada Revenue Agency regarding the decision in Canada (National Revenue) v. Cameco Corporation (2019 FCA 67), CRA Webpage

CRA can infer and assume where, post-Cameco, taxpayers refuse interviews

After noting that it will not seek to appeal Cameco, CRA indicated that this case decided:

[T]he Minister … does not have the authority to compel the employees requested by the CRA to attend interviews and answer oral questions under a general audit and inspection rule of the Income Tax Act.

…[T]he FCA … also stated that:

  • all taxpayers should fully cooperate with reasonable requests arising in the course of an audit;
  • it remains open to the Minister to make inferences when no answer is given; and
  • the Minister is free to make assumptions and to assess on that basis.

CRA then stated:

The CRA will continue to seek interviews where necessary and expects that the vast majority of taxpayers will continue to comply. Where taxpayers decline interviews in circumstances similar to the Cameco case, the CRA will use alternative means to carry out its obligations in verifying a taxpayer's level of compliance, which may increase tax uncertainty and compliance burden for the taxpayer. This may include the use of assumptions about the nature of a taxpayer's business activities and tax planning to form the basis of an assessment of taxes owing.

27 March 2019 CTF Seminar - Transfer Pricing

access to tax accrual working papers only where necessary

BP is not a complete bar to access tax accrual working papers, as indicated by Atlas. The Communiqué contemplates reasonableness and restraint. It indicates that CRA need not always see the analysis behind transactions, as what is needed is the facts and (also, sometimes in a s. 247 context) the purpose of the transaction. If CRA is satisfied that it understands the facts and purpose of the transaction, it will make its own determination of its legal effects.

Headquarters is to be notified if auditors are seeking tax accrual working papers.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 247 - New - Subsection 247(10) downward-adjustment requests reviewed for whether there is double non-taxation 110
Tax Topics - Income Tax Act - Section 247 - New - Subsection 247(2) - Paragraph 247(2)(d) 3-step process before s. 247(2)(d) is applied 165
Tax Topics - Income Tax Act - Section 233.8 - Subsection 233.8(3) use of CbC reports for assessing risk 36

AD-19-02 Obtaining Information for Audit Purposes 2019-03-21

Communiqué on “Obtaining Information for Audit Purposes” including access to tax accrual working papers and interpretation of BP

Pending decision in Cameco

Pending a final decision in this case, CRA officials can continue to have oral discussions with taxpayers and can request that individuals be interviewed.

Large tax reserves indicative of high risk of non-compliance

CRA officials will examine the books and records of the taxpayer and rely predominantly upon original source information and contemporaneous documentation to ensure that the overall risk of non-compliance is low. A taxpayer with large unexplained tax reserves may be considered to be at a higher risk of non-compliance.

Requests for TAWPs of higher risk taxpayers

Tax accrual working papers can be requested where they are relevant to a specific item under audit. ...

Tax accrual working papers, particularly the list of uncertain tax positions, can also be requested to identify audit issues in the context of an ongoing audit. This can be done in circumstances where CRA officials determine there is a higher risk of non-compliance. …

Listing of uncertain tax positions not privileged

The taxpayer’s list of uncertain tax positions that relates to the tax reserve in their financial statements is not a privileged document. …

Exclusions of advisors’ tax analysis may be accommodated

Provided all the relevant facts of the transactions are disclosed, including the taxpayer's purpose or purposes in undertaking a transaction or series of transactions, exclusions of their advisors’ analysis of the legal and tax effects of the transactions may be accommodated.

TAWP requests are not requests to self-audit

The CRA’s position is that taxpayers are required to disclose sufficient detail regarding their business and tax transactions for the CRA to fulfill its mandate of assessing taxes owing. Where the criteria outlined in the communiqué are met, the CRA considers that it retains the right to request tax accrual working papers, including a list of uncertain tax positions. A request for the taxpayer’s list of uncertain tax positions in these circumstances is not a request that the taxpayer self-audit. The CRA may audit transactions underlying these positions and will make its own determination as to the tax effects of the transactions. Overall, the onus remains with the taxpayer to report and pay the correct amount of tax pursuant to the ITA or ETA under Canada’s self-assessment system.

Paragraph 231.1(1)(d)

Cases

Canada (National Revenue) v. Cameco Corporation, 2017 FC 763, aff'd 2019 FCA 67

s. 231.1(1)(d) does not accord CRA an unfettered right to interview taxpayer personnel

In the course of doing a transfer-pricing audit of the 2010-2012 taxation years of the respondent (“Cameco”), the Minister demanded in-person interviews with 25 listed personnel who were present or former employees of Cameco or non-resident subsidiaries. Cameco refused this demand and the Minister sought a compliance order under s. 231.7.

McVeigh J accepted (at para. 50) that transfer-pricing litigation before the Tax Court respecting earlier taxation years would “likely resolve most of the issues that would form the basis of the requested interviews.” She further found (at para 39):

Cameco has provided the Minister with every opportunity to inspect, audit and examine their books, records and documents and to inspect their property. … Cameco has not allowed the oral interviews that they had done in previous years given the numbers requested and the fact that the subject matter of the audit is similar, if not identical as the ongoing litigation before the Tax Court of Canada.

In dismissing the Minister’s application, McVeigh J first found (at para. 42):

[]P]aragraph 231.1(1)(d)… does not provide the Minister with an unlimited right to conduct oral interviews of Cameco employees. To do so would ignore the mid-amble of the section which expressly restricts assistance for the purposes of allowing the Minister to “inspect, audit or examine” the books, records, documents and property of Cameco. In order to avoid redundancy, the Court must attribute a meaning and function to the words “and for those purposes” over and above what is expressed in the balance of the provision. Those purposes are the inspection, audit or examination of books, records, documents or property. The Minister’s argument that “inspect, audit and examine” in paragraph 231.1(1)(a) necessarily includes the authority to ask questions of a taxpayer would render paragraph 231.1(1)(d) redundant.

She then stated (at paras. 43, 44 and 50):

Parliament could not have intended for there to be no restraint on how the Minister questions employees of a corporation. …

The Minister’s interpretation imposes a much broader form of examination for discovery than allowed before the Tax Court of Canada without any of the procedural safeguards. The Minister arrived at a different answer than Cameco regarding transfer pricing and it is the role of the Tax Court of Canada to sort out who is correct. …

The time and cost involved in allowing the Minister to interview more than 25 Cameco personnel scattered across the world is not proportional to the information being sought since the Tax Court of Canada will determine the issues that are the focus of the requested interviews.

Locations of other summaries Wordcount
Tax Topics - Other Legislation/Constitution - Federal - Tax Court of Canada Rules (General Procedure) - Section 95 - Subsection 95(1) unfettered CRA interview right would undercut Rules and proportionality principle 250
Tax Topics - Statutory Interpretation - Redundancy/reading in words presumption against tautology 44

BP Canada Energy Company v. Canada (National Revenue), 2017 FCA 61

taxpayers should not be compelled to disclose to CRA the uncertain tax positions contained in their working papers

In order to explain the numerical derivation of an amount being reviewed by CRA on its audit of the taxpayer, the taxpayer provided redacted copies of some of its tax accrual working papers (“TAWPs”). The auditors were satisfied with this backup, but noticed that the redacted listed amounts of taxes that could be payable as a result of uncertain tax positions taken by the taxpayer appeared to be much larger than the proposed CRA reassessments. This concern was also alleviated by the taxpayer, but the auditors nonetheless insisted that the taxpayer provide a list of the uncertain tax positions that it had taken for the benefit of future CRA audits, and made a s. 231.7 application to enforce their demand for this information.

In finding that Campbell J below should not have granted this order, Noël CJ stated (at para. 82):

[The] obligation to “self-assess” does not require taxpayers to tax themselves on amounts which they believe not to be taxable. Faced with an issue that is reasonably open to debate…taxpayers are entitled to file their tax return on the basis most favourable to them. … [A]lthough auditors are entitled to be provided with “all reasonable assistance” in performing their audits (paragraph 231.1(1)(d)…), they cannot compel taxpayers to reveal their “soft spots”. …

After referencing financial reporting obligations of public companies under provincial securities legislation including the accurate reporting of accrued taxes and before noting concerns of CPA Canada that required disclosure to CRA of tax accrual working papers would reduce the candour of disclosures by companies to their external auditors, he stated (at para. 86):

By enacting subsection 231.1(1), Parliament could not have intended to vest the Minister with a power so sweeping that it would undermine those obligations.

He concluded (at para. 99):

[T]he Minister cannot invoke subsection 231.1(1) for the purpose of obtaining general and unrestricted access to those parts of BP Canada’s Tax Reserve Papers which reveal its uncertain tax positions. In practical terms, this means that the Minister cannot enlist taxpayers who maintain TAWPs to perform the core aspect of audits conducted under the Act.

Locations of other summaries Wordcount
Tax Topics - Statutory Interpretation - Interpretation Act - Section 8.1 federal power should be exercised harmoniously with provincial law 202

See Also

Jimenez, R. (On the Application of) v The First Tier Tribunal (Tax Chamber), [2019] EWCA Civ 51

sending a demand for information to a former UK resident did not entail an exercise of extraterritorial enforcement jurisdiction but merely entailed the potential imposition of UK penalties against any UK assets

The taxpayer was a UK national who had formerly resided in the U.K. and was now resident in Dubai. In connection with its investigation of his past and present tax positions including as to when he ceased to be a U.K resident, the HMRC issued a notice under paragraph 1 of Schedule 36 to the Finance Act 2008 to the taxpayer at his address in Dubai asking the taxpayer to produce information including details of bank and credit card accounts since 6 April 2004 and a schedule of his visits to the UK between that date and 5 April 2013. Paragraph 1 provided:

An officer of Revenue and Customs may by notice in writing require a person ("the taxpayer")—

(a) to provide information, or

(b) to produce a document,

if the information or document is reasonably required by the officer for the purpose of checking the taxpayer's tax position.

The decision below to quash the paragraph 1 notice was reversed. After noting (at para. 41) that “HMRC do not of course contend that the civil penalties for non-compliance with the notice could be directly enforced against the taxpayer in a foreign state but … [i]n the case of a UK taxpayer with a residence abroad, there will in many cases be a real possibility that the taxpayer continues to hold assets within the jurisdiction which could be used to recover the civil penalties for non-compliance,” Patten LJ stated (at paras 48 and 49):

Prescriptive (sometimes called legislative) jurisdiction is the power to make rules or issue instructions binding on the persons to whom they are directed. It is distinguishable from the enforcement of those rules by some type of coercive action which in the case of legislation or a direction affecting someone abroad may involve the legislating state taking positive action in the jurisdiction of another state.

…It is sufficient that the sending of a taxpayer's notice to Mr Jimenez in Dubai has not been shown to contravene any international obligation of the UK.

In his concurring reasons (with which Nicola Davies LJ also agreed), Legatt LJ stated (at paras. 52-54):

Counsel for Mr Jimenez … relied on a distinction … adopted … in Oroville Reman & Reloadbetween documents of notice that merely involve the supply of information with no threat of penalties in the event of non-compliance and documents involving a compulsory process or containing a command. They submitted that a document of the latter kind, such as the notice issued in this case which explicitly threatened penalties if Mr Jimenez did not comply with it, must be regarded as an unlawful exercise of enforcement jurisdiction.

Delineating the precise boundary between prescriptive (or legislative) and enforcement jurisdiction in international law is far from straightforward. But I do not accept that sending a notice by post to a person in a foreign state requiring him to produce information that is reasonably required for the purpose of checking his tax position in the UK violates the principle of state sovereignty. Such a measure does not involve the performance of any official act within the territory of another state – as would, for example, sending an officer of Revenue and Customs to enter the person's business premises in a foreign state and inspect business documents that are on the premises pursuant to paragraph 10 of Schedule 36. Nor does it seem to me objectionable that the notice is expressed as a command rather than a mere request for the supply of information. …

It is a further and separate question whether the imposition of a civil penalty under Part 7 of Schedule 36 for failure to comply with such a taxpayer notice would involve an exercise of enforcement jurisdiction. Again, however, I cannot see that it would, provided that no steps are taken to seek to enforce the penalty in a foreign state.

Locations of other summaries Wordcount
Tax Topics - Statutory Interpretation - Territorial Limits a demand for information issued to a former UK resident was valid 355

Administrative Policy

20 November 2017 CTF Annual Conference - CRA Panel on Issues in the Administration and Enforcement of the ITA, Q.12

Cameco appealed given that scope of transfer-pricing audits is broader than on discovery

In Cameco, the Court dismissed CRA’s application to question 25 corporate employees in the course of an audit, noting that this would essentially amount to a discovery process without the procedural safeguards built into ordinary discovery. Should an audit be narrower or broader than discovery in tax litigation?

CRA responded that the audit process is necessarily and generally a broader process than the discovery process, because the former is directed at determining what the taxpayer did in order to come to an accurate assessment of tax, whereas in tax litigation, there is an attempt to narrow and focus on the issues still in dispute. Accordingly, oral interviews on audit cannot be equated with oral interviews on discovery. Although for the Cameco audit, 25 interviews seems like a lot, in the context of a large transfer pricing matter, the taxpayer should have offered 5 or 10.

20 November 2017 CTF Annual Conference - CRA Panel on Issues in the Administration and Enforcement of the ITA, Q.11

in response to BP Canada, CRA will focus information requests on what the taxpayer did

What is the CRA’s policy on tax accrual working papers and its response to BP Canada?

CRA noted that its focus is in determining what taxpayers have done. CRA did not appeal BP Canada, as it was uncomfortable seeking an absolute right to seek information. CRA has set up a committee and is revising its procedures. CRA’s policy is to request only the information that it believes it requires, and to do so on a basis (in terms of consistency, documentation and justification) that will withstand court scrutiny. Where this standard is not met (e.g., the receipt of unreasonable and burdensome requests), the taxpayer should speak to a more senior large case file manager or the assistant director of its TSO.

Subsection 233.1(2)

Administrative Policy

7 October 2016 APFF Roundtable Q. 1C, 2016-0652771C6 F - T106 and multiple year ends

acquisition of control generally will not generate additional T106 filings

Will CRA accept a single form T106 for the period of 12 months ending on December 31, 2016 if that period consists of a taxation year ending on April 30, 2016 as a result of an acquisition of control and a taxation year ending on December 31, 2016 resulting from the choice of that year end by the corporation? If yes, is the filing deadline June 30, 2017? CRA responded:

[I]f the number of months from the start of the fiscal period until the new year end of December 31, 2016 exceeds 12 months, the CRA will require the filing of more than one T106. Otherwise, one T106 with a letter accompanying the form will be acceptable. …

Provided that the sum of the stub taxation years does not exceed 12 months, the CRA will accept the filing of the T106 form on June 30, 2017 (6 months after the December 31, 2016 year end).

Subsection 231.1(3) - Application

Cases

R. v. Baudais, 2014 DTC 5071 [at 6973], 2014 BCSC 856

CRA could obtain warrants under Criminal Code rather than tax statutes

The accused argued that it was inappropriate for CRA to obtain a search warrant under s. 487 of the Criminal Code in respect of suspected offences under the Income Tax Act and Excise Tax Act, as both Acts have their own provisions for obtaining search warrants that (the accused argued) place more stringent requirements on obtaining a search warrant (ITA s. 231.3(1) and ETA s. 290). He argued that the specific procedures set out in those provisions "should not be ignored" in favour of more general procedures dealing with the same matter, and that CRA's policy of obtaining warrants under the Criminal Code instead of the ITA and ETA is a pervasive abuse of process.

Barrow J found no merit in the accused's submissions. The overriding of a general provision by a specific one occurs where the two provisions cannot "stand together," whereas here the provisions merely authorized warrants "somewhat differently" (para. 49).

As for the abuse of process argument, CRA's choice to invoke the Criminal Code procedure was appropriate. Barrow J stated (at para. 54):

[I]n this case the revenue authorities would have had to obtain two warrants, had they attempted one under the Income Tax Act and one under the Excise Tax Act, as opposed to a single warrant granted under the Criminal Code. Second, there is no basis to conclude that because the Income Tax Act and Excise Tax Act warrants can only be issued by a superior court judge, that the level of review applied by the issuing judicial officer is any different, never mind more rigorous, than the review carried out by any other judicial officer.

Locations of other summaries Wordcount
Tax Topics - Statutory Interpretation - Other/Conflicting Statutes CRA could obtain warrants under Criminal Code rather than tax statutes 96

A.G. (Canada) v. Pica, 86 DTC 6001, [1986] 1 CTC 155 (Ont CA)

The seizure of 48 boxes of documents pursuant to s. 231(1)(d) was permissible given the complexity of the taxpayer's affairs. To insist that in all cases the determination of relevance be based upon the examination of the documents at the time of the search would be impractical.

The Queen v. Dzagic, 85 DTC 5252, [1985] 1 CTC 346 (S.C.O.), rev'd 86 DTC 6432, [1986] 2 CTC 288 (Ont CA)

rev'd on other grounds 86 DTC 6432, [1986] 2 CTC 288 (Ont CA)

S.231(1)(d) is ultra vires by virtue of s. 8 of the Charter because it permits seizure in advance of any judicial authorization. "The argument advanced by the appellant that immediate seizure may be necessary to prevent loss or destruction of potential evidence, is in my view without merit on the issue of the constitutionality of the section although it may conceivably, at least, justify warrantless seizures in special circumstances."

New Garden Restaurant and Tavern Ltd. v. MNR, 83 DTC 5338, [1983] CTC 332 (SCO)

The procedure contemplated by S.231(1)(d) should not be regarded as interfering with the types of privacy interests protected by S.8 of the Charter, given the public interest in a reasonably efficient system of collecting taxes.

S.231(1)(d) (as opposed to S.231(4)) does not authorize an auditor to seize if he had formulated a belief of probable guilt prior to coming upon the incriminating records.

Royal Craft Products Ltd. v. The Queen, 80 DTC 6143, [1980] CTC 97 (Alta. C.A.)

It was indicated, obiter, that S.231(1)(d) "embraces all the documents required to be retained by a taxpayer under S.230", rather than being limited to the seizure of documents relating to the taxation year in which there appears to have been a violation.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 231.3 - Subsection 231.3(3) 46

In re Usarco Ltd., 80 DTC 6085, [1980] CTC 145 (Ont CA)

It was stated, obiter, that it is immaterial that there is a time lag between the noting of the violation and the seizure.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 231.3 - Subsection 231.3(7) 108

Subsection 231.1(4)

See Also

Delzotto v. The Queen, 95 DTC 5518 (FCTD)

Before going on to find that there was insufficient evidence of a material change in circumstances (i.e., insufficient evidence that a proposed enquiry was primarily directed at incriminating the taxpayer) to justify lifting a stay order that had been previously granted, McKeown J. stated, in obiter dicta (at p. 5523):

"... it does not appear to me that simply because a court has validated a statute on the basis that it is primarily a regulatory statute, the Department is entitled to bypass any regulatory aspect of it and concentrate solely on bringing penal actions without the need to have any economic input.