Section 231.7

The respondent ("Chad”) was the protector of the CF Trust, Ralphie Trust and BKR Trust (and beneficiary of the CF Trust), president of Czech International and a former director of Pedigree and Oz Management. CRA had sent a requirement (the “First Requirement”) pursuant to s. 231.1 to Chad to provide documents and answer questions respecting such entities (the “Non-Resident Entities”). The Non-Resident Entities refused to provide the requested information to Chad (or, in the case of Oz Management, it had been struck from the Bahamas corporate register).

The Minister then sent Chad a requirement pursuant to s. 231.2 to produce the information. The trustee of the Ralphie and CF trusts refused to provide the information to Chad, the director of Czech International and the lawyer for Pedigree so refused on the grounds that doing so was not in the best interests of the shareholder (which were Ralphie Trust and CF Trust, respectively), and the response for Oz Management and BKR Trust was that it or its trustee had been struck from the corporate registry.

In rejecting Chad’s submission that the requested documents were “foreign-based documents” which could only be requested under s. 231.6(2), Favel J noted (at para. 31) that the “[c]ourts have yet to definitively rule on whether sections 231.1 and 231.2 apply to foreign-based information or documents,” but found that, as in the 2022 Ghermezian decision, the evidentiary record was lacking as to whether the mooted information was accessible from Canada. However, in dismissing the Minister’s application for a compliance order pursuant to s. 231.7, Favel J stated (at para. 42):

I am satisfied, on a balance of probabilities, that the Respondent has made reasonable efforts to satisfy this requirement. The Respondent has persuaded me that he does not possess and cannot access the documents and information.

Zeifmans, 2021 FC 363, aff’d 2022 FCA 160 concerned the application of the Zeifmans accounting firm for judicial review of a CRA issuance of a requirement letter pursuant to s. 231.2(1) respecting three named individual clients of the firm and all “entities owned, operated, controlled or otherwise connected to [such] individuals” (the “Unnamed Persons.”) The submission of Zeifmans - that judicial authorization should have been obtained pursuant to s. 231.2(3) given that the RFI extended to the Unnamed Persons – was rejected essentially because there was “no evidence in the record that the Unnamed Persons [we]re a current investigation target.”

In this subsequent proceeding, an application of the Minister for a compliance order pursuant to s. 231.7 was dismissed. Of crucial significance was the finding of Pallota J that Unnamed Persons were (and had been at the time of issuing the Requirement) an investigation target, i.e., the lead auditor had effectively admitted in cross examination in these proceedings that the requirement had been issued as part of the CRA audits of all the companies in the group (paras. 105, 144).

Pallota J also rejected the Crown’s position that Zeifmans’ position in this application represented an impermissible collateral attack on the prior administrative order (the requirement) given that inter alia the imposition of separate conditions under s. 231.7(1)(a) notwithstanding that a recipient of a requirement could apply for judicial review of the requirement “indicate[d] Parliament did not intend for judicial review to be the sole forum for considering whether the Minister properly exercised her authority in issuing the Requirement” (para. 66), the two proceedings had a different character (of a reasonableness review, contrasted to a substantive review of whether the s. 231.7 considerations were satisfied – see paras. 74, 81-82), and in the earlier proceeding, the Minister had failed to disclose that the Unnamed Persons in fact were being targeted.

The Minister brought an application pursuant to s. 231.7 seeking an order requiring the respondent (“BMONB”) to provide an unredacted version of a spreadsheet (the “MSPM”). The redacted column in the spreadsheet, which had been provided by BMONB pursuant to a request made by CRA in July 2019 in relation to its audit of suspected dividend rental arrangement transactions engaged in by BMONB in its 2016 taxation year, was claimed by BMONB to reflect legal advice in a small portion of legal written advice received by it in 2012 and 2013 from two law firms (McCarthy’s and Torys).

After finding that the MSPM was not protected by solicitor-client privilege, Kane J also rejected some further submissions of the taxpayer.

Kane J found (at para. 120) that “there are no time limits for the Minister’s exercise of its authorities pursuant to section 231.1 or 231.7, stating (at para. 121) that “[i]f Parliament intended to impose time limits, it could have done so.”

Furthermore, in rejecting the BMONB submission that the Minister was precluded from relying on s. 231.1 or 231.7 because there was no open audit or inquiry, she indicated (at para. 126) that she did “not agree that BMONB’s notice of objection puts an end to the Minister’s authority pursuant to sections 231.1 or 231.7,” noting that “[i]n the present case, the Minister made the request for information pursuant to section 231.1 in 2019, long before the reassessment or notice of objection, and stated (at para. 127):

[R]estricting a request for information to the pre‑assessment or pre-reassessment period would not be in the spirit of the Act, which gives broad powers to ensure the administration and enforcement of the Act, and could promote non‑compliance.

In addition, BP “did not refuse to order compliance with the Minister’s request for information solely because the audit for a specific year had concluded, but because the information had been requested for broader purposes, other than the issues identified in the audit, and the issues identified in the audit had already been addressed,” whereas here, “the Minister identified the specific purpose of the Request for Information related to the 2016 audit … [which] information has not been provided and the issue identified in the audit has not been resolved” (paras. 129, 131).

Although the spreadsheet had some aspects of a tax accrual working paper (“TAWP”) considered in BP, there the “FCA’s caution was against imposing an obligation to self-audit” (para. 153), whereas here “[u]nlike BP, the concerns arising from the tax year under audit have not been addressed … [and] the Minister has not sought access to the MSPM (whether or not it is a TAWP) without advancing a particular justification” (para. 152).

Finally, regarding a submission that granting the requested production would undermine the discovery process in the Tax Court of Canada proceedings, which had procedural protections not set out in s. 231.1, Kane J stated (at para. 160) that Cameco (at paras. 40-41):

…found that the Tax Court of Canada Rules are not a factor in determining the Minister’s powers under section 231.1. The Court of Appeal noted that the Tax Court of Canada could sort out any issues regarding the admissibility of the evidence or potential prejudice arguments.

The taxpayer (“Dominelli”) had entered into two leveraged insurance annuity arrangements for which he had claimed $139 million in carrying charges from his employment income. The Minister had sought a s. 231.7 compliance order for documents respecting Dominelli’s 2016 taxation year. Before the Federal Court rendered a decision on the Minister’s application, Dominelli and the Minister reached an agreement under which Dominelli undertook “to perform a detailed and exhaustive search of… records in my possession” and to “particularize my efforts” and “to request and direct my professional advisors to conduct an exhaustive search”, “to make inquiries of individuals and entities listed below” and to “particularize my efforts in making these inquiries,” all as described by affidavit with appended documents – with it being further agreed that if the Minister was not satisfied with the affidavit materials, she would ask that judgment be delivered on the compliance application. After the Minister indicated that the affidavit response was unsatisfactory, Dominelli brought this motion before Pentney J to enforce the settlement agreement, and Diner J agreed to keep postpone rendering judgment in the compliance application until this motion was decided.

Pentney J stated (at para. 59) that he agreed “with Dominelli that the scope of the Minister’s discretion to determine that she is not satisfied that he has discharged his obligations under the agreement must be limited by the terms of their agreement … .”

However, in going on to find that Dominelli’s affidavit did not demonstrate that he had met his obligations under the agreement, Pentney J stated (at para. 66):

His affidavit contains no information regarding any search of his own records, and no indication that he requested his professional advisors to search for anything. Instead, it simply states that on January 13, 2021, Robert Young [the insurance consultant] sent documents pertaining to the Outstanding Material to his lawyers “that Young advises contains the answers to certain requests made by the applicant in this summary application.” Implicit in this statement is that Dominelli must have asked Mr. Young to conduct some sort of search, but no details are provided.

After noting the various documents that had been requested on audit and not provided, Pentney J stated (at para. 79):

Understood in that context, the gap between what Dominelli promised to do and what his affidavit states is striking. … [H]is evidence does not establish that he has met the specific and detailed terms of the agreement and the Undertaking that he negotiated, and thus his motion cannot succeed.

Mr. Miller did consulting work for a European client (“Casala”). He also received payment of his professional fees from other clients through deposits in trust with two Canadian law firms.

Walker J granted a compliance order pursuant to s. 231.7(1) regarding an extensive list of items that CRA had demanded including information regarding the terms and conditions of his oral contract with Casala and copies of the trust ledgers from one of the law firms.

Regarding her order to disclose the terms of his oral contract with Casala, she stated (at para. 44) that this was information “that Mr. Miller ought to have documented in his records,” that the “requests do not stray into the problematic type of questions identified in Cameco and BP Canada” e.g., an attempt “to compel Mr. Miller to reveal his ‘soft spots’,” and that a “request for the information that would have been included in any written contract and issued invoices is the Minister’s mechanism to ensure her access to basic information necessary for the Audit.”

Regarding the required disclosure of the trust ledger accounts with the law firms, she stated (at para. 59):

I do not agree that the Cameco decision establishes that a taxpayer discharges their obligation to satisfy a request that is otherwise within the scope of subsection 231.1(1) with a response that they simply do not have those documents in their possession. … [A] taxpayer is required to exercise reasonable efforts to obtain and provide to the Minister information and documentation that should be in its books and records.

Walker J did not make a compliance order for a description of the development of Mr. Miller’s business relationship with Casala (para. 54).

Art. 26(1) of the Canada-France Convention provided for exchanges of “such information as is foreseeably relevant … to the administration or enforcement of the domestic laws concerning taxes of every kind … imposed on behalf of the Contracting States, insofar as the taxation thereunder is not contrary to the Convention.”

CRA issued requests for information (RFIs) to the appellant (“Blue Bridge”), which was the trustee of some trusts, as a result of a request made by the French tax authorities pursuant to Art. 26 for various particulars regarding the trusts, including the identity of the beneficiaries and financial information.

Blue Bridge argued that it was the Minister’s responsibility to ensure that the “taxation … not contrary to the Convention” condition in Art. 26 was met before transmitting the requested information to France, whereas here, France was seeking to impose tax under a French wealth-tax statute which attributed all foreign trust assets to a French settlor or beneficiary in order to subject them to the tax, which in its view raised the possibility of the information being used to levy tax contrary to the Convention.

In rejecting this argument, Rivoalen JA determined that the Federal Court did not have expert evidence of French law so as to be able to conclusively address this argument, and that this argument was based on facts that had not been verified, and could not be verified at this stage, by the Minister. She stated (at para. 47, TaxInterpretations translation):

The judge rightly concluded that a requirement for thorough research and analysis of the facts and the law of the requesting State would impede the proper and effective operation of the Convention’s provisions … .

She concluded that the Federal Court had not erred in finding that the requirements for issuing a compliance order under ITA s. 231.7(1) had been met.

The Friedmans, a married couple, who had not filed T1135 returns, each received Requests for Information under s. 231.1(1) (“RFIs”) whose wording was essentially identical to those received by the taxpayers in Lin, e.g., they were addressed to them personally, and stated inter alia:

Your personal income tax returns and any other related or associated entities have been selected for audit … . [Y]ou may have offshore holdings that you have failed to disclose … .

In order to expedite and facilitate our audit, we will require a clear understanding of all entities with which you had a connection or affiliation during the taxation years noted above. …

Please send us back the attached questionnaire fully completed within 30 days … .

The taxpayers refused to provide the requested information and argued that, like Lin, the RFIs were not clearly addressed to them and it was unclear whether the CRA is auditing them or their related entities. In rejecting these submissions, Pamel J noted that it was unclear whether the Court in Lin was provided with the questionnaires accompanying the letters, and stated (at para. 35):

Upon close examination of the RFIs and, in particular, the accompanying questionnaires, I am satisfied that, unlike in Chamandy [2014 FC 354] and SML, the CRA is clearly directing its questions to Mr. and Mrs. Friedman in their personal capacity as taxpayers. In addition, as opposed to how matters were assessed in Lin, the CRA is specifically directing those questions to the Friedmans in respect of their personal tax situation.

Pamel J also rejected their submissions that the RFIs contravened s. 13 or 7 of the Charter.

The three respondents were a couple and their daughter. The father considered himself to reside only in China, whereas his wife and daughter acknowledged that they were Canadian residents. The father stated that he had filed Canadian returns only because he did not realize that he was a non-resident.

Each respondent received a letter from CRA in September 2016, captioned as being respecting an audit of the 10 taxation years ending on December 31, 2015, and stating:

Your personal income tax returns and any other related or associated entities have been selected for audit for the above noted period. [CRA] is in possession of information that has led us to determine that you may have offshore holdings that you have failed to disclose as required by the Income Tax Act. All individuals, corporations, trusts or partnerships are required to complete and file form T1135 … .

The letter went on to request completion of a questionnaire. Only some of the information was provided, and CRA then sought a compliance order under s. 231.7.

In rejecting most of the respondents’ submissions, Boswell J stated (at paras. 23, 25 and 27):

[A]ny valid reason, such as a suspicion of offshore holdings, meets the low threshold for the reasonableness of an audit … .

… There is no statutory time limit within which to make a request for information under subsection 231.1(1) … .

The fact that the Letter does not specify the documents, books, or records to be produced is not fatal to the requests for information … .

However, he nonetheless dismissed the application on the following ground (paras.31-32):

[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 by the Minister … .

The U.S. parent (JMC) of the Canadian taxpayer (Atlas) acquired another Canadian company (LSI), following which some of the pieces of LSI ended up in Atlas’ hands in a post-closing reorganization. CRA requested, pursuant to s. 231.1, a copy of a tax due diligence report - that EY had prepared on LSI in advance of the LSI acquisition - on the grounds that it might be relevant to its audit of Atlas.

The EY report included an analysis of the tax filing positions taken by LSI and their risk of successful challenge by CRA. Atlas argued that compelling disclosure of the report was contrary to BP, which found that tax accrual working papers setting out uncertain tax positions were protected. In rejecting this argument, Southcott J stated (at paras. 65-66):

BP is to be read as precluding general and unrestricted access to TAWPs 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. …[T]he 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.

He also found that, as the report’s “dominant purpose when commissioned and generated was to inform the decision whether to proceed with the transaction and at what price” rather than to assist Stikeman in structuring the acquisition, it was not protected by solicitor-client privilege.

CRA found out from the French authorities that the taxpayer was on the list obtained from a disgruntled HSBC employee of those with large Swiss bank accounts. The taxpayer had not reported the account or the interest thereon. When CRA sought a compliance order under s. 231.7(1) for the taxpayer to answer its requests for information issued under s. 231.1(1), the taxpayer argued that it was obvious that this was occurring pursuant to a criminal investigation of her. Russell J disagreed, stating (at paras. 50, 55) that:

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. …

[A] mere suspicion does not change the predominant purpose of an audit into a criminal investigation. See Jarvis … .

The taxpayer was ordered by the Federal Court under s. 231.7 of the Act to comply with certain requests for documents and information issued against it during an audit. In rejecting the taxpayer’s submission, based on Chambre des notaires and Thompson, that the Federal Court lacked authority to make this order, Stratas JA stated (at paras 6 and 7):

[T]he Supreme Court read down section 231.7 to exclude lawyers and notaries. But section 231.7 otherwise remains in force.…

… The appellant is neither a lawyer nor a notary. Therefore, in this case, section 231.7 still authorized the Federal Court to make the order it did.

Respecting the further submission that the order “indirectly ordered the appellant’s law firm to disclose material, contrary to the Supreme Court’s two decisions” he stated (para. 9):

… The Federal Court’s order is directed only against the appellant… . Here, the client had a full opportunity to contest issues relating to legal professional privilege and legal professional privilege was fully respected in this case.

An application by the Minister was dismissed given that the Minister had not demonstrated that the person served with the requirement letter was the taxpayer rather than its officer in his personal capacity (as the salutation in the requirement letter was addressed "Dear Sir", and a threat of incarceration for failure to respond suggested that the letter was not directed to a corporation), and given that it had not been demonstrated that the person required to provide the requested information or documents had not done so (as there had been the production of some documents).

Grammond J had previously made an order pursuant to s. 231.2 that the taxpayer (“Béarence,” a land developer with numerous land sales and who had been undergoing a CRA audit) provide, within five days, an Excel file containing all the daily transactions for its 2012 to 2015 years and a report of transactions by each general ledger account for those years. Over five months later, the Minister sought an order that Béarence was in contempt of court for not having complied with the order.

Bell J accepted the taxpayer’s submission that CRA already had available to it all the information it needed (including with respect to federal and provincial "sales tax" matters - para. 10) to perform its audit (including the provision to it of a copy of the general ledger, and information provided to the ARQ) and stated (at paras. 12-13, TaxInterpretations translation):

[D]oes the CRA have the right to require that Béarence disburse funds to provide information in the format requested by the CRA where this information has already been provided and is available in another format? …

[N]either the CRA nor this Court can impose the format in which this information must be provided to the CRA, as all the necessary information has already been provided.

He went on to find, in the alternative, that in any event, the following elements for a finding of contempt were not established: an unequivocal indication of what must be done (the order appeared to incorrectly assume that the requested documents were in existence and it did not specify that Béarence was to create documents- and, if it had, such an order would be appealable); and the order had knowlingly and intentionally been violated (there was reasonable doubt in this regard).

Accordingly, no contempt declaration was made.

The respondent (“Chi”) failed to supply banking documents under a June 2016 Request for Information pursuant to s. 231.2(1) and subsequent October 2017 Compliance Order pursuant to s. 231.7. At issue were banking records and statements for three accounts registered at an HSBC branch in Hong Kong in the name of corporations owned or controlled directly or indirectly by the taxpayer, and a fourth TD Bank account. Mosley J, on a motion brought ex parte by the Minister was satisfied that there was a prima facie case of contempt of the Compliance Order, and in April 2018 ordered Chi to attend the Court’s general sittings in Ottawa (the “Show-Cause Order”). Chi, who was present at the show-cause hearing and testified as to why he should not be found in contempt of the order, provided the TD bank statements (only) at that time. In finding Chi to be in contempt, LeBlanc J stated (at paras. 40, 45):

… [T]he evidence … displays sporadic attempts by Mr. Chi to contact representatives at the HSBC in Hong Kong to obtain the bank statements at issue, most of them fruitless as Mr. Chi either failed to follow-up on information provided or failed to obtain the evidence that could support his contention that he is unable to comply with the Compliance Order.

…[T]he evidence before me points not to a clear and unequivocal effort to comply, but rather leads me to conclude, beyond a reasonable doubt, that Mr. Chi has demonstrated a “serious indifference or contemptuous disregard at the Court” ... .

After noting (at para. 35) that there were mitigating factors calling for a milder sentence than in other cases, LeBlanc J ordered Chi to pay a fine of $2,000 and legal costs of $3,500, and provide the HSBC bank statements (or documented evidence that they were unavailable) all within 30 days, failing which Chi would be subjected to 15 days’ imprisonment.