From the intrusive to the abusive – what happens when the CRA goes too far?

by Dentons
Contact

[author: ]

In order to administer and enforce the self-reporting system of tax assessment in Canada, the Income Tax Act (ITA) and Excise Tax Act (ETA) provide the CRA with the power to demand certain information from taxpayers. Generally, this information is collected for the purposes of auditing a taxpayer, but may also be obtained where no audit is conducted. For example, the CRA may access such information for the purpose of evaluating whether record-keeping requirements have been complied with. Higher statutory thresholds are imposed on the CRA – such as requiring a search warrant issued by a judge – where the information sought would not normally be required for an audit.

Despite the broad statutory powers conferred on the CRA to ensure compliance, the courts are wary of the potential for abuse and have been careful to circumscribe their application. In James Richardson & Sons v. M.N.R., the Supreme Court of Canada clarified that when requiring the production of documentation there must be a “genuine and serious inquiry” into the tax liability of a specific taxpayer (or taxpayers). Richardson was decided in the context of what is now section 231.2 of the ITA, which requires taxpayers to provide documents or information to the CRA for the enforcement or administration of the Act. In its recent decision in R. v. He, the British Columbia Court of Appeal confirmed that the same principle should be applied to section 231.1 of the ITA (and the corresponding section 288 of the ETA) when inspecting records at the taxpayer’s place of business.

R. v. He concerned a CRA program called the Electronic Records Evaluation Pilot Project (“ERE”) that targeted specific businesses for research purposes – including restaurants, convenience stores and small supermarkets – to evaluate their record-keeping compliance. One business chosen for the program was the restaurant, Sushi Man, run by the He family in Vancouver. Although the initial contact by the CRA indicated that its review would not be an audit, certain inconsistencies were found that led to an audit, investigation and, ultimately, criminal charges. Apparently, CRA thought that Sushi Man had been using some form of sales suppression software (known as a “zapper”) to erase the record of certain transactions and thereby evade taxes. The taxpayer alleged that the CRA’s real purpose was to conduct a criminal investigation into establishments using the zapper software and, therefore, it had strayed outside the scope of section 231 of the ITA (and 288 of the ETA) thereby violating his right against unreasonable search and seizure under section 8 of the Canadian Charter of Rights and Freedoms.

The issue before the courts was whether, under the circumstances, the CRA was entitled to seize information from Sushi Man under section 231.1 of the ITA and 288 of the ETA. The Provincial Court Judge found that there had been no “genuine and serious” inquiry into that taxpayer’s tax liability and concluded that the seizure of information by the CRA was unlawful, implying that the ERE program had been used improperly for an undercover investigation into restaurants using zappers. On appeal, both the Supreme Court of British Columbia and the British Columbia Court of Appeal agreed with the Provincial Court that the rule established in Richardson should be applied to section 231.1 of the ITA (and by extension to section 288 of the ETA).

Writing for the Court of Appeal, Justice Hinkson remarked as follows:

[54] In my opinion, s. 231.1 of the ITA, if interpreted too broadly, is open to that same possibility of abuse. It and its parallel section in the ETA permit the same broad authority to the CRA as does s. 231.2 and its parallel section in the ETA. Further, as discussed by the appeal judge, s. 231.1 allows for a more intrusive power than that permitted under s. 231.2. It is my opinion that the correct interpretation of s. 231.1 requires that the reasoning in Richardson must therefore be applied to that section.

With respect to the conduct of the CRA investigation, Justice Hinkson deferred to the Provincial Court Judge’s conclusion that the ERE’s true purpose was not to review books and records nor to audit the individual businesses selected. Therefore, the seizure of information was not permissible under section 231.1 of the ITA (or section 288 of the ETA).

While it is not yet certain whether the Crown will seek leave to appeal to the Supreme Court of Canada (no leave application has been filed at the time of this post), it seems clear that unless it has secured prior judicial authorization, the CRA cannot obtain information from a taxpayer in the absence of a “genuine and serious” inquiry into the taxpayer’s tax liability.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Dentons | Attorney Advertising

Written by:

Dentons
Contact
more
less

Dentons on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.