Background
On July 31, 2008, the Supreme Court of Canada ("SCC") delivered its reasons for judgment in Redeemer Foundation v. Canada (National Revenue)1 ("Redeemer"). Redeemer addressed the Canada Revenue Agency's ("CRA") power to obtain records from taxpayers relating to third parties, under three provisions of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) ("Act"), namely, sections 230,2 231.13 and 231.2. A majority of the SCC supported the CRA and substantially reduced the scope of ss. 231.2(2), a remedial provision intended to protect taxpayers.
The Canadian income tax system is a self-assessment system that largely depends on the honest reporting of taxpayers.4 To verify compliance, the CRA has broad powers to identify and take action against taxpayers. Subsection 231.2(1) allows the CRA to require any person to provide information or documents to administer or enforce the Act. However, pursuant to ss. 231.2(2), the CRA may not require a taxpayer to provide information about "unnamed persons" without a judge's prior authorization. In Bernick v. The Queen,5 the Court held that ss. 231.2(2) applies when the CRA is seeking information from a taxpayer concerning an unnamed party to verify that unnamed party's compliance with the Act. The purpose of ss. 231.2(2) is to reduce the scope of the CRA's authority to gather information and to protect taxpayers by requiring the CRA to obtain a Court order before obtaining information in a taxpayer's records concerning unnamed persons.6
The predecessor to s. 231.2, namely, ss. 231(3), was framed in broad language, which if construed liberally might have enabled the CRA to conduct "fishing expeditions" in taxpayer's affairs without having any reasonable or probable grounds to suspect non-compliance.7 Section 231.2 was enacted to address concerns about former ss. 231(3) and is to be interpreted restrictively since the process is intrusive on taxpayer's privacy.8 Intrusion into the private affairs of Canadians is rightly considered to be a serious matter, particularly where third-party information is concerned, hence the requirement for judicial oversight.9
Notwithstanding the legislative purpose behind s. 231.2 and the requirement for judicial authorization, the Courts have been progressively eroding these protections for taxpayers. For example, prior to the Federal Court of Appeal's ("FCA") judgment in Greater Montreal Real Estate Board v. M.N.R.,10 one of the prerequisites for a demand for information was that the CRA have a "genuine and serious inquiry" into the tax liability of some specific person or persons.11 Even though the "genuine and serious inquiry" test was endorsed by the SCC in Richardson, and in more recent SCC judgments such as R. v. Jarvis12, the FCA did not apply that test in Greater Montreal Real Estate and endorsed the CRA's power to conduct fishing expeditions. It is in this context of eroding taxpayer rights that Redeemer was decided.
Background
Redeemer Foundation ("Foundation") is affiliated with Redeemer University College ("College") and operates a forgivable loan program ("FLP") to support students enrolled in the College. The Foundation and the College were first audited in 1998 in respect of the 1997 taxation year. The CRA was concerned about the validity of certain charitable donations to the Foundation, since it appeared that many of the donations to the Foundation were "earmarked" by parents for their own children's educations. The CRA was concerned because it is generally against tax policy for taxpayers to claim deductions or credits for personal expenditures.13
The Foundation was unable to locate and provide the information requested by the CRA. Consequently, the CRA ordered the Foundation to maintain adequate records and then waited until the records existed before conducting a further audit in 2001. In the meantime, in July, 2000, the CRA began issuing letters to donors proposing to reassess them to disallow deductions for their donations to the Foundation. During that further audit in 2001, the CRA requested and was provided with a donor list, leading to the subsequent reassessment of those donors. When an additional request for a second donor list was made by the CRA, the Foundation resisted, stating that it would be improper to provide information concerning these "unnamed persons" until the CRA obtained judicial authorization under s. 231.2.
The Foundation brought an application for judicial review of both of the CRA's requests for donor lists. The Foundation sought an order declaring the second request improper, requiring the CRA to return the information it had received previously and preventing the CRA from reassessing donors identified.
Issue
The issue before the SCC was whether the Minister was required to obtain judicial authorization before compelling the Foundation to disgorge information about the identity of its donors in the course of the audit(s), pursuant to ss. 231.2(2) of the Act. A majority of the SCC concluded that judicial authorization is simply not required.
Reasoning
The Foundation advanced three arguments:
(a) the prior judicial authorization required by s. 231.2 would be robbed of its meaning if the CRA could avoid the section by merely requesting information on unnamed persons in the course of an audit pursuant to s. 231.1;
(b) the CRA's primary purpose for obtaining the donor list was not to verify the Foundation's compliance, but to reassess donors, which requires judicial authorization; and
(c) allowing the CRA to obtain such information in the context of an audit would lead to an abuse of the CRA's audit power.
Paragraph 230(2)(a) requires charities to maintain books and records to verify compliance with the Act, while s. 231.1 grants the CRA broad powers to inspect, audit or examine books, records or any document of a taxpayer. The four judge majority of the SCC held that, on a plain reading of these two provisions, the Foundation was obliged to maintain books and records and disclose it all in the course of the audit, including information and documents relating to unnamed third parties. On behalf of the three dissenting judges, Rothstein J. wrote that the judicial authorization required by ss. 231.2(1) must be interpreted as providing the CRA with powers in addition to those granted under sections 230 and 231.1. If ss. 231.2 did not provide the CRA with additional power it would be superfluous, as the CRA could always avoid seeking judicial authorization by simply asking for information on unnamed persons in the context of an audit.
The SCC next turned its attention to the underlying purpose of the CRA's request for the donor list. According to the majority's view, the CRA required the donor list to verify the legitimacy of the FLP pursuant to the audit, and the reassessment of any donors was simply a logical consequence of a determination that the FLP was not a legitimate program. However, as Rothstein J. observed in his dissenting opinion, the CRA had formed the intention to reassess donors prior to the 2001 audit (the CRA clearly formed the intention to reassess donors in July, 2000, but that it did not have sufficient information to do so at that time.) Thus, this was not a case where the CRA had the information it required for donors when its purpose was to audit the charity. So, the requirement that the Foundation maintain adequate books and records was not a requirement strictly upon the Foundation, but rather was issued so that the CRA could obtain information on donor's compliance. In Rothstein J.'s view, judicial authorization should be required for the release of information on these unnamed persons.
The majority's view was that donor information is integral to any audit of a charity, and that if ss. 231.2(2) applied to audits this would require judicial authorization every time a charity is audited. However, as Rothstein J. wrote in the dissenting opinion, the threshold for obtaining judicial authorization is not terribly high, thus, the requirement to obtain such authorization is not particularly burdensome. In any case, it is unclear why the CRA should be relieved of the obligations imposed on it by the Act simply because they are supposedly burdensome. The majority further stated that it would be illogical to require a charity to maintain books and records and to then require the CRA to obtain judicial authorization to see those books and records. No further explanation was given as to why this is so illogical.
Finally, the majority considered and rejected the Foundation's "policy" argument. The Foundation had argued that allowing the CRA access to information about unnamed third parties in the context of audits may lead to abuse of audit powers. In the majority's view, there is a low expectation of privacy for business records relating to tax liability. Thus, a person who contributes to a charity can reasonably expect that if the charity is audited, the contribution may be examined, leading to a reassessment. The risk was said to be minimal that the CRA would audit one taxpayer not suspected of non-compliance merely to investigate other unnamed taxpayers. Although Rothstein J. agreed that there is a low expectation of privacy in respect of a taxpayer's business and tax records, he stated that this is not germane, since this case was about statutory interpretation and the provisions of the Act must be given a coherent meaning when read together. Further, he pointed out that the CRA's authority under the Act is extremely broad and that the CRA should accordingly be required to follow the procedures in the Act vigorously. In his view, ss. 231.2(2) was intended to provide some minimal restraint on the CRA's broad powers.
The majority's reasons also allude to the CRA's interest in investigating non-compliant taxpayers outside the context of charities involved in so-called "reciprocal" arrangements. The SCC noted that where a charitable program is not valid, both the charity and its donors are non-compliant and the CRA therefore has a valid interest in reassessing both. However, the SCC went on to state that the same would be true of any other relationship involving reciprocal tax treatment. Thus, it appears that in the SCC's view if one party to a reciprocal arrangement may be non-compliant, the other party or parties cannot reasonably expect that their privacy relating to their tax records will be respected. Taxpayers should bear this in mind when considering the relative privacy of their books and records in their dealings with third parties.
In conclusion, Redeemer appears to further erode statutory protections for taxpayers and in our view a legislative amendment would be needed to re-establish them.
Footnotes
1. 2008 SCC 46.
2. Section 230 of the Act requires taxpayers to maintain books and records essentially for the purposes of verifying compliance with the Act and ss. 230(2) sets out specific requirements for charities and registered amateur athletic associations. Paragraph 230(2)(a) requires registered charities to keep books and records in Canada to enable the Minister to determine if there are grounds for revoking a charity's status under the Act.
3. Section 231.1 grants the CRA broad powers to inspect, audit or examine books, records or any document of a taxpayer or other person for the purposes of administering and enforcing the Act.
4. R. v. McKinley Transport Ltd., [1990] 1 S.C.R. 627.
5. (2002), 56 D.T.C. 7167 (On. SCJ).
6. Canada v. Toronto Dominion Bank, (2004), 59 D.T.C. 5140 at paras. 7 and 8.
7. James Richardson & Sons, Ltd. v. M.N.R., [1984] 1 S.C.R. 614 ("Richardson").
8. M.N.R. v. Sand Exploration Ltd., (1995), 49 D.T.C. 5358 (F.C.T.D.) ("Sand").
9. Ibid.
10. 2007 F.C.A. 346 ("Greater Montreal Real Estate").
11. Richardson.
12. [2002] 3 S.C.R. 757.
13. There are provisions in the Act governing tax credits for educational purposes. A "tied gift," by which a parent in effect gets a charitable tax credit for payment of a child's tuition at a private school, would be outside that regime.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
