In a unanimous decision released on November 7, 2008 the Federal Court of Appeal dismissed the appeal in eBay Canada Ltd. et al. v. Minister of National Revenue, requiring that the appellants produce to the Minister of National Revenue confidential information maintained on computer servers located outside of Canada. Disclosure was ordered notwithstanding that the servers were not owned by the appellants (but by a related non-resident company), and were not physically located in Canada. This decision has far-reaching implications for Canadian resident taxpayers with foreign operations and those that operate as subsidiaries to foreign corporations. Indeed, the implications are significant for any person whose business records are kept outside of Canada.
Facts and Judicial History
The eBay group of corporations, which includes the appellants (eBay Canada), operates an online global marketplace where registered users offer goods and services for sale to the highest bidder. Persons who generate a certain volume of monthly sales are identified as "PowerSellers" and are required to provide certain personal information to eBay which is kept confidential, despite circulation within the group. eBay Canada is granted secure online access to information concerning Canadian resident PowerSellers and regularly uses this information as an integral part of its business. The information is electronically stored on servers located in California which are owned by a U.S. corporation in the eBay group.
In October 2006, the Federal Court had granted an ex parte order authorizing the Minister of National Revenue (the Minister) to require eBay Canada to provide information relating to any PowerSellers registered as having a Canadian address at any time during the 2004 and 2005 calendar years. The impugned requirement had been issued pursuant to subsection 231.2(2) of the Income Tax Act (Canada) (the Act), a provision that obliges the Minister to obtain judicial authorization before imposing a requirement for the production of information relating to "unnamed persons" (in this case, Canadian resident PowerSellers).
eBay Canada applied to the Federal Court under subsection 231.2(5) of the Act for a review of the authorization. The issue was whether section 231.2 could be interpreted to require a Canadian resident to provide information to which it had access for business purposes in Canada but which was stored in data facilities owned by a third party located outside Canada.
eBay Canada argued that the unnamed persons requirement issued under subsection 231.2(2) was insufficient in these circumstances and that a requirement for "foreign-based information" under section 231.6 would be necessary instead. Importantly, however, section 231.6 does not authorize a requirement to be imposed for the production of foreign-based information relating to unnamed persons (i.e., if the information was found to be foreign-based, it would have been outside the power of the Minister to require production). Accordingly, eBay Canada alleged that, by resorting to section 231.2, the Minister had improperly tried to circumvent limitations imposed by section 231.6 on requirements to produce records located outside Canada.
Justice Hughes of the Federal Court rejected this argument and held that the information, although stored in data facilities outside Canada, could be "summoned up" in Canada. As a result, the information itself was "not foreign but within Canada" for purposes of section 231.2 of the Act. Justice Hughes also ruled that the Minister was not obliged to demonstrate that he was engaged in a "genuine and serious inquiry" into the tax affairs of the unnamed persons before judicial authorization could be obtained. It was sufficient if the information (or documents) sought by the Minister was required for a tax audit conducted in good faith.
eBay Canada appealed this decision to the Federal Court of Appeal.
Decision of the Federal Court of Appeal
The principal issue on appeal was whether the information sought by the Minister was foreign-based because it was "available or located outside Canada" for purposes of section 231.6 of the Act, despite the admitted fact that eBay Canada had instantaneous access to the information for business use in Canada. eBay Canada argued that as a matter of law, information in electronic form stored on a server is "located" wherever the server is situated and, until downloaded or printed, is not located anywhere else.
Noting that "with the click of a mouse" eBay Canada could make the relevant information appear on computer screens anywhere in Canada, the Federal Court of Appeal concluded that "...information in electronic form stored on servers outside Canada is in law capable of being located in Canada..." It was insignificant that the information had not been downloaded or printed by eBay Canada.
The Court of Appeal also rejected the argument that there must be a genuine and serious inquiry into the tax affairs of unnamed persons before a requirement can be authorized. In doing so, the Court relied on its earlier decision in Canada (Minister of National Revenue) v. Greater Montreal Real Estate Board. The Court observed that in a self-reporting system, taxpayers have a very low expectation of privacy in their business records relevant to the determination of their tax liability, and that a requirement provides the least intrusive means by which the Minister can ensure compliance.
Implications of the Decision
The ruling of the Federal Court of Appeal in eBay Canada is an important, though perhaps unwelcome, decision defining the entitlement of the Minister to collect information about unnamed persons located beyond Canadian borders. The decision continues the current judicial trend of interpreting the statutory powers of the Minister in extremely broad terms. In particular, the ruling is consistent with the approach reflected in Redeemer Foundation v. Canada (National Revenue), a recent decision of the Supreme Court of Canada holding that the Minister is not required to obtain prior judicial authorization where information about unnamed third parties is sought in the course of an audit.
It is important that persons carrying on business in Canada be aware that any information ordinarily used or accessed for business purposes may now be producible on demand by the Minister. If the information relates to unnamed persons, the Minister may require judicial authorization; however, the fact that the information sought is maintained outside Canada can no longer be advanced as a legitimate defence to the demand.
eBay Canada has until January 6, 2009 to file an application for leave to appeal the decision to the Supreme Court of Canada.
The Federal Court of Appeal decision is available here.
Alexandra Brown is a partner in the Tax Department in the firm's Toronto office. Pooja Samtani is an associate in the Tax Department in the firm's Toronto office.
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