Canada: Tax Lawyer Analysis: CRA's Broad Powers To Compel Third Party Information Under Section 231.2 Is Not Without Limits

Section 231.2: CRA's Broad Powers to Compel Information from Third Parties

The CRA derives its power to conduct tax audits against taxpayers under section 231.1 of the Income Tax Act. The CRA can compel a taxpayer to provide books and records and allow a CRA representative to enter premises where a business is carried on. Moreover, taxpayers are required to provide reasonable assistance and to provide answers to reasonable questions to the CRA tax auditor. Under section 231.2, the CRA even has broad powers to demand information about the investigated taxpayer from third parties for tax audit purposes. In this article, we will discuss about the CRA's power to compel information from third parties.

CRA's Power to Compel Information from Third Parties is not without Limits

Under section 231.2 of the Income Tax Act, the CRA is given broad discretion to compel third party information. Subsection 231.2(1) states that the CRA may "for any purpose related to the administration or enforcement of this Act. require that any person provide. any document." If the requested information relates to one or more unnamed persons, subsection 231.2(2) states that the Minister must first obtain authorization from the Federal Court under subsection 231.2(3). Thus, although the CRA's discretion is broad, the CRA cannot compel a third party to provide any information without limitation. The information must first be related to the administration or enforcement of the Income Tax Act. If the information requested is not related to the administration or enforcement of the Income Tax Act, the CRA does not have the power to compel it. Also, if the information relates to one or more unnamed persons, the CRA must first obtain authorization from the Federal Court. This requirement exists to prevent the CRA from going on so called "fishing expeditions". On numerous occasions, the Canadian courts have disapproved such fishing expeditions that have practically unlimited scope especially if the requests lack consideration for the invasion of privacy and the consequences of all taxpayers involved in the requests.

Meaning of "Purpose Related to the Administration or Enforcement of the Act"

The Tax Act itself is silent with respect to what constitutes a "purpose related to the administration or enforcement of the Act." Thus, Canadian tax litigation lawyers have developed common law to fill in this gap. The Federal Court in Ghermezian v Canada (Attorney General), stated that the purpose related to the administration or enforcement of the Tax Act is to "obtain information relevant to the tax liability" of the person who is under investigation. The Tax Court stated that the "determination of a taxpayer's tax liability is a purpose related to the administration and enforcement of the Act."

As such, generally speaking, information that has relevance in determining the tax liability of the investigated taxpayer can be requested for the purpose of the administration or enforcement of the Tax Act. On the other hand, if a requested information does not have relevance in determining the tax liability of the investigated taxpayer, then the information prima facie cannot be requested for the purpose of the administration or enforcement of the Income Tax Act.

The Federal Court in Ghermezian also discussed additional principles that may be taken into account "when determining whether a request is for the purpose of administration and enforcement" of the Income Tax Act. One of the principles raised was that a tax audit must be "conducted in good faith, on a genuine factual basis, and with the objective of ensuring compliance" with the Income Tax Act. The Federal Court recognized that good faith and genuine factual basis are principles that are recognized for the purposes of subsection 231.2(3) applications. However, the Court concluded that the principles of good faith and genuine factual basis added little value to guide their decisions for the particular case, which involved subsection 231.2(1) requests, because of the absence of any bad faith or improper purpose on the part of the Minister. Nevertheless, from this case, we can infer that if a tax audit is conducted in bad faith or with improper purpose on the part of the CRA, good faith and genuine factual basis principles should be taken into account when determining whether a subsection 231.2(1) request is for the purpose of the administration and enforcement of the Act. For example, if the CRA makes incorrect or contradictory statements to a third party knowingly to convince them to provide certain information, this may be indicating that the CRA is conducting the tax audit in bad faith.

Pro Tax Tip: A Third Party Information Request from the CRA Must Have "Purpose Related to the Administration or Enforcement of the Act"

Although the CRA been granted broad powers under subsection 231.2 to compel third parties to provide information regarding another taxpayer, the CRA cannot use this power to compel information from third parties that have no relevance to determining a given taxpayer's tax liability. Determining whether a requested document has a purpose related to the administration or enforcement of the Tax Act requires a Canadian tax professional to analyze the law and the documents being requested. If you have any questions or concerns regarding the CRA's powers to compel third party information, please contact one of our experienced Toronto Tax Lawyers.

F.A.Q

Can the CRA Demand my Bank to Provide Documents Related to Me During my Tax Audit?

Most likely. Under subsection 231.2 of the Income Tax Act, the CRA can compel third parties to provide documents for a purpose related to the administration or enforcement of the Income Tax Act.

What is a "Purpose Related to the Administration of Enforcement of the Income Tax Act?"

The Act does not define what constitutes a "purpose related to the administration or enforcement of the Act." The Federal Court in Ghermezian stated that the purpose related to the administration or enforcement of the Tax Act is to "obtain information relevant to the tax liability" of the person who is under investigation.

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.