Appeal Court Upholds Order for Company to Hand Over Client Information to the CRA under the “Unnamed Persons” Requirement
Earlier this year, we wrote about a Federal Court decision in which the court found that a taxpayer company was required to reveal customer names and purchase information to the Canada Revenue Agency (“CRA”) under the Income Tax Act’s Unnamed Persons Requirement.
The taxpayer appealed and the Federal Court of Appeal recently decided the case in the CRA’s favour.
The taxpayer was a roofing supply company in Ontario. The Minister of National Revenue (the “Minister”) had brought an application under the Income Tax Act (“ITA”) and the Excise Tax Act (“ETA”) for judicial authorization to require the taxpayer to provide information and documents relating to some of its customers (the “Unnamed Persons”).
Specifically, the Minister sought information about residential and commercial construction contractors who had an account with the roofing company. The Minister asked to be provided with the Unnamed Persons’ names and addresses, as well as itemized transaction details (including invoice information, sales amounts, methods and payments, and addresses of delivery) and the Unnamed Persons’ bank account information. The information sought was for the periods of 2015 to 2018 and targeted Unnamed Persons whose total annual purchase and/or billed amount was between $10,000-$20,000 or greater.
The Minister reasoned that an estimated 28% of the residential construction industry’s business is unreported or under-reported. As a result, the Minister wanted to verify that the targeted Unnamed Persons, who purchased roofing and building supplies and materials from the roofing company, had complied with their duties and obligations under the ITA and the ETA.
Federal Court Decision
The court explained that, as set out in the statute, there are only two requirements that must be met for such an application:
a) Whether the unnamed persons are ascertainable and,
b) Whether the requirement is made to verify compliance by the person or persons in the group with any duty or obligation under the ITA.
While the roofing company had argued that the Unnamed Persons were not ascertainable and that the Minister had failed to adduce convincing evidence to establish that the target group of residential and commercial roofing contractors could be delineated from the roofing company’s other customers, the court found that the Unnamed Persons in the case were an ascertainable group.
The court was also satisfied that the Minister had met the second criterion, finding that the Minister was attempting to verify whether the roofing company’s commercial customers were compliant with their duties and obligations under the ITA and ETA.
As a result, the court concluded that it was appropriate and in the interests of justice to exercise its discretion in favour of the Minister and to authorize the Minister to impose the Unnamed Persons Requirement on the roofing company.
Issues on Appeal
The taxpayer raised three main objections to the order:
- The taxpayer contended that the application was ultra vires because it was not brought by a person authorized by the statute to do so. Subsection 231.2(3) of the ITA states that the application for judicial authorization is to be made by the Minister. The taxpayer argued that it was not the Minister who made the application, but rather the CRA official who swore the affidavit in support of the application. The taxpayer also argued that the Minister’s counsel did not have authority to file the application.
- The taxpayer argued that the Federal Court erred in its application of the statutory criteria. More particularly, it was an error to find that the Unnamed Persons were “ascertainable” within the meaning of paragraph 231.2(3)(a) of the ITA, and that the information was required to “verify compliance” within the meaning of paragraph 231.2(3)(b) of the ITA.
- The taxpayer argued that the Federal Court applied the incorrect burden of proof to its assessment of the Minister’s application.
Federal Court of Appeal Decision
The court rejected the taxpayer’s ultra vires argument, first, because the notice of application was brought by the Minister, and not by the CRA official. While the CRA official filed an affidavit in support of the Minister’s application, the CRA official did not bring the application himself. Second, the court rejected the taxpayer’s claim that counsel for the Minister did not have the authority to bring the application. The court stated that, once retained, counsel have all the authority—apparent, ostensible and implied—to take all necessary steps and actions in litigation on behalf of their client. The court explained that while a party may challenge a solicitor’s authority, this must be done by way of a motion to stay the proceeding, not in an application or appeal. The court found that there was nothing in the record that justified, even remotely, the argument that counsel did not act with instructions.
The court also rejected the taxpayer’s second ground of appeal, finding that the Federal Court did not err in finding that the Unnamed Persons targeted by the application were an ascertainable group. The court found that there was ample evidence that justified its conclusion that the group was ascertainable. The total annual purchase requirement was sufficient, in the view of the Federal Court, to establish the target group of residential and commercial contractors among the taxpayer’s customers. The court stated:
“The fact that the [Unnamed Persons Request] may target an unspecified or large number of accounts or that a significant amount of financial information may be captured does not affect its validity. The statutory criteria are not altered by the size of the request.”
Finally, the court rejected the taxpayer’s argument that the Minister failed to prove that the information it sought would be used to verify compliance with the ITA. The court found no error in the Federal Court’s conclusion that the information sought would assist in determining whether the Unnamed Persons had filed their returns as required, made payroll, GST and HST remittances, reported any and all of the income earned on the sale or supply of roofing materials, or claimed the purchases as business expenses.
As a result, the appeal was dismissed and the taxpayer was required to provide the Minister with the requested information.
Mark Feigenbaum brings together many years of litigation experience with a deep knowledge of tax law, corporate law, accounting, finance, and other related practice areas. Mark can help you avoid the biggest risks that may arise in tax disputes.
Prior to founding his law firm, Mark worked in the cross-border tax department of an international Big 4 firm, and held accounting management positions across a variety of sectors in both Canada and the United States.
With tax legislation in constant flux on both sides of the border, Mark takes great care to stay current on all relevant developments in law and policy. He carefully considers all solutions available to craft a response that proactively considers the policies and best practices of a given tax authority.
If you are involved in a tax dispute or related litigation, contact Mark Feigenbaum for exceptional representation and guidance. Mark’s many years of interdisciplinary knowledge in law, tax, accounting, and finance and significant cross-border experience make him uniquely positioned to assist you. Mark offers services to clients in the U.S., Canada and around the world. Contact Mark online or call him at (905) 695-1269 or toll-free at (877) 275-4792 to book a consultation.