Redeemer Foundation v. M.N.R., 2005 FC 1361, represents an interesting coda to my article on CRA demands for third-party information. In this decision, the Federal Court quashed reassessments that were based on information obtained pursuant to an improper demand for third-party information.
In 2003, the CRA was auditing the Foundation. In the course of the audit, the CRA auditor verbally requested that the Foundation provide a list of its donors. The Foundation complied with the request even though it believed that the CRA would use the information to examine the deductions claimed by the donors for their gifts to the Foundation. The Foundation was unaware of the requirements of section 231.2 of the Income Tax Act (Canada), and the CRA did nothing to enlighten it.
In May, 2004, the CRA again approached the Foundation for information about its donors, but by this time the Foundation had consulted with legal counsel, who advised it that the CRA could demand such information only after obtaining a court order. The Foundation refused to provide the list. The CRA never applied for an order in respect of the third-party information it requested from the Foundation.
In late 2004, the Foundation became aware that the CRA had contacted some of its donors and was proposing to reassess them to deny deductions they had claimed in respect of gifts to the Foundation. The Foundation applied to the Federal Court for relief.
The Court granted the Foundation’s application, ordered the CRA to return the information obtained “illegally” and quashed as many as 50 reassessments based on that information. Mr Justice Hughes wrote:
[14] Taking a functional and pragmatic approach to this legislation, it is clear that Parliament intended to protect third parties from having information relating to their activities obtained from other persons audited by the Minister, who then will use it for taxation purposes. While section 231.2 provides for a request by the Minister in writing and a refusal the requirement for a prior Order cannot be limited to situation where only that occurs. To do otherwise would encourage the Minister’s officials and agents to attempt by other means to secure the information whether by friendly means, subterfuge or guile and prey upon the innocence, inadvertence or mistake of one taxpayer in order to secure otherwise unavailable information about another. Parliament would not have provided for a Court Order to be obtained first before securing such information if that provision could be so easily circumvented.
[15] Thus to obtain information from an audit of one taxpayer as to other taxpayers, for the purpose of using that information to reassess those other taxpayers, without first having obtained the appropriate Order of this Court, is wrong. In this case the CCRA auditor acted wrongly in requesting that information and the Minister acted wrongly in using it.
Redeemer Foundation represents a significant defeat for the CRA. It would be surprising if the Agency did not instruct the Department of Justice to file an appeal with the Federal Court of Appeal.
