Yesterday, the Federal Court of Appeal released its decision in M.N.R. v. Redeemer Foundation, 2006 FCA 325, which overturns the decision of the Federal Court in Redeemer Foundation v. M.N.R., 2005 FC 1361 (see my article on the latter case).
The Federal Court of Appeal’s decision represents a significant departure from previous decisions of the courts in this area. In effect, the Court concluded that, if the CRA asks for a document in the course of an audit of a taxpayer, the taxpayer must provide it, assuming that the CRA’s general audit powers authorize the CRA to request the document. According to the Court, it appears that there is no need to assess whether the CRA was requesting information about third parties to audit their affairs rather than merely determine whether the taxpayer was in compliance with the Income Tax Act. The Court arrived at this conclusion after discussing the duty of a taxpayer to maintain adequate books and records and the power of the CRA to ensure compliance with this duty. In this regard, the Court referred to sections 230, 230.2, 231.1 and 231.2 of the Act. The Court found these sections to be sufficient legal grounds for the CRA to make its request; “no recourse to section 231.2 was required” (¶35).
What about the privacy rights of Foundation and its donors especially in light of the clear wording of subsection 231.2(2)? The Court responded that this concern was “simply not credible” notwithstanding the dicta of Mr. Justice Rothstein in M.N.R. v. Sand Exploration Ltd., [1995] 3 F.C. 44, [1995] 2 C.T.C. 140; (1995), 49 D.T.C. 5358 (F.C.T.D.). According to the Federal Court of Appeal, per the Supreme Court’s decision in The Queen v. Mckinlay Transport Ltd., [1990] 1 S.C.R. 627, [1990] 2 C.T.C. 103; (1990), 44 D.T.C. 6243:
[A] taxpayer has ‘little expectation of privacy in relation to his business records relevant to the determination of his tax liablity.’ When a charity issues a tax receipt, it loses the right to exclude the Minister into inquiring into the circumstances of the gift to determine if it is eligible for deduction. Likewise, when a taxpayer claims a deduction on the basis of a donation receipt, he or she loses the right to exclude an inquiry by the Minister into the circumstances of the donation for the purpose of verifying whether the donation qualifies for the deduction claimed. [¶39]
The Court also found it significant that the Act usually imposes “reciprocity” in respect of most commercial transactions: “simply put, one person’s business deduction is another person’s revenue” (¶41). In the Court’s view, this fact justified forcing one taxpayer to provide, without prior judicial authorization, information about another that could result in the other taxpayer being reassessed under the Act.
The Court seems to have run roughshod over the privacy rights of Foundation donors in this case in the face of clear wording in the Act about the procedure to be followed when the CRA wants information about unnamed taxpayers. It is unfortunate that the Court chose not to consider this wording in light of the importance afforded to privacy rights in other areas of our law. Moreover, it is hard to see how “reciprocity” has anything to do with whether taxpayers enjoy privacy rights, even under the Act.
At the same time, the Court’s decision has the virtue of (apparently) providing certainty for organizations from whom the CRA demands information about unnamed third parties. I have complained elsewhere about the guessing game that prior decisions seemed to force upon such organizations because the test turned on whether the CRA was requesting the information merely in connection with an audit of the organization or whether the CRA wished to audit and perhaps the reassess the unnamed parties.
It will be interesting to see whether Redeemer Foundation will appeal to the Supreme Court of Canada.
