Section 231.2 of the Income Tax Act (Canada) (the “Act”) authorizes the CRA to demand information from any person for any purpose related to the enforcement of the Act. What do you need to know about a demand for information about an unnamed third party, if the CRA comes knocking at your door with one in hand?
The first point to note is that many organizations have a duty to keep confidential much of the information that they possess about third parties. Accountants and lawyers have a professional obligation to keep information about their clients confidential. Private schools and banks are required by law to protect information about their students and clients respectively. The Personal Information Protection and Electronic Documents Act (Canada), which applies to organizations in Ontario, prohibits the disclosure of information about an identifiable individual without “the knowledge and consent of the individual to whom the information relates” except under carefully defined circumstances.
In light of these requirements, it seems obvious that nobody should hand over information about unnamed third parties simply because the CRA asks for it. In fact, subsection 231.2(2) of the Act exists to provide additional protection of private information. The subsection requires the CRA to obtain prior judicial authorization before it demands information about unnamed persons. Under subsection 231.2(3), a Court may provide such authorization if the person or group about whom information is sought is ascertainable and the requirement is made to verify that the person or group is complying with any duty or obligation under the Act.
In theory, then, an organization confronted with a demand for information about third parties can rest easy because a judge decides whether the CRA should get the requested information. If the CRA wants information about an unnamed third party, it must get prior judicial approval. Without that approval, it cannot get the information.
In practice, as always, life is more complicated. Part of the complexity derives from the unfortunate fact that the CRA is sometimes less than scrupulous about obtaining prior judicial authorization. We know of at least one situation where a CRA auditor made an “informal” demand for third-party information. The auditor became abusive when told that he would get the information only if he requested it in writing and he provided reference to the provision of the Act authorizing his request. He became abusive, but then he dropped his request.
Apparently, the CRA’s behaviour in this regard is nothing new. In an article published in 1998 in CCH’s Tax Topics (Report #1358), Mary Messih noted that there was a growing trend toward “informal” CRA requests for third-party information. In M.N.R. v. National Foundation for Christian Leadership, 2004 FC 1753 (affirmed 2005 FCA 246), the judge (at ¶16) noted that the CRA had first demanded third-party information from the Foundation without having obtained judicial authorization. The Foundation had to go to court to have the demand withdrawn.
What is more, the case law shows that the CRA has tried its best to chip away at the requirements imposed on it by subsection 231.2(2). For example, in M.N.R. v. Toronto Dominion Bank, 2004 FC 169 (aff’d 2004 FCA 359), the CRA demanded information about an unnamed account holder even though it had not obtained prior judicial authorization. The CRA argued that it could not obtain such authorization because it had no way to know whether the unnamed person was in compliance with a duty imposed under the Act. The Court was unsympathetic: the CRA, it held, would not get the information without prior judicial authorization. In Capital Vision Inc. v. M.N.R., 2002 FCT 1317, the CRA demanded information about unnamed parties on the grounds that it was required for an on-going audit of Capital Vision itself. The Court found that the CRA was attempting to do indirectly what it could not do directly: the CRA was trying to obtain information about unnamed parties without court approval by pretending that the information was needed for an on-going audit.
The CRA chafes at the bonds imposed by subsection 231.2(2). In part, this can be explained by bureaucratic laziness: in clear cases, where the CRA should obtain judicial authorization, it does not, apparently because it is too much trouble.
In part, however, the CRA is right to chafe. Is the CRA required to obtain judicial authorization if, during an audit of an expense account, it demands to see a receipt and the receipt contains the name and address of the payee? Our tax system could not function if judicial authorization were required in these circumstances. In Artistic Ideas Inc. v. M.N.R., 2004 FC 573 (aff’d 2005 FCA 68), Madam Justice Snider wrote (at ¶¶26–27):
Thus, we have the bookends:
- if the focus of the audit is on a named taxpayer and information is being requested that would identify persons who are not the subject of an investigation, such information, including the names of previously unnamed persons, may be disclosed without judicial authorization; but
- if the focus of the investigation is the unnamed persons and the information is requested from a person not under investigation (such as an accounting firm), prior judicial authorization is required.
But, what happens when the Requirement is served on a person who is both the subject of a genuine audit and the holder of the names of other persons who are also under the CCRA’s magnifying glass?
Justice Snider concluded that, if “there [is] clear evidence that the unnamed persons are to be investigated”, then the person also under investigation on whom a demand is served can require the CRA to obtain prior judicial authorization.
Unfortunately, this approach puts the onus back on the person served with the demand to ensure that the CRA is not abusing its authority to require information. How is the person to know whether the unnamed persons really are not of interest to the CRA in light of Capital Vision?
Perhaps the best that an organization under audit can do when served with a demand for information about unnamed persons is
- ensure the request is in writing,
- require the CRA to specify the statutory authority under which the demand is made and
- if the demand is for information about unnamed third parties, require the CRA to confirm in writing that the parties are not under investigation.
If the CRA refuses to provide the latter reassurance, then the person served with the demand, in order to protect itself, might be required to bring the matter before a judge. In the alternative, the person might redact third-party information, as suggested by Justice Rothstein in Artistic Ideas (at ¶16).
[This article by Joseph Monaco and John Loukidelis appears in the October 2005 issue of The Bottom Line.]
