International Tax Audit Powers Aided by Court Decision

Budget 2013 included some measures that would help the Canada Revenue Agency (CRA) find and prosecute international tax non-compliance, such as the Stop International Tax Evasion Program. A recent decision from the Federal Court, Soft-Moc Inc. v MNR (2013) FC 291, sets a precedent that strengthens the CRA’s ability to access information outside of the country.

Soft-Moc is a Canadian resident taxpayer. The President of Soft-Moc, Bryan Bardocz, owns 10% of the common shares of the company and Bert Krista owns the other 90%. Mr. Krista took up residence in the Bahamas and incorporated four other companies that he wholly owns: ITPC Inc. (ITPC), Manser Inc. (Manser), MWF Inc. (MWF) and SoftPOS Inc. (SoftPOS).

The CRA suspected that these companies were involved in sophisticated tax evasion tactics that included transactions of a substantial amount for a variety of vaguely described services such as merchandising, consulting, business development, and software licensing fees. Essentially, the CRA was suspicious that Soft-Moc was actually benefiting from the consideration paid to the other four companies in non-arm’s length transfers.

Under subsection 231.6(2) of the ITA, the CRA asked Soft-Moc 74 questions to which they had previously provided responses from 2009 audit queries that were considered incomplete or lacking in detail by the CRA.

Soft-Moc was an application for judicial review in respect of a decision by the CRA to issue a Foreign-Based Information Requirement requiring Soft-Moc to provide certain foreign-based information and documents related to its business.

The legal standard of judicial review in these circumstances is reasonableness. When reviewing a decision on the standard of reasonableness, the analysis will be concerned with “the existence of justification, transparency, and intelligibility within the decision making process [and also with] whether the decision falls within a range of possible, acceptable outcomes which are defensible in respect of the facts and law.”

Soft-Moc argued that Section 236.1 was overly broad, required them to divulge information that wasn’t relevant for the CRA’s purpose, and was prejudicial to their business interests generally. The court replied by stating, at paragraph 81, that “subsection 231.6 of [the] ITA makes it clear that ‘foreign-based information or document’ means any information or document that is available, or located outside of Canada that “may be relevant” to the administration or enforcement of the Act, including the collection of any amount payable under the act by any person”.

It is likely that the result in Soft-Moc will encourage the CRA to use the foreign-based requirements earlier in the audit process and much more frequently. This decision will surely be welcomed by the Federal Government, who have been determined to crack down on international tax non-compliance in recent months.

Source: http://decisions.fct-cf.gc.ca/en/2013/2013fc291/2013fc291.pdf