10-8 Plans: Budget Bolsters the Law After CRA Fishing Expeditions Made More Difficult in Court

Today's federal budget proposed to change the law both in respect of 10-8 plans and information required from third parties for the purposes of tax administration or enforcement. Here's the case...

Here's the case that caused the changes that dealt a blow to this type of planning and also to third parties who now will be required to make any representation they choose at the hearing of an application for a court order from a judge of the Federal Court. This will speed up the court order process because third parties will no longer have specific rights to seek a review of the issuance of the court order or the usual rights of further appeal: MNR v RBC Life Insurance Co, 2013 FCA 50

CRA can go to third parties for information about other taxpayers to verify compliance with the Income Tax Act (the Act), but will have to have a strong case behind them. The third parties in this particular case were insurance companies, and the Federal Court of Appeal (FCA) made some interesting remarks in dismissing the Minister of National Revenue’s appeal from a decision of the Federal Court, denying the applications.

The Federal Court had cancelled four authorizations previously obtained by the Minister under subsection 231.2(3) of the Act. The authorizations required RBC Life Insurance Company, Industrial Alliance Pacific Insurance and Financial Services Inc., Industrielle Alliance Assurance et Services Financiers Inc., and BMO Life Assurance Company (the respondents) to produce information pertaining to some of their customers who had purchased an insurance product known as the “10-8 plan.” There were three main issues to be decided:

(1) What is the jurisdiction of the Federal Court on an ex-parte application under subsection 231.2(3) and on a review under 231.2(6)?

(2) Did the Minister make full and frank disclosure of relevant information on the ex- parte application?

(3) Did the Minister’s valid audit purpose save the authorizations?

The respondents also cross-appealed, in case their defence to the main appeal was unsuccessful, claiming that subsection 231.2(3) of the Act is of no force or effect because it unjustifiably infringes section 8 of the Canadian Charter of Rights and Freedoms. As the main appeal did not succeed, the Court did not have to answer that question. The law pertaining to this case is as follows:

(1) Under subsection 231.2(3) of the Act, the Minister can obtain an authorization from a judge requiring a third party to provide information about unnamed taxpayers. If the judge is satisfied that the unnamed taxpayers are ascertainable and the authorization’s purpose is to verify the unnamed taxpayers’ compliance with the Act, the authorization will be granted.

(2) When the third party becomes aware of the authorization, it can apply to have it reviewed. The reviewing judge may cancel, confirm, or vary the authorization under subsection 231.2(6) of the Act.

(3) If the authorization is not cancelled, the Minister may enforce the authorization through a compliance order pursuant to section 231.7 of the Act.

The authorizations were initially granted, but upon review, the Federal Court cancelled them, stating that “the Court was not in a position to appreciate the full context in which the Minister brought the ex-parte applications” because an insufficient amount of evidence had been adduced in support of them. The Federal Court also was not satisfied that another prerequisite for these types of authorizations had been met, namely that the authorizations were not made to verify compliance with the Act.

In order for the appeal to be successful, the FCA would have to find that the Federal Court made a palpable and overriding error - a highly deferential standard requiring an absence of almost any valid reason for coming to a decision.

At paragraph 26 Judge Stratas stated that, in seeking an authorization under subsection 231.2(3), the Minister cannot leave “a judge in the dark” on facts relevant to the exercise of his/her discretion, even if those facts are harmful to the Minister’s case.

Stratas also disagreed with the Minister’s argument that the judge has a certain level of discretion under subsection 231.2(3) but none under subsection 231.2(6), and that under that latter subsection judges are limited only to verifying that the statutory preconditions are met (that the unnamed taxpayers are ascertainable and the authorization’s purpose is to verify the unnamed taxpayers’ compliance with the Act). 

At paragraphs 28 and 29 Judge Stratas stated:

“Under the Minister’s interpretation, the Minister could withhold important information from the authorizing judge under subsection 231.2(3) –information that would have caused the authorizing judge to exercise the discretion to deny authorization –but on a review under subsection 231.2(6), that same judge must uphold the authorization if he or she finds the two statutory preconditions to be met. The judge –despite knowing of the non-disclosure of important information that would have caused her to deny authorization –is nothing more than a cipher, powerless to act, forced to leave the ill-gotten authorization in place.

[29] Of course, more extreme facts – not present here – can be supposed. On the Minister’s interpretation, the authorizing judge could be induced to grant an authorization on the basis of bald lies but, on review, if the statutory preconditions are met, that same judge, having discovered she was deceived, can do nothing about it.”

Accordingly, the FCA dismissed the Minister’s appeal. Taxpayers should welcome this decision, as it leaves a strong precedent in their favour when it comes to interpreting these peculiar subsections of the Act. The Minister will have to adduce a stronger case in order to satisfy a judge that an authorization should be granted under subsection 231.2(3).

Greer Jacks is updating jurisprudence in EverGreen Explanatory Notes, an online research library of assistance to tax and financial professionals in working with their clients.