A Brief History:  Why CRA’s Fishing Expeditions Are Legal

Marco Iampieri B.A., JD, M.B.A.

Section 231.2 of the ITA provides the Minister with the ability to gather large swaths of taxpayer information and analyze this information through the lens of compliance with section 231.2 of the ITA, which originally was more protective of taxpayers.  Now there are very few legislative safeguards erected on behalf of taxpayers relating to section 231.2 and that’s a problem, because it allows CRA to go on “fishing expeditions” for more audit-worthy files.

In fact, fishing expeditions for new audit prospects were contemplated by Parliament when enacting section 231.2 of the ITA.  But the government has been vigilant in clearing the path for such activity.  For example, parliament repealed subsections 231.2 (4) – (6) from the ITA, as it provided a clear legislative path for persons subject to an information request under section 231.2 to appeal the information request.

Parliament also repealed paragraph 231.2(3) (c) and (d). Here is why: “these paragraphs required the judge to be satisfied that it was reasonable to expect that the unnamed persons were not likely to provide the information or would not adhere to the Act, and that the information is not available elsewhere”.

By eliminating the need for the Minister to show that unnamed persons were not in compliance with the ITA, the provision was transformed from what was presumably a provision intended to protect taxpayers, into a provision that authorizes CRA fishing expeditions by allowing requests for information prior to having grounds to suspect non­compliance with the ITA.

That’s bad news for unuspecting taxpayers.   There are now limited taxpayer safeguards in place under section 231.2 of the ITA. When the Minister requests information under section 231.2 of the ITA, the court must determine whether the person or group is ascertainable and that the request is made to verify compliance by the person or persons in the group with any duty or obligation under the ITA.

Ascertainable in the context of section 231.2 of the ITA is given a broad meaning, and the Minister is given some ‘elbow room’ in order to verify compliance with the ITA.

Generally, a CRA auditor only needs to provide affidavit-based evidence to demonstrate that a group is ascertainable, and that a judicial order under section 231.2 of the ITA will provide relevant information in verifying compliance with the ITA.

Learned counsel have challenged orders issued under section 231.2 of the ITA, arguing that the information requested under section 231.2 of the ITA was overly broad, unreasonable and would interfere with privacy rights, with limited success.

In Canada (National Revenue) v. Hydro-Québec, 2018 FC 622, however, the Federal Court rejected the Minister’s section 231.2 request to judicially authorize the disclosure of the identity of Hydro-Québec’s business customers. The Court stated that the tax status of Hydro-Québec’s business customers was not of direct interest, and that the group is not ascertainable within the meaning intended by the ITA.

Further, taxpayers that have dutifully complied with their tax reporting obligations in good faith are susceptible to having their information shared with the Minister during a statute-barred year when the Minister requests information under 231.2 of the ITA.

Lord Denning, the Charter, and Moving Forward.

Lord Denning famously once said that “honest people need not fear: that it will never be used against them. That tax inspectors can be trusted, only to use it in the case of the big, bad frauds.”  This is an attractive argument, but I would reject it. Once great power is granted, there is a danger of it being abused. Rather than risk such abuse, it is, as I see it, the duty of the courts so to construe the statute as to see that it encroaches as little as possible upon the liberties of the people of England”. R. v. I.R.C., Ex parte Rossminster, [1979] 3 All E.R. 385 at 399; rev’d. [1980] 1 All E.R. 80 (H.L.).

And that is where taxpayers may need to invoke the Canadian Charter of Rights and Freedoms (“Charter”) which guarantees the rights and freedoms set out in it, subject only to such reasonable limits prescribed by law as can be demonstrably justified in a free and democratic society to the people of Canada.

Subsection 32(1) of the Charter defines the scope of the Charter’s application. The text of section 32(1) provides “a strong message that the Charter … is essentially an instrument for checking the powers of government over the individual”: McKinney v. University of Guelph, [1990] 3 S.C.R. 229 at 261.

Section 7 of the Charter requires that laws or state actions that interfere with the life, liberty, and security of the person conform to the principles of fundamental justice — the basic principles that underlie our notions of justice and fair process. The principles of fundamental justice include the principles against arbitrariness, overbreadth, and gross disproportionality. 

Bottom line:  Moving forward, the Federal Court of Appeal has heavily scrutinized section 231.2 of the ITA throughout 2020 FCA 85 regarding, among other things, privacy concerns and preconditions to the exercise of power under subsection 231.2(3). However, the Federal Court of Appeal did not engage in a Charter analysis regarding section 231.2 of the ITA.

An aggrieved third party that is subject to the Minister’s exercise of power under subsection 231.2(3) may consider challenging the adherence of section 231.2 to the Charter.

Marco Iampieri B.A., JD, M.B.A. practices tax law in southern Ontario and will be a guest Faculty member at the September 23 CE Summits to provide more information on audit procedures and interesting defences in Canada’s courts.

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