SCC deals a blow to tax evaders in Canada | David Rotfleisch
Wednesday, July 03, 2019 @ 2:11 PM | By David Rotfleisch
There has been a concerted global effort by international tax authorities to combat bank secrecy and tax evasion through the use of offshore hidden assets. Foreign banks and their tax lawyers have been fined by the American Internal Revenue Service and by European tax authorities for their involvement in aiding and abetting international tax evasion.
Here in Canada, the attempt to hide information from tax authorities is not necessarily restricted to international bank accounts, as demonstrated by the case of 1068754 Alberta Ltd. v. Québec (Agence de revenu) 2019 SCC 37, which was recently decided by the Supreme Court of Canada (SCC).
Canadian tax authorities, notably the Canada Revenue Agency (CRA), but also provincial tax authorities such as the Québec Revenue Agency (QRA), have extensive audit powers that include the ability to compel information from third parties.
For example, s. 231.2(1) of the Income Tax Act provides general powers to the CRA to require a person to provide information related to a tax audit done in good faith.
These general powers are limited by s. 231.2(2), such that the CRA cannot require the person to provide third-party documents, that is, documents or information relating to one or more unnamed persons.
However, with judicial authorization under s. 231.2(3), the CRA can require third-party documents if the judge is satisfied the person or group is ascertainable and the requirement is made to verify compliance of that person; in this case, the contractor clients of the taxpayer, with any duty or obligation under the Act.
For example, in MNR v. Roofmart Ontario Inc. 2019 FC 506, the taxpayer, Roofmart, sought to prevent the CRA via their Canadian tax lawyers from requiring it to provide information related to third parties, specifically its contractor customers.
The CRA sought this information to verify whether the contractors, who purchased roofing and building supplies from Roofmart, had complied with their duties and obligations under the Income Tax Act and the Excise Tax Act.
The application by the CRA was allowed because the unnamed persons were an ascertainable group and the CRA was conducting a good faith tax audit.
Every Canadian tax lawyer knows that a tax audit is always an uphill struggle for any tax authority. They come into an audit situation with tax returns and in the case of a corporation financial statements and little else.
They then need to verify if the taxpayer has properly reported all income and only claimed allowable deductions with no deliberate or accidental errors or misstatements.
If the taxpayer is operating in a single jurisdiction, take Quebec as an example, obtaining third-party information is straightforward. CRA, or QRA, have the ability to obtain information from third parties, such as a bank, using their basic audit authority.
Where different jurisdictions are involved the issue becomes more complex. Which brings us back to the case of 1068754 Alberta Ltd.
The appeal went all the way to the SCC. National Bank’s Canadian tax lawyers argued the tax appeal based on extraterritoriality.
QRA made a formal demand, under s. 39 of Quebec’s Tax Administration Act, for bank records at a Calgary branch of the National Bank, where the Quebec-based taxpayer maintained an account. Quebec tax authorities were seeking the bank account information to allow them to determine the trust’s residence and therefore to determine if the trust was taxable in Quebec.
Despite Charter arguments made by the taxpayer, the SCC held that the QRA had the authority to request the information and the bank was required to comply.
Importantly, the SCC decision was 9-0, sending a clear signal to the National Bank and all other companies that they cannot hide tax information in another province.
Given the concerted efforts levied by tax authorities worldwide against bank secrecy and the general opprobrium with which tax evasion is now viewed — not as a victimless crime, but as money out of the pockets of every taxpaying Canadian — it would have been extraordinary had a provincial tax authority been found not to have the authority to request taxpayer information from a bank in another province.
Equally important, Justice Malcolm Rowe said that Alberta’s territorial sovereignty was not interfered with by the tax authorities’ communication of a formal demand to the National Bank through one of the bank’s branches in Alberta.
“Nor is there any unfairness in subjecting a corporation that operates in multiple jurisdictions in Canada to a formal demand from a jurisdiction in which it operates,” wrote Justice Rowe.
So when a company that operated in another province is under CRA tax audit and is served with a production order for documents, it must comply.
Bottom line? Tax evasion within Canada is not cool, says SCC. Canadian tax lawyers, take note.
David Rotfleisch, email@example.com, is the founding tax lawyer of Rotfleisch & Samulovitch P.C., a Toronto-based boutique tax law firm. With experience as both a lawyer and chartered professional accountant, he has helped businesses with will and estate planning, voluntary disclosures and tax dispute resolution.
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