Limitations to CRA Audit Powers in Canada (National Revenue) v. Chad: Taxpayer “Reasonable Efforts” and the Minister’s Applications for Compliance Orders

Case Overview

On March 22, 2024, the Federal Court of Canada, in Canada (National Revenue) v. S. Robert Chad,[1] (hereinafter, “Chad”) found that the Respondent, Mr. Chad, met the “reasonable efforts” threshold when attempting to obtain information and documentation (collectively, the “documentation”) of non-residents, and refused to grant a compliance order sought by the Minister of National Revenue (the “Minister”). Additionally, for documents Mr. Chad alleged were privileged, the Court agreed with Mr. Chad’s request to have him submit them to the Court “under seal” to assess whether a continuum of communications between solicitor and client existed. The decision in Chad serves as a study of the Income Tax Act[2] (the “ITA”) compliance order process and is a good reminder of the limits of the Canada Revenue Agency’s (the “CRA”) audit powers in a situation where taxpayers are unable to obtain the documents requested from others outside of Canada.

I. Facts

In Chad, the Minister’s delegates applied for a section 231.7 ITA compliance order to require Mr. Chad to produce documentation pursuant to a CRA related party audit (“RPA”).[3] This CRA audit type examines the compliance of high net-worth individuals and related entities.[4] The documentation sought related to non-resident corporations and trusts in the Bahamas and the Cook Islands.[5]

Most of the entities refused or could not provide Mr. Chad the documentation because he was either not a director of those entities, or the relevant corporations or corporate trustees were struck from each jurisdiction’s corporate registries.[6] Per Bahamian corporate law, this legally prevented current and former directors from acting to provide Mr. Chad with the documentation.[7] The Minister believed Mr. Chad was wrong at law and was disingenuous about being unable obtain the documentation.[8] The CRA did not believe Mr. Chad was unable to obtain the documentation.

The Minister first relied on section 231.1 ITA to request documentation.[9] Although Mr. Chad applied to Federal Court to challenge the reasonableness of CRA’s requests, this was unsuccessful.[10] When the CRA deemed a section 231.1 ITA request to be unsuccessful, the Minister utilized section 231.2 ITA to require Mr. Chad to provide the documentation.[11] Reliance on section 231.2 ITA is a prelude to the Minister potentially applying for a compliance order. Throughout, Mr. Chad informed the CRA that the non-resident entities had refused to provide the documentation.

II. Issues

At issue in the Minister’s section 231.7 ITA application was whether: a) Mr. Chad was required to provide the documentation per section 231.1 or 231.2 of the ITA, b) he subsequently failed to provide the documentation, and lastly, c) the documents were protected by solicitor-client privilege.[12]

III. Court’s Analysis & Decision

In refusing to grant the Minister’s application, the Court relied on the Federal Court of Appeal’s 2022 decision in Miller v. Canada (National Revenue),[13] (“Miller”) where it was held that the onus is on the Minister to prove conditions in section 231.1 ITA are met in order for a compliance order to be granted.

i. Mr. Chad Demonstrated “Reasonable Efforts”

Per the Federal Courts decision in (Canada (National Revenue) v. Dominelli[14] (“Dominelli”), citing the first instance of Miller,[15] the Court had determined a taxpayer must exercise “reasonable efforts” under section 231.5 ITA to acquire information. The Court noted that “reasonableness” depends on context, and referenced examples in paragraph 34 of Dominelli, citing two seminal decisions[16] where the Court denied section 231.7 ITA compliance order applications in instances where a document was destroyed or when the information sought is beyond the taxpayer’s possession and the taxpayer has no power to obtain it (i.e., even if the information may exist).

On a balance of probabilities, the Federal Court was satisfied Mr. Chad made “reasonable efforts” in attempting to obtain the documentation from non-residents, and that it was unlikely Mr. Chad had the right to access the documents due to the trust settlement terms. In the case of one trust, although Mr. Chad had the right to access the documentation, the corporate trustee had long since been struck from the Bahamian corporate registry, thereby preventing disclosure (i.e., with no submissions to the contrary by the Applicant). A similar situation existed with corporate entities, which had since lapsed with their corporate registration.

In citing Canada (National Revenue) v. Amdocs Canadian Managed Services Inc.[17] (“Amdocs”), the Court noted Mr. Chad’s situation was similar, where, on a balance of probabilities, documents were not produced because a taxpayer did not possess the documents and they were not available to that taxpayer. Moreover, sufficient evidence was provided to show “reasonable efforts” were made by Mr. Chad through written requests with corresponding refusals and affidavit evidence, but the documentation remained unavailable or inaccessible by him.

ii. Asset Protection Agreement Entered into Court “Under Seal”

As part of its application, the Minister also sought an asset protection agreement, over which Mr. Chad claimed solicitor-client privilege. Because neither the Minister’s delegates nor the Court ever reviewed the contents of this agreement, the Court noted that per Canada (National Revenue) v. Ghermezian[18] (“Ghermezian”), for documents allegedly protected from disclosure by solicitor-client privilege, Mr. Chad had the onus to prove that a continuum of communications between solicitor and client existed.

Although the Court held Mr. Chad did not discharge his “balance of probabilities” burden of showing how the agreement is a privileged communication, the Court noted that a section 231.7 ITA compliance order for such documents is controversial and asked for those documents to be filed with the Court within 30 days “under seal”. This way, the Court could evaluate if the agreement would be subject to solicitor-client privilege. Per Canada (National Revenue) v. Revcon Oilfield Constructors Incorporated[19] (“Revcon”), Courts are advised to use the “under seal” approach sparingly.

IV. Conclusion

The Courts have ruled that compelling foreign-based information under section 231.2 ITA is only possible if the information is also available in Canada.

The onus is then on both on the Minister (i.e., as the applicant) and on the taxpayer (i.e., as the respondent) in equipping the Court with evidence to show whether the foreign-based information is indeed also available in Canada.

The Court clarified that subsection 231.6(1) ITA is the appropriate process for foreign-based documentation requests, and that foreign-based documentation which is only foreign-based is not subject to a section 231.7 ITA compliance order:

[29] A compliance order under section 231.7 of the Act is only available where the Minister seeks information or documents under section 231.1 and 231.2 of the [ITA]… the [ITA] provides an alternative process to request and require information and documents under section 231.6 if there is foreign-based information or documents involved.

(…)

[31] Courts have yet to definitively rule on whether sections 231.1 and 231.2 apply to foreign-based information or documents. Rather, Courts have only ruled that foreign information or documents which is also available in Canada can be compelled under section 231.2.

(…)

[33] The evidentiary records before the Court in section 231.7 proceedings, rather than judicial reviews, has not led this Court to make a definitive finding on whether a section 231.7 order can compel an individual to produce information or documents that are only foreign-based and not accessible from within Canada. [20] [Emphasis added].

Chad reminds that subsection 231.1(1) ITA is broadly worded and allows access to “…information that is or should be in the books and records of the taxpayer”[21], while paragraph 231.1(1)(b) ITA extends the scope of the Minister’s purview to any matter that would assist the Minister’s delegates in ascertaining the amount of tax payable under the ITA.

Additionally, section 231.2 ITA confers the Minister with broad power to “…require any person to produce any information or any document for any purpose related to the administration of the [ITA]”.[22]

Ultimately, the Minister did not obtain its section 231.7 ITA compliance order, had to pay costs to Mr. Chad, and it was up to the Court to evaluate whether a continuum of communications between solicitor and client existed for the asset protection agreement.

Aside from it being critical to document one’s “reasonable efforts” per section 231.5 ITA when addressing CRA information requests, the decision in Chad also shows there are limits to the Minister’s ability to compel foreign-based documentation, where it is located in a foreign jurisdiction and over which a taxpayer has no control or right of access.