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.