In TLQ 4:2, we reported that online marketplace eBay Canada had lost its bid to stay a decision ordering the production of information on Canadian "PowerSellers" pending appeal. The Federal Court of Appeal has now dismissed eBay’s appeal. It found that the information, located on US servers, is not "foreign-based" because it is readily accessible in Canada.

PowerSellers are eBay users who have, over a certain period of time, sold items totalling a certain amount and are essentially free from complaints. The Canada Revenue Agency (CRA) wanted to determine if PowerSellers in Canada had complied with their income-reporting obligations under the Income Tax Act. Because the CRA did not know the names of the individuals or the value of the goods and services sold on eBay, the Minister of National Revenue obtained a court order pursuant to Section 231.2(3) of the act that required eBay Canada to produce information on Canadian PowerSellers.

eBay Canada brought an application under the act for a review of that order. It asserted it neither owned nor possessed information on the PowerSellers. Rather, it asserted that the information was maintained by eBay AG and stored electronically on computer servers, located in the US and owned by eBay Inc., a US corporation. eBay Canada contended that the information sought was "foreign-based" and was therefore subject to Section 231.6, rather than Section 231.2.

Section 231.6 deals with requirements for the production of "foreign-based information or document," which is defined as "any information or document that is available or located outside Canada."

Section 231.2 allows the Minister to require a person to produce information relating to unnamed persons, if he first obtains a court order. It was enacted after the Supreme Court of Canada’s decision in James Richardson & Sons, Limited. In that case, the Supreme Court interpreted the predecessor section restrictively, as only permitting the Minister to obtain information on specific persons if their tax liability is the subject of a genuine and serious inquiry. That predecessor section is akin to Section 231.6, in that neither provision specifies a process for obtaining information on unnamed persons. If Section 231.6 applied in the eBay case, the Minister would arguably have to satisfy the higher threshold in Richardson and would not be able to go on fishing expeditions.

At issue was whether Section 231.2 of the act permitted an order that would require a resident of Canada to provide information located outside Canada, but accessible within Canada.

On review, the lower court judge affirmed his order. While he agreed that this information was not "owned" or controlled by eBay Canada, he found that eBay Canada had access to this information and, indeed, accessed and used it in the course of its business operations in Canada. He reasoned that the location of the servers was irrelevant since, in today’s world, electronic information "cannot truly be said to ‘reside’ in only one place or be ‘owned’ by only one person. The reality is that the information is readily and instantaneously available to those within the group of eBay entities in a variety of places."

"Foreign-Based" or Not?

The Federal Court of Appeal upheld the lower court decision. It found that that the information was located in Canada because eBay Canada could readily access it and use the information as an integral part of its business, which was carried on in Canada. Therefore, the CRA could seek production under Section 231.2, instead of Section 231.6.

The Appeal Court considered the reasons for the enactment of Section 231.6 and concluded that Section 231.6 was enacted to make it "easier for the Minister to obtain information about cross-border transfer pricing." An order for production cannot be enforced against a non-resident, but subsection 231.6(2) enables the Minister to serve a notice on a resident to obtain documents located outside Canada. Under subsection 231.6(5), a person may apply for review of the production requirement on the grounds that it is "unreasonable." This suggests that Parliament was concerned that "it could be unduly onerous for a person to be required to produce material located outside Canada’s and in the possession of another person."

Nevertheless, the Appeal Court concluded that this policy concern was not applicable in eBay Canada’s appeal. eBay Canada could obtain the information sought with a "click of a mouse." The information was as easily accessible as documents that were located in the offices of eBay Canada. It made no sense to consider the information to be located outside Canada as a matter of law for the purpose of Section 231.6. Writing for the court, Mr. Justice Evans then stated that it would be extremely formalistic to hold that the information was not located in Canada until the simple task of downloading it onto a computer located in Canada occurred.

The Appeal Court concluded that the lower court judge’s application of the law to the facts was not vitiated by palpable and overriding error. He had properly taken into consideration the fact that eBay US and eBay AG had granted eBay Canada access to information regarding Canadian PowerSellers, and eBay Canada had used this information for business purposes.

McCarthy Tétrault Notes:

A broader meaning for "located"

With respect, the latest Federal Court of Appeal decision is problematic. It suggests that information or documents physically situated outside of Canada might now be considered "located" in Canada. The information may have been "available" through electronic means, but certainly was not located or stored in Canada. What if the information had been recorded only on documents in paper form and the documents were physically located in the United States? If eBay Canada had the use of — or the right to use — the information, and sent employees to view the documents in the United States, could it be said that the information or documents were located in Canada? Such documents likely could not even be said to be "available" in Canada, let alone "located."

No answers regarding the breadth of Section 231.2 and the scope of demands for information

The Federal Court of Appeal considered the information to be located in Canada, and therefore, not "foreign-based." As such, it was not necessary to deal with the question of whether the scope of Section 231.2 extends to include demands for "foreign-based information" or whether Section 231.6 permits a "fishing expedition" for information or documents relating to unnamed persons.

More audits of online vendors?

As a result of this ruling, it is anticipated that:

  • the CRA will seek more orders requiring website operators, who permit the sale of goods or services through their sites, to provide information on the identity of their customers; and
  • the number of CRA audits of individuals and companies selling online will increase and the CRA will aggressively pursue those who have not properly reported income from online sales.