On a day to day basis, investment dealers are involved in transactions and receive client documents that the Canada Revenue Agency (“CRA”) may wish to review for audit purposes. When the CRA wants this information, it either requests it voluntarily or through more formal channels. Investment dealers should be aware, however, that there are limitations placed on what information and records the CRA can require them to produce.
The Income Tax Act (Canada) (the “Tax Act”) contains provisions that give the CRA the power to require the production of “any information or additional information, including a return of income or a supplementary return, or any document” for any purpose related to the administration or enforcement of the Tax Act. A CRA auditor may verbally request information or documents, but taxpayers should only respond to validly issued requirements. For a requirement to be validly issued, it must meet the following criteria:
- It must be served personally or by registered mail on the person for whom the document or information is sought;
- Only the Minister of National Revenue or an authorized delegate has the legal authority to issue a requirement; and
- The notice must stipulate a reasonable amount of time within which to comply. Normally 30 days from the date the requirement is served is deemed “reasonable.”
Where the CRA issues a requirement for information relating to a “named” third party, the financial institution will typically have to provide that information to the CRA, although documents that are covered by solicitor-client privilege will not have to be provided. It is a question of fact whether solicitor-client privilege applies to a specific document.
In situations, however, where the requirement for documents or information relates to “unnamed” third parties, prior-judicial authorization may be required. In Redeemer Foundation v. Minister of National Revenue (Redeemer), the Supreme Court of Canada ruled that the CRA can require a person to produce documents related to “unnamed” third parties without prior judicial authorization where the person is being audited and the information is relevant to the audit. If, however, the CRA requires an individual to produce documents or information related to unnamed third parties, and that individual is not being audited, then prior judicial authorization is required.
A judge may only authorize a requirement relating to an unnamed party where the judge is satisfied by information on oath that the unnamed party is ascertainable and the requirement is made to verify compliance by the unnamed party with an duty or obligation under the Tax Act.
Requirements to provide information issued to an individual who is not under audit may in fact be a part of a larger “fishing expedition” for information. A dealer should not divulge client information unless the CRA has been properly authorized to request such information. Where judicial authorization has been granted, the third party may apply for a review of the authorization within 15 days after service of the notice.
The Supreme Court of Canada has also held that a requirement to produce documents constitutes a seizure. A number of decisions have looked at whether the forced production of documents by an individual that was issued a requirement violated Section 8 of the Charter. In these cases, public policy arguments have been made that requirements run counter to privacy legislation and infringe upon an individual’s reasonable expectation of privacy. The Supreme Court of Canada has held, however, that requirements issued by the CRA are the least intrusive means by which effective monitoring of compliance with the Tax Act can be effected. In Redeemer, the Supreme Court of Canada also added that taxpayers have a very low expectation of privacy in their business records relevant to the determination of their tax liability. Therefore, Section 8 Charter challenges can be made against requirements, but have proven difficult to make out.
When the CRA issues a requirement to produce documents or information there may be limitations placed on the CRA. The CRA’s broad power to require the production of documents or information for any purpose related to the enforcement of the Tax Act are not absolute and can be challenged in certain circumstances. While a challenge to a requirement, such as one based on the failure to obtain prior judicial authorization relating to unnamed third parties or a Section 8 Charter argument, may only delay the CRA from inevitably obtaining the documents or information it is seeking, a financial institution which voluntarily discloses information or documents to the CRA without appropriate challenge would be doing a disservice to its clients.