The Issue

Can the Canada Revenue Agency force an audit of a municipality’s procurement practices?

Answer

Yes. The Federal Court has ordered such an audit in Quebec.

Procurement practices of municipalities have been the subject of investigations and public scrutiny across Canada. In Ontario, for example, the RIM Park Financing Inquiry and the Toronto Computer Leasing Inquiry resulted in a heightened concern over municipal corporate governance and public accountability. The aftermath of these inquiries has led to a more robust governance structure respecting municipal procurement. In Ontario, legislative measures were put in place to strengthen the municipal procurement framework with the introduction of the Municipal Act, 2001. In particular, the statute now requires that municipalities in Ontario adopt policies to govern the procurement of goods and services in an effort to improve the transparency and accountability of municipality procurement responsibilities and minimize municipal exposure to liability.

Despite the changes enshrined in the Municipal Act 2001, there continues to be instances where Ontario municipalities have been the subject of questionable procurement and tendering practices. In April 2011, a Toronto-based engineering and construction company had allegedly used a sophisticated scheme of kickbacks from many of its subcontractors in order to siphon almost $1.8 million of taxpayers’ money from a municipal project in the Town of Gravenhurst. Shortly after the scandal was exposed, all federal and provincial payments associated with this project were frozen, pending an investigation by police and government auditors.

Very recently, similar concerns were raised in municipalities across the province of Quebec. Questionable procurement practices involving a number of Quebec municipalities resulted in a recent Federal Court action filed by the Canada Revenue Agency (the “CRA”). This legal action resulted in 146 municipalities across Quebec being required to reveal all payments made to contractors and consultants between the years of 2007 and 2010. The Federal Court’s order is interestingly broad and does not provide any limitations or direction with respect to the scope of the required information. The order will enable the CRA to scrutinize the detailed financial records as well as analyze the procurement practices of each of the 146 municipalities. Federal auditors have also indicated that this information will enable the CRA to review invoices and revenues declared on contractors and consultants’ tax returns against the payments made by municipalities.

In light of this recent and rather expansive decision by the Federal Court, both the provincial and federal levels of government continue to target improper municipal procurement and tendering practices in an effort to assuage the public’s concerns with respect to the improper use of public funds. Municipalities in Ontario and any companies that have contracts with the municipal sector should take notice of the significance of the Federal Court ruling. It may just be a matter of time before Ontario municipalities are the target of similar investigations. At the very least, the recent events in Quebec are a good reminder to all municipalities of the importance of enshrining comprehensive public procurement policies to ensure the veracity of public sector spending.