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Gone Fishing: An Analysis of CRA Powers and Policies Relating to the Use of Fishing Expeditions in Information Gathering

ABSTRACT Recent case law, most notably the eBay and Redeemer Foundation cases, has brought attention to the CRA’s use of provisions of the Income Tax Act that allow it to seek information regarding unnamed taxpayers. Not surprisingly, the CRA was accused of embarking on a fishing expedition in which they assumed the taxpayers about whom it sought information were failing to comply with the Act. Despite the prominence of such cases, the provisions relied upon are just one way by which the CRA can seek out information on taxpayers that is not reported by either the taxpayer himself or a third party that is under a reporting obligation.

This paper seeks to identify the various methods used by the CRA to obtain information that is not otherwise required to be reported, and why such efforts to obtain information appear objectionable from the point of view of a taxpayer. In doing so, current law as well as CRA policy will be examined in order to show not only the legal limits of the CRA’s investigative abilities, but also the actual practices of the CRA as described in the Investigations Manual. Proposed changes to the Act are also noted in order to balance the need of the CRA to obtain information to use in enforcing the Act with the taxpayer’s expectation of privacy and fairness.

INTRODUCTION ......................................................................................................................2 WHAT IS A “FISHING EXPEDITION”?...................................................................................3 DISTINCTION FROM OTHER FORMS OF VERIFICATION..................................................4 DISCOVERY .............................................................................................................................6 USE OF PUBLIC INFORMATION............................................................................................6 Examples of Public Information Use .......................................................................................7

SECTION 231.2: THE MINISTER’S FISHING LICENSE.........................................................9 James Richardson..................................................................................................................10 Sand Exploration...................................................................................................................10 Greater Montréal Real Estate Board ......................................................................................11 eBay Canada .........................................................................................................................12 Redeemer Foundation............................................................................................................14 Current State of Subsection 231.2(3) .....................................................................................17 Limits to Subsection 231.2(3)................................................................................................17 Unnamed Persons Not Under Investigation........................................................................17 Investigations Becoming Criminal Investigations ..............................................................18

FISHING EXPEDITIONS INVOLVING OTHER GOVERNMENTS......................................18 Provincial and Municipal Governments.................................................................................19 Communication with Federal Government Departments and Crown Corporations .............19 Communication with Provinces and Municipalities ...........................................................20

International Fishing Expeditions ..........................................................................................21 Exchange of Information with Other Countries..................................................................21 Exchange of Information with the United States ................................................................22 Automatic, Spontaneous, and Specific Exchanges of Information......................................23

Section 241 Limits on Information Exchange with Other Governments.................................24 ARE FISHING EXPEDITIONS JUSTIFIABLE?......................................................................25

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Privacy Concerns ..................................................................................................................25 Revenue Collection and Future Reporting Requirements .......................................................27

OTHER COUNTRIES ..............................................................................................................28 PROPOSED MODIFICATIONS...............................................................................................29 OECD Model Tax Information Exchange Agreement............................................................29 Re­implementation of Paragraph 231.2(3)(c).........................................................................30 Repealing Subsections 231.2(2) and (3).................................................................................31 Requiring Notice to Taxpayer................................................................................................32

CONCLUSION.........................................................................................................................33

INTRODUCTION

To ensure the integrity of Canada’s self reporting income tax system, the Income Tax Act 1 provides the CRA with various methods of obtaining information beyond what is normally found within a taxpayer’s tax returns. 2 The Act provides for, among other things, the ability of the CRA to audit the records of a business or individual, 3 to seek a warrant to enter an individual’s home, 4 and to conduct an inquiry into the affairs of a taxpayer. 5

Few would dispute that these powers are necessary for the CRA to obtain information in the course of an investigation. However, one certain act on the part of the CRA appears to be met with disdain by taxpayers. The term “fishing expedition” is often thrown at tax authorities in an almost insulting manner, 6 painting the picture of an authoritarian revenue agency that works on the assumption that the taxpayer has done something illegal until the taxpayer proves otherwise. Even those less predisposed towards feeling sympathy for taxpayers can perhaps understand why these so­called fishing expeditions crate a sense of unease among taxpayers. For the most part, the CRA’s ability to conduct such investigations is due to section 231.2, which is the provision that requires taxpayers to provide documents or information to the CRA upon request.

Despite the importance of section 231.2 and its role in authorizing fishing expeditions, commentary tends to be limited to case comments about decisions involving the section. 7,8 Articles that comment on section 231.2 often do so in a limited manner, and due to the recent release of several decisions, do not take into account the most recent cases. Perhaps due to the volume of case law on the issue, it appears that the literature lacks an analysis of the current situations in which section 231.2 will apply. More detailed consideration of unnamed persons requirements can be found in the American literature. 9 Commentary regarding fishing

1 RSC 1985, c. 1 (5th Supp.), as amended (herein referred to as “the Act”). Unless otherwise stated, statutory references in this paper are to the Act. 2 Howard J. Kellough, “Information Requirements and Privilege Under the Act,” in 2003 British Columbia Tax Conference (Toronto: Canadian Tax Foundation, 2003) tab 2, at 1. 3 Section 231.1. 4 Section 231.3. 5 Section 231.4. 6 See, for example, Andrew Osterland and Nicholas Rummell, “IRS launches PE fishing expedition,” Financial Week, November 12, 2007, at http://www.financialweek.com/apps/pbcs.dll/article?AID=/20071112/REG/ 711120306/1002 and Richard Koman, “Judge slams FBI fishing expedition at Amazon,” November 28, 2007, (available on the Web at http://government.zdnet.com/?p=3539). 7 Margaret Nixon, “The Minister’s Power to Issue Requirements: Minister of National Revenue v. Greater Montreal Real Estate Board” (2008) vol. 15, no. 4 Tax Litigation 954­59. 8 David E. Spiro, “Charity Donor Lists: Redeemer Foundation v. Canada (National Revenue)” (2008) vol. 16, no. 1 Tax Litigation 970­74. 9 Lauren Watson, “IRS Third­Party Administrative Summonses v. The Right to Privacy: The Case of Barter Exchanges” (1984) vol. 35, no. 1 Hastings Law Journal 187­232.

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expeditions in an international context is somewhat more substantial, and can be found in both various OECD reports and academic articles. 10 However, the Canadian tax knowledge base lacks a comprehensive examination of the various situations in which a taxpayer might find himself the target of a CRA fishing expedition that takes into account use of public information, information obtained via powers granted by the Act, and information obtained from international sources. In addition, there does not appear to be any commentary examining the CRA Investigations Manual, and its role in how the CRA seeks taxpayer information. Recent cases have arguably given the CRA too much power to demand information; therefore, as a final point, proposals for limiting the scope of the CRA’s ability to require documents and information will be made in an attempt to balance the CRA’s need for information with the taxpayer’s right to privacy.

WHAT IS A “FISHING EXPEDITION”?

Despite its frequent use in reference to actions of tax authorities, a “fishing expedition” is not a concept unique to tax. However, all definitions seem to indicate that it is, in a sense, an investigation for the purposes of finding out whether there is a need to investigate. Black’s Law Dictionary defines a fishing expedition as “[a]n attempt, through broad discovery requests or random questions, to elicit information from another party in the hope that something relevant might be found”. 11 The Federal Court 12 has accepted the definition used by Lord Esher MR in Hennessy v. Wright (No. 2), a libel case, in which Lord Esher stated that

the plaintiff wishes to maintain his questions, and to insist upon answers to them, in order that he may find out something of which he knows nothing now, which might enable him to make a case of which he has no knowledge at present. 13

While the Federal Court accepted this definition in the context of a discovery, a discovery can arguably be seen as analogous to an investigation into the affairs of a taxpayer. What both the Black’s Law Dictionary and Hennessy definition have in common is the idea that it is inappropriate for a questioner to direct questions to someone (a taxpayer, in the present case) in order to prove allegations about which the questioner does not yet have a basis for suspecting. This issue is distinct, for example, from the CRA requesting supporting documents for a transaction entered into by a taxpayer; in such a case, the CRA is already aware of the outcome and wishes to ensure it is appropriate. A fishing expedition instead assumes there may be an “outcome” of some sort, and then seeks information to determine whether there should be an investigation into the outcome and the means by which it was achieved.

To apply the above definitions in the context of the Act and its enforcement, a fishing expedition would appear to be a situation in which revenue authorities seek additional information from various sources over and above simply determining the particulars of information that has been voluntarily supplied to that particular revenue authority by the taxpayer in question. Such a definition takes into account that there is some legitimacy in requiring a taxpayer to explain details of transactions voluntarily reported, but that seeking information, from the taxpayer or another source, about possibly non­existent transactions not

10 Sara K. McCracken, "Going, Going, Gone...Global: A Canadian Perspective on International Tax Administration Issues in the ‘Exchange­of­Information Age’" (2002) vol. 50, no. 6 Canadian Tax Journal 1869­1903. 11 Brian A. Garner, ed., Black’s Law Dictionary, 9th ed. (St. Paul, MN: Thomson West, 1999) at 668. 12 Intel Corp. v. 3395383 Canada Inc., 2004 FC 218. 13 (1980), 24 Q.B.D. 445 at 448.

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reported by the taxpayer strays into more exploratory territory. It also takes into account, described in greater detail below, that various governments’ revenue authorities may share and seek information with one another.

DISTINCTION FROM OTHER FORMS OF VERIFICATION

In order to verify taxpayers’ returns, the CRA engages in numerous methods of verification. This may take the form of reporting requirements or document matching conducted by the CRA.

The Act contains numerous examples of reporting requirements. For example, subsection 153(1) requires an employer to remit taxes to the Receiver General. During the course of remittance, information regarding the taxpayer’s wages or salary will also be transmitted. Similarly, subsection 237.1(7) requires the promoter of a tax shelter to report information about taxpayers that invest in the tax shelter. Implementation of reporting requirements in tax statutes significantly reduces underreporting of income, and thus is a valuable tool in any system of self­ assessment, 14 and Canada is not alone in implementing such requirements. 15

In addition, a comprehensive matching system is also used to minimize non­compliance with the Act. The matching system implemented by the CRA compares the returns submitted by taxpayers with the information reported by their employers or banks, which can uncover omissions or errors of the taxpayer that filed the return. 16 This matching process has been found to be an effective means of dealing with underreporting, whether intentional or inadvertent. 17

Given that there is already a significant volume of information flowing from taxpayers and third parties to the CRA, one might question why a search for additional information is objectionable; if a taxpayer’s employer is already reporting their salary and payroll deductions, what harm can there be in determining whether the taxpayer earns additional income through online retailing? This is an understandable query; however, engaging in fishing expeditions for additional information should be seen as a form of investigation distinct from routine reporting requirements and matching systems.

Routine exchange of certain forms of information, such as information that is already subject to reporting requirements, tends to be used for general verification purposes, and is information that would, in all likelihood, be reported by the taxpayer even without the reporting requirement. 18 In addition, since individuals are assumed to know the law, they presumably accept an offer of employment with the knowledge that their employers will be reporting their earnings to the revenue authorities.

In contrast, a fishing expedition is an attempt at obtaining information related to a particular event or transaction; rather than being collected for verification purposes, seeking information by engaging in a fishing expedition appears to presuppose that there is some degree of non­compliance already taking place. It has been stated that the reason routine reporting appears less invasive is that reporting “does not correspond to a specific inquiry on a known taxpayer, and hence has no particular investigative function.” 19 While this comment was made in

14 Martin A. Sullivan, “Treasury Expects Billions from Credit Card Reporting Proposal” (2007) vol. 115, no. 12 Tax Notes 890­92 at 890. 15 Steven A. Dean, “The Incomplete Global Market for Tax Information” (2008) vol. 49, no. 3 Boston College Law Review 605­672, at 616. 16 Canada, Office of the Auditor General of Canada, Report of the Auditor General of Canada to the House of Commons (Ottawa: Office of the Auditor General of Canada, November, 2005), 3:8. 17 Ibid., at 3:6. 18 McCracken, supra note 10, at 1896­1897. 19 Ibid.

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reference to automatic information exchange under a tax treaty or other information sharing agreement, it applies equally well to routine domestic reporting.

Where information regarding certain transactions or customers of a third party is requested, information reporting takes on a more investigative character. While it is important to provide appropriate resources to the CRA to allow the enforcement of the Act, the transition from a passive recipient of information to an active seeker of it may cause concern amongst taxpayers. Steven Dean distinguishes between what he refers to as “the two principal techniques tax authorities employ to ensure taxpayer compliance: observation and investigation” 20 with the investigatory role more suited to taking action against non­compliant taxpayers. In the American context, it has been said that the increased level of enforcement by the Internal Revenue Service (IRS) in attempting to uncover non­compliance

should strike a measure of fear into the heart of the general taxpaying public. Not fear driven of a guilty conscience, but fear that overzealousness on the part of the [Internal Revenue] Service will be directed at honest taxpayers rather than the intended targets. 21

As an example, an attempt to obtain information from credit card companies regarding taxpayer spending might very well uncover taxpayers whose spending and payment habits far exceed what could be expected based on their reported income. However, can the additional revenue obtained from identifying such persons justify granting the CRA access to records of the taxpayers included in the request for information that have not engaged in wrongdoing? Does the end justify the means?

As noted above, the Act contains numerous provisions that impose a reporting requirement on various parties; these provisions do not include imposing a reporting requirement on, for example, the owners of an online marketplace to report vendor and purchaser information. However, through the use of subsection 231.2(2), the CRA may nonetheless be entitled to obtain such information; nothing prevents the annual use of this provision in order to make regular requests for information from the third party. The result of this would effectively be the creation of a reporting requirement applied to a situation in which the Act does not otherwise impose a reporting requirement. Presumably, if Parliament desired the CRA to receive information from online marketplaces, a reporting requirement would have been drafted and legislated into existence. The absence of any such requirement is cause to question whether such third party requests should be entertained and, if so, under what circumstances. Fishing expeditions, therefore, may be subject to criticisms from practitioners based on the fact that compliant taxpayers may have their privacy sacrificed for the purpose of identifying non­ compliant taxpayers, and that the effect of allowing such means of obtaining information results in the creation of reporting requirements where that are not specifically authorized by the Act. However, it may also be the case that a fishing expedition that uncovered suspected non­ compliance may serve as grounds for future introduction of reporting requirements pertaining to such a situation. Put another way, when engaging in fishing expeditions in certain industries, trades, or activities generates revenue and exposes non­compliance, it may serve as evidence for including relevant reporting requirements in the Act to avoid the time and expense of having to seek judicial authorization.

20 Supra note 15, at 618. 21 Richard Lavoie, “Analyzing the Schizoid Agency: Achieving the Proper Balance in Enforcing the Internal Revenue Code” (2008) vol. 23, no. 1 Akron Tax Journal 1­31, at 2.

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Despite the distinction from other forms of compliance verification, the CRA regularly engages in fishing expeditions, and, in some cases (such as subsection 231.2(2)), is explicitly permitted to do so by the Act. In some situations, such as the use of public information, the fact that information is obtained via a fishing expedition does not appear to be particularly offensive, for reasons described below. However, certain other means of obtaining information, such as the issuance of requirements to provide information on unnamed persons, seem much more invasive.

DISCOVERY

While detailed examination of the issues involved in litigation discovery are beyond the scope of this paper, the concept of fishing expeditions once tax disputes reach the litigation stage warrant brief consideration.

When disputes reach the discovery stage, a fishing expedition may take the form of asking questions to elicit information outside the scope of the issue for which discovery is taking place. Proper questions during discovery should be correlated with the issues being dealt with in the proceeding. 22 Whether something is at issue in the proceedings can generally be determined by the parties’ pleadings, though this should not be interpreted too narrowly, as seemingly unrelated questions may lead to relevant facts. 23 Specific rules pertaining to the scope and conduct of discovery are addressed throughout the Tax Court of Canada Rules (General Procedure). 24

USE OF PUBLIC INFORMATION

The CRA’s position with regards to public information is that any information available to the general public can be used in the course of an investigation. The only condition that CRA policy places upon this is that public information must be obtained in the same manner in which a member of the public would obtain that information; for example, the CRA Investigations Manual notes that they must accept the same costs and time frame as a member of the public would. 25

In determining whether information is public information, the CRA considers the nature of the body to which the request is made, and identifies municipalities and federal and provincial agencies and departments as potential holders of public information. 26 While the precise nature of what constitutes public information will likely differ depending on the recipient of the CRA request, the CRA notes that bylaws or statutes pertaining to the holder of the information should indicate whether public disclosure is authorized. 27 The CRA takes the position that certain documents and records, such as government grants and contracts or property assessments, will generally be public information. 28

In cases in which the CRA seeks public information that is “bulk information” certain steps are suggested. The Investigations Manual states that “bulk information” is “for use in

22 A. Christina Tari, Federal Income Tax Litigation in Canada (Markham, ON: Butterworths, 2002), at 8.81. 23 Ibid., at 8.83. 24 SOR/90­688a at sections 78­118. 25 Canada, Canada Customs and Revenue Agency, Investigations Manual, Part 2 ­ Tax and GST: Chapter 11 – Requirement for Information and Production of Documents (Ottawa: Canada Customs and Revenue Agency, February 26, 2002), 21. 26 Ibid., at 22. 27 Ibid. 28 Ibid.

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identifying compliance of groups of taxpayers;” 29 presumably with regards to public information, this capture requests for information that is in fact public information, but a volume of information that is unlikely to actually be sought by a member of the public. Where such information is sought, contact with public officials should be approved by the Tax Services Office (TSO) Director or his designate. 30 Once approved, it is necessary to determine the means of transferring the information if it is determined to be public. 31 Where it cannot be determined if the information is public, the Investigations Manual states that the Director General, Audit Directorate should be contacted, who may advise whether to proceed through an information sharing agreement of through access to information legislation. 32

It is important to note that despite the fact that public information may very well deal with unnamed persons, collection of such information should not be subject to subsection 231.2(2), which would require judicial authorization. This is based on the opening words of the provision, which state “[t]he Minister shall not impose on any person...a requirement under subsection (1) to provide information or any document relating to one or more unnamed persons” [emphasis added]. Where information is within the public domain, and can be acquired simply by taking it or making a request for it, it is clear that the Minister has not imposed on any person an obligation to provide such information. The CRA appears to take the same position, as the Investigations Manual states that where information is found not to be public information, it will be necessary to obtain authorization under subsection 231.2(3). 33 Based on this, it can be inferred that the CRA does not view information pertaining to unnamed persons to be subject to subsections 231.2(2) and (3) where the information is available to the public at large.

Examples of Public Information Use

There appear to be few examples of CRA use of public information, possibly because such use does not lead to the volume of litigation that arises from attempts to access non­public information. However, there are some situations in which the CRA has made use of public records. For example, the CRA has acknowledged using neighbourhood income statistics as a comparison to tax returns filed by sole proprietors. 34 This is a function of “data matching”, which compares various pieces of taxpayer data in order to assess compliance; the statistics involving sole proprietors also link those taxpayers to their spouses. 35 Such information would allow an examination as to whether an individual is living in a wealthier area than their reported income would suggest they could afford. 36 According to the OECD, the CRA uses more that 200 criteria that are matched to determine possible non­compliance with the Act, such as examining landlords’ property tax assessments and interest deductions. This allows the CRA to arrive at a value on the property, which will allow an approximation of appropriate rental income on that property. Where the landlord claims a loss on the rental property, such data matching will allow

29 Ibid., at 21. 30 Ibid., at 22. 31 Ibid. 32 Ibid. 33 Ibid., at 21. 34 Organisation for Economic Co­operation and Development, Compliance Risk Management: Managing and Improving Tax Compliance (Paris: OECD, 2004) (available on the Web at http://www.oecd.org/dataoecd/44/19/ 33818656.pdf) at paragraph 108. 35 Ibid. 36 Alan Macnaughton, review of Organisation for Economic Co­operation and Development, Centre for Tax Policy and Administration, Compliance Risk Management: Managing and Improving Tax Compliance, in Tim Edgar and Alan Macnaughton, "Current Tax Reading" (2005) vol. 53, no. 2 Canadian Tax Journal 589­604, at 603.

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the CRA to assess whether the loss was a result of the landlord’s failure to rent at the market rate. 37 The ultimate decision is therefore based on a combination of the landlord’s interest deductions as reported to the CRA and property taxes that may be obtained from the jurisdiction of the rental property. The CRA has also sought details from the Department of Fisheries and Oceans regarding the values of the commercial fisheries, which would allow a comparison with the incomes reported by fishermen in the area. 38 It has also been noted that an investigation can be commenced based on “[n]ewspaper reports, public records, observation of styles of living, or any unusual circumstances that attract attention.” 39

The CRA’s use of public information is not necessarily limited to public information located within Canada. The CRA has previously used public information obtained in Barbados to identify and contact the Canadian directors and shareholders of Barbados IBCs. 40,41 A TSO Director has acknowledged that use of international public information may serve a particularly important purpose for the CRA where the foreign based public information is located in a non­ treaty country, as it may be the only information available to the CRA. 42

In addition to both domestic and international public information, the CRA has also made use of public information pertaining to electronic commerce. The CRA created “Internet Business Audit” projects in order to identify tax avoidance or evasion through the use of internet businesses. 43 Other OECD countries have investigated internet commerce by searching for website registration data or contact information, 44 and in some cases have even gone as far as purchasing goods to determine the jurisdiction from which e­mail receipts are sent or to obtain information about the seller’s bank account to which payment is directed. 45

While it may be surprising to some that CRA investigators may actively be searching for the assessment value of their home, or the true owner of a website, there does not appear to be anything objectionable to such searches. Though taxpayers may have valid claims to privacy in other situations, the fact that such information is already a matter of public record suggests that the persons to whom the public information pertains should have no privacy expectation when it comes to that information. If John Doe’s neighbour can obtain an estimated value of John Doe’s house through a municipal property assessment agency, to be used however he pleases, conceptually there is no compelling reason why the CRA should not also be entitled to obtain the same information. Though this might constitute a fishing expedition in that it involves the CRA searching without looking for anything in particular, the fact that anyone else could conduct a similar search for any reason should undermine criticism of such information gathering techniques.

37 Ibid., at paragraph 114. 38 Supra note 34, at paragraph 176. 39 Kathleen M. O'Neill, Nancy E. Hopkins, Stephen S. Heller, Peter R. Stephen, and Jack Bernstein, “Current Tax Issues: An Update," in Report of Proceedings of the Forty­Sixth Tax Conference, 1994 Conference Report (Toronto: Canadian Tax Foundation, 1995), 2:1­150, at 2:120. 40 Doug Connell and Sandra Goldberg, "Barbados as a Base for Offshore Activities," in Report of Proceedings of the Fifty­Fourth Tax Conference, 2002 Conference Report (Toronto: Canadian Tax Foundation, 2003), 19:1­20, at 19:13 and footnote 84. 41 Carl Steiss, "International Tax Developments," in Report of Proceedings of the Fifty­Fourth Tax Conference, 2002 Conference Report (Toronto: Canadian Tax Foundation, 2003), 2:1­12, at 2:11. 42 Carole Gouin, "International Tax Compliance: Revenue Canada's Perspective," in Report of Proceedings of the Forty­Eighth Tax Conference, 1996 Conference Report (Toronto: Canadian Tax Foundation, 1997), 40:1­9, at 40:4. 43 Organisation for Economic Co­operation and Development, Compliance Risk Management: Progress with the Development of Internet Search Tools for Tax Administration (Paris: OECD, 2004) (available on the Web at http://www.oecd.org/dataoecd/44/15/33818593.pdf) at paragraph 15. 44 Ibid., at paragraph 26. 45 Ibid., at paragraph 27.

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SECTION 231.2: THE MINISTER’S FISHING LICENSE

Much analysis of CRA fishing expeditions is focused on the section 231.2 requirement to provide documents or information. There is a large volume of jurisprudence on the provision, particularly where the information sought is in regards to unnamed persons. Subsection 231.2(1) contains a broad authority for the Minister to seek information. Paragraphs 231.2(1)(a) and (b) allow the Minister to seek any information or document from any person, where that information or document is sought for “any purpose related to the administration or enforcement of this Act”. 46 The only restriction in subsection (1) is that it is subject to subsection (2), which requires the Minister to obtain judicial authorization under subsection (3) before requiring a taxpayer to provide the Minister with information regarding unnamed persons.

Subsection 231.2(3) states that on an ex parte application, a judge may authorize the CRA to serve a third party with a requirement to provide information on unnamed persons. The ex parte nature of this initial application means that the third party from whom information is being sought is neither present upon the hearing of the application, nor notified that an application is being made. The application, therefore, is based upon the satisfaction of the judge that the persons are ascertainable and that the requirement to provide information is sought to ensure the persons are in compliance with the Act. 47 Because the application is ex parte, the judge’s decision is not based on any information or evidence presented by the third party.

Disputes pertaining to section 231.2 are governed by section 18.1 of the Federal Courts Act. 48 If the CRA is granted authorization under subsection (3), subsection (4) requires that the authorization be served along with the notice required in subsection (1). This provision requires that where the CRA issues a request for information, it be served to the person personally or by registered or certified mail.

Unless the taxpayer had previously declined CRA requests for information prior to judicial authorization, the notice served under subsection 231.2(1) and the judicial authorization granted under subsection 231.2(3) may be the first indication to the third party that there is any CRA investigation in progress. The third party, at this point, must decide to either cooperate with the CRA by allowing an examination of the information, or seek judicial review of the authorization that was granted under subsection (3). If the third party seeks judicial review of the authorization, subsection (5) requires the third party to do so within 15 days of being served with the notice and authorization under subsection (1), though it may be possible to seek an extension under section 18.2 of the Federal Courts Act. 49 This application for review is made to the judge who authorized the request under subsection (3) or, if that judge is unavailable, to another judge of the issuing court. 50

Once the application is heard, subsection 231.2(6) specifies the power of the judge hearing the application for review under subsection (5). The judge may cancel the authorization if the judge is of the opinion that paragraphs 231.2(3)(a) and (b) have not been met, or uphold or vary the authorization if of the opinion paragraphs (3)(a) and (b) have been met.

46 Subsection 231.2(1). 47 Paragraphs 231.2(3)(a) and (b). 48 R.S., 1985, c. F­7. 49 Ed Kroft and Dan Lipetz, “How Does a Taxpayer Contest a Requirement for Information?” (2000) vol. 8, no. 2 Tax Litigation 502­03 at 502. 50 Subsection 231.2(5).

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Though there is a large amount of case law on the subject, there are five key cases that have shaped the CRA’s ability to request information pertaining to unnamed parties, and have led to the amendments resulting in the current form of subsection 231.2.

James Richardson

James Richardson & Sons, Limited v. MNR 51 was decided under section 231(3) of the Act, which has since been repealed. The section, which was an early version of section 231.2, stated that for purposes of administering the Act, the Minister may require from any person any documents or information. However, the subsection, which is similar to current subsection 231.2(1), did not contain a provision for acquiring information from unnamed persons.

The appellant was a commodities futures broker that had agreed to participate in a study by the Department of National Revenue. This participation involved submitting to the Department monthly statements of the appellant’s customers, though the statements contained account numbers only; there was no way to identify the customers. The Department later demanded a complete list of the customers and their account numbers, in order that they could be matched with the redacted statements being provided by the appellant.

The Federal Court ­ Trial Division 52 and Federal Court of Appeal 53 both found that the Department was carrying out a genuine and serious inquiry into the affairs of the unnamed customers. The comment that it was a “genuine and serious inquiry” originated in Canadian Bank of Commerce v. AG (Canada), 54 a case also involving information seeking in which both the appellant and the Attorney General agreed there was a genuine and serious inquiry, 55 though there was no indication that this was a prior condition that must be met before attempting to acquire the information.

The Supreme Court held that, as drafted, the provision would give the Department very broad powers without necessarily requiring the Minister to believe that the Act had not been adhered to. 56 Based on Canadian Bank of Commerce, the Court found that it “is only available to the Minister to obtain information relevant to the tax liability of some specific person or persons if the tax liability of such person or persons is the subject of a genuine and serious inquiry” 57 and that it could not be used to “check generally” into the appellant’s clients 58 or “to provide the random sample for a check on general compliance by the entire class” of commodities traders. 59 The results of James Richardson were, therefore, that the taxpayers the Department was ultimately seeking information about could not be unnamed persons; they had to be specified. In addition, the Court took the agreed fact of the parties in Canadian Bank of Commerce that there was a genuine and serious inquiry and made it a requirement of the provision.

Sand Exploration

51 84 DTC 6325 (SCC). 52 James Richardson and Sons Limited v. MNR, 81 DTC 5232 (FCTD). 53 James Richardson & Sons, Limited v. MNR, 82 DTC 6204 (FCA). 54 62 DTC 1236 (SCC). 55 Ibid., at 1238. 56 Supra note 51, at 6329. 57 Ibid., at 6330. 58 Ibid. 59 Ibid.

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Following the decision in James Richardson, section 231.2 was enacted to address the Supreme Court’s narrow interpretation of subsection 231(3). 60 The provision was tested in MNR v. Sand Exploration Limited, 61 with the Court concluding that the revised requirement to provide documents or information gave the Minister the ability to seek information on unnamed third parties. The revised provision therefore effectively legislatively overturned James Richardson by explicitly allowing what the Supreme Court did not. While the facts of the case are straightforward – it dealt with the unnamed purchasers of seismic data that the Minister alleged was overvalued – Rothstein J. provides a detailed analysis of the workings of section 231.2. The Minister had obtained an order requiring the respondent to produce a list of the names of the data purchasers, along with the dates of their purchases, with the intention of obtaining all other information from the purchasers themselves, presumably through the use of subsection 231.2(1).

The respondent argued that the Court was bound by James Richardson, and that while the Minister could seek information about unnamed persons, a list of names was outside the scope of the section. 62 This was the conclusion reached in R. v. Bruyneel, 63 in which it was decided that the Minister could not use the provision to seek the names of unnamed persons. In disagreeing with the taxpayer that section 231.2 could not compel the respondent to produce a list of names, Rothstein J. noted that both James Richardson and Bruyneel were decided under the previous section 231(3), and that section 231.2 was specifically drafted to allow the Minister to seek names of third parties. 64 As a result, James Richardson would be decided differently under section 231.2 than it was under subsection 231(3).

Though deciding the case in favour of the Minister, Justice Rothstein agreed with the respondent that “a procedure by which the Minister may require third parties to disclose information about unnamed taxpayers is intrusive.” 65 Because of the intrusive nature of the section and the ex parte application provided for in subsection 231.2(3), Rothstein J. states that the Minister must act with good faith and ensure “full and frank” disclosure. 66

Greater Montréal Real Estate Board

Despite the Minister’s victory in Sand Exploration, subsection 231.2(3) underwent another revision following that decision. At the time of Sand Exploration, paragraphs 231.2(3)(a)­(d) defined the requirements necessary for a judicial authorization to seek information regarding unnamed persons. The decision in Sand Exploration was based, at least in part, on the fact that paragraphs (c) and (d) were met by the Minister. These paragraphs required the judge to be satisfied that it was reasonable to expect that the unnamed persons were not likely to provide the information or would not adhere to the Act, and that the information is not available elsewhere. After paragraphs (c) and (d) were repealed, all that remains for the Minister to show is that the unnamed person or persons are ascertainable, 67 and that the information is sought to ensure the unnamed persons are in compliance with the Act. 68 This revision presents a very low burden for the Minister to meet. By eliminating the need for the Minister to show that unnamed persons were not in compliance with the Act, the provision was transformed from what

60 Canadian Tax Reporter Commentary (North York, ON: CCH Canadian) (looseleaf), paragraph 27,448. 61 95 DTC 5358 (FCTD). 62 Ibid., at 5360. 63 86 DTC 6119 (B.C. CA). 64 Supra note 61, at 5361. 65 Ibid. 66 Ibid. 67 Paragraph 231.2(3)(a). 68 Paragraph 231.2(3)(b).

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was presumably a provision intended to protect taxpayers into a provision that authorizes CRA fishing expeditions by allowing requests for information prior to actually having grounds to suspect non­compliance with the Act. 69

These loosened requirements for the Minister were considered in MNR v. Greater Montréal Real Estate Board, 70 which dealt with the Minister’s attempt to obtain from the Greater Montreal Real Estate Board (GMREB) information relating to Montreal real estate agents. In determining whether the Minister met the reduced requirements under subsection 231.2(3), Trudel J.A. found that the group of real estate agents was ascertainable despite the fact that some 2,000 people made up the group. 71

Of greater importance is the Court’s consideration of whether the request for information was made in order to verify compliance with the Act. Contrary to the presumption of many tax practitioners, 72 and reversing case law influenced by Canadian Bank of Commerce, the Court found that verifying compliance does not require a genuine and serious inquiry, stating that

[t]he statutory provision under review does not mention “genuine and serious inquiry.” This expression, which originated in The Canadian Bank of Commerce v. The Attorney General of Canada...and resulted from a simple admission by the parties...has since been repeated and argued as if it were an established legal principle.

In my view, whether a “genuine and serious inquiry” exists is not the appropriate test in considering an application under subsection 231.2(3) of the Act. 73

The Court continues, stating that to require a genuine and serious inquiry would have the effect of reading in the repealed paragraphs (c) and (d), 74 and that by removing those paragraphs, “Parliament permitted a type of fishing expedition...for the purpose of facilitating the MNR’s access to information.” 75 The Court concluded by stating that an application under subsection 231.2(3) should be granted so long as the Minister can show a judge that he is conducting an audit in good faith. 76

eBay Canada

eBay Canada Limited and eBay CS Vancouver Inc. 77 Presents another indication that the courts are prepared to give the Minister’s powers under section 231.2 as wide a scope as possible. At issue was a CRA request to eBay for the account information pertaining to Canadian eBay “PowerSellers,” which were essentially the accounts registered with a Canadian address that had the greatest number of sales on eBay.

There were several issues to be addressed by the courts. First, the data sought by the CRA was stored on servers owned and operated by a party outside of Canada. Second, there was a

69 David M. Sherman, ed., Practitioner’s Income Tax Act, 33rd ed., (Toronto: Thomson Carswell, 2008) at 1364. 70 2007 FCA 346. 71 Ibid., at paragraph 15. 72 Nixon, supra note 7 at 954. 73 Supra note 70, at paragraphs 20 and 21. 74 Ibid., at paragraph 38. 75 Ibid., at paragraph 45. 76 Ibid., at paragraph 48. 77 2007 FC 930 and 2008 FC 180; aff’d 2008 FCA 348.

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question as to whether section 231.6, which allows the Minister to seek information from foreign sources, can be used to obtain information regarding unnamed persons.

With regards to the first issue, eBay conceded that had the information sought by the CRA been stored within Canada, section 231.2 would require its production for the CRA. 78 Justice Hughes of the Federal Court concluded that despite the fact that the servers storing the information were located in a jurisdiction outside Canada, it does not necessarily follow that the information cannot be located within Canada as well. As a result, the server did not contain foreign information subject to section 231.6, thus rendering the interpretation of section 231.6 a moot point. 79 This result was upheld by the Federal Court of Appeal, which accepted that the information was located in Canada. 80

As a result of the conclusions of both the Federal Court and the Federal Court of Appeal, the discussion surrounding section 231.6 appears to be more focused on explaining why that provision did not apply in eBay’s case by instead concentrating on the location of the data, rather than explaining the workings of section 231.6. The Federal Court of Appeal acknowledged that section 231.6 does not deal with information pertaining to unnamed persons, 81 leaving open the possibility that in the limited circumstances where the CRA seeks foreign information regarding unnamed persons, James Richardson continues to govern. Presumably, since the Act does not authorize the Minister to seek such information when it is located in a foreign jurisdiction, any foreign information sought must pertain to specific taxpayers.

The failure of the courts to address the interaction of sections 231.2 and 231.6 results in three unanswered questions, according to Ed Kroft. First, does section 231.2 apply only to information inside Canada or can it be used to obtain information outside of Canada? Second, can section 231.6 be used to obtain information about unnamed persons? Third, will requests under both sections be subject to the same compliance time frame? 82 Kroft concludes that it is unfortunate that these questions were not addressed, and states that as a result of the courts’ silence, the CRA may be motivated to further pursue information from taxpayers. 83 As a result of the decision, some practitioners have argued there will be an increase in 231.2 requests made to internet retailers, as well as a more aggressive approach to audits on such sellers. 84

A point worthy of consideration is whether the information sought from eBay would have been attainable by the IRS through the use of the exchange of information provisions in the Canada­US Treaty. Article XXVII 85 of the treaty deals with information exchange, and states at paragraph 1 that Canada and the US “shall exchange such information as may be relevant for carrying out the provisions of this Convention or of the domestic laws of the Contracting States concerning taxes”. If requested, paragraph XXXVII(2) would require the IRS to use its information gathering powers to obtain the information requested by the CRA, even where the

78 Ibid., 2007 FC 930, at paragraph 20. 79 Ibid., at paragraph 25. 80 2008 FCA 348, supra note 77 at paragraphs 48­50. 81 Ibid., at paragraph 30. 82 Ed Kroft, “Requirement Letters and Technology – eBay Canada Limited,” Tax Topics, no. 1917 (North York, ON: CCH Canadian, December 4, 2008), 1­7, at 2. 83 Ibid. 84 Wendy Gross, Edwin G. Kroft, and Joel Ramsey, “eBay Canada Limited Loses Appeal in PowerSellers Case: Information Stored on Servers Outside Canada but Accessible in Canada is not ‘Foreign­Based’,” February 12, 2009 (available on the Web at http://www.mccarthy.ca/article_detail.aspx?id=4360). 85 The Convention between Canada and the United States of America with Respect to Taxes on Income and on Capital, signed at Washington, DC on September 26, 1980, as amended by the protocols signed on June 14, 1983, March 28, 1984, March 17, 1995, July 29, 1997, and September 21, 2007 (herein referred to as the “Canada­US Treaty”).

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IRS did not require the information for its enforcement of US tax purposes. Paragraphs (1) and (2) are subject to paragraph (3), which states that despite paragraphs (1) and (2), the IRS is not obliged to act outside its normal laws and administrative requirements to obtain the information, and is also not obliged to obtain and supply information that would not normally be available to the IRS in the United States or the CRA in Canada.

The reason this may have been a factor in the CRA’s decision to obtain the information from the IRS is that the Internal Revenue Code 86 sets a stricter standard before disclosure of information about unnamed persons will be required. Section 7609(f) is the Code’s equivalent to section 231.2; or rather, it is the equivalent of section 231.2 prior to the revisions that followed Sand Exploration. Section 7609(f) of the Code contains requirements analogous to the repealed paragraphs 231.2(3)(c) and (d), in that it requires reason to suspect that the persons have not complied with the law, and the lack of another source from which the information is readily available.

There is no discussion in the eBay decisions about whether the information was ever sought from the IRS, so contemplation as to why it was not is to engage in pure speculation. However, in order for the CRA to seek the eBay server data through the Canada­US treaty, it would have been necessary for the IRS to meet the requirements of section 7609(f). To obtain an order requiring eBay to disclose the information, the IRS would have had to demonstrate that there are grounds to suspect non­compliance with the tax laws, and that there was no other manner of acquiring the information. It is unclear whether the CRA felt that this was too significant a hurdle or would take too long. It may also be the case that the CRA felt it was unnecessary, given their position that eBay’s ability to access the information from Canada meant that it was, in fact, located in Canada. Whatever the reason may be, the treaty was not relied upon.

Redeemer Foundation

Redeemer Foundation v. MNR 87 is yet another high profile case involving a request by the Minister for information pertaining to unnamed persons, though the decision does not appear to be of general application and may be constrained to charities. Of particular interest is that the Supreme Court did not specify when subsection 231.2(2) would apply, but rather the circumstances in which it is not necessary for the CRA to seek judicial approval of its request.

The Redeemer Foundation was a charity that financed tuition at a college that was connected with the Foundation. The CRA sought the identities of donors to the Foundation because of a suspicion that donors were not making a true donation, but rather were making a donation that would be applied against the tuition of their own children. While the Foundation initially complied with CRA requests for information, it later applied for judicial review of the requests, as the CRA had not obtained judicial authorization for requests that sought information on the unnamed donors. The Federal Court agreed with the Foundation that the requests were improper; 88 however, the Federal Court of Appeal reversed this decision. 89

In dismissing the Foundation’s appeal, the Supreme Court ruled that the Minister did not need to rely on subsection 231.2(2), despite the fact that there were unnamed persons involved. Instead, “[t]he Minister was entitled to information about the identity of the donors through the

86 Internal Revenue Code of 1986, as amended, (herein referred to as “the Code”) 87 2008 SCC 48. 88 2005 DTC 5617 (FC). 89 2006 DTC 6712 (FCA).

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combined effect of s 230(2)(a) and s. 231.1.” 90 Rather than treating the Minister’s request as a request for information regarding unnamed persons, the Supreme Court instead looked at the request as one covered by section 231.1, which requires a taxpayer to produce records for examination by the Minister. Due to paragraph 230(2)(a), the Foundation was required to maintain a list of donors such that the Minister can determine whether its charitable registration should be revoked; it could therefore be called upon to provide donor information.

The Supreme Court’s decision is troubling due to the Court’s reasoning in reconciling the existence of section 231.2 with its approach to the present case. This effectively bypasses the need for judicial authorization. The Court stated that

we do not accept the argument that s. 231.2 serves no purpose if s. 231.1 is read as authorizing the Minister to obtain information on unnamed third parties during the audit of a taxpayer. The Minister may well need to obtain information about one or more taxpayers outside the context of a formal audit. 91

This statement suggests that the CRA can avoid seeking judicial authorization when requesting from third party information about unnamed persons so long as the third party is itself subject to an audit by the CRA. The Court itself acknowledges that where the third party is being audited, subsection 231.2(2) should not apply even where “there is a possibility or probability that the audit will lead to the investigation of other unnamed taxpayers.” 92

A cynical tax practitioner might take note of the opportunities this presents to the CRA to obtain information that would otherwise require judicial authorization. While the Court recognized the additional powers they were granting the CRA by allowing access to third party information through the use of section 231.1 rather than 231.2, the Court noted that this is business information that is not subject to a high degree of privacy, 93 an assertion based on the findings of the Supreme Court in McKinlay Transport Limited v. The Queen. 94 However, there is a glaring omission in this reasoning: what might be business information of the third party with a corresponding low degree of privacy might just as easily be personal information to the unnamed person that should be subject to a higher degree of privacy. For example, a bookstore served with a section 231.1 request might have a low expectation of privacy with regards to its sales records, but can the same be said of its customers, who may have a legitimate concern with the government gaining access to their reading preferences? Presumably, dealing with such varying degrees of privacy is one of the purposes of subsection 231.2(2), in that a court must determine whether it is justifiable in a given situation to seek information about persons that may have a greater expectation of privacy than the third party served with the order.

The dissent authored by Justice Rothstein indicates his reluctance to allow the CRA to avoid being required to seek judicial authorization simply because the information regarding unnamed persons is requested in the course of an audit. Justice Rothstein concludes that the “audit and inspection powers under s. 230 and s. 231.1 cannot be as wide as the majority asserts because such interpretation would ignore and give no meaning to s. 231.2,” 95 and that the

90 Supra note 87, at paragraph 1. 91 Ibid., at paragraph 15. 92 Ibid., at paragraph 22. 93 Ibid., at paragraph 25. 94 90 DTC 6243 (SCC). 95 Supra note 87, at paragraph 37.

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majority’s conclusion “would render s. 231.2(2), a taxpayer protection provision, at best, a feeble requirement and, at worst, totally ineffective.” 96

While it has been suggested that Redeemer Foundation is applicable only to charities, 97 there is no reason that the decision of the majority could not be applied to any other situation. While the results of Redeemer Foundation were, in part, based on information that charities are required to retain in their records, where a taxpayer under audit happens to have information pertaining to unnamed persons, there is no basis to conclude that such information is insulated from the bypass of subsection 231.2(2) that results from the majority decision. Such a result undermines what little protection is now offered to taxpayers by subsection 231.2(2). If the CRA were unable to meet even the eroded burden placed upon it by subsection 231.2(2), section 231.1 would provide a means to obtain the desired information so long as an audit of the third party was commenced. The majority in Redeemer Foundation judged this to be a remote possibility, 98 but it remains a possibility nonetheless. As Lord Denning once stated,

[i]t may be said that "honest people need not fear; that it will never be used against them; that tax inspectors can be trusted only to use it in the case of the big, bad frauds". This is an attractive argument, but I would reject it. Once great power is granted, there is a danger of it being abused. Rather than risk such abuse, it is, as I see it, the duty of the courts so to construe the statute as to see that it encroaches as little as possible on the liberties of the people. 99

Had the CRA sought judicial authorization under subsection 231.2(2) in the course of their investigation into the Redeemer Foundation, authorization would almost certainly have been granted. The effect of the Redeemer Foundation decision, and the present “abuse” in the context of Lord Denning’s opinion, is that the Supreme Court chose to ignore the CRA’s failure to comply with a very specific requirement under the Act. As noted in Justice Rothstein’s dissent, the Act is very clear about the necessity of obtaining judicial authorization when seeking information about unnamed persons. Rather than striking out the requirement for information about such taxpayers the Supreme Court chose to rectify the CRA’s omission, though one practitioner suggests the likelihood of receiving judicial authorization under subsection 231.2(3) had it been sought may have influenced the court. 100

The Supreme Court’s decision appears to have come as a surprise to tax practitioners, as it was not in accordance with “common wisdom” regarding seeking information regarding unnamed persons. 101 Practitioners have also noted that the decision should cause concern for any business that collects personal information from its customers, as it may be subject to disclosure to the CRA without a court’s authorization. 102

96 Ibid., at paragraph 38. 97 Spiro, supra note 8 at 973. 98 Supra note 87, at paragraph 27. 99 R. v. I.R.C., Ex parte Rossminster, [1979] 3 All E.R. 385 at 399; rev’d. [1980] 1 All E.R. 80 (H.L.). 100 Leonard Nesbitt, “Information Required From ‘Unnamed Persons’,” May 15, 2007 (available on the Web at http://www.mccarthy.ca/article_detail.aspx?id=3862). 101 Robert Kepes and Robert Winters, "Dealing with the CRA: An Update to the Voluntary Disclosure Program, Taxpayer Relief (Fairness) Provisions, and Matters Related to Dispute Resolution," in 2007 Ontario Tax Conference (Toronto: Canadian Tax Foundation, 2007), tab 5A, at 31. 102 Robert G. Kreklewetz and Jenny Siu, “CRA Requirements for Third Party Information” (2009) vol. 9, no. 1 Tax for the Owner Manager 7­8 at 8.

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Current State of Subsection 231.2(3)

The cumulative results of section 231.2 cases indicated that the courts are prepared to grant the CRA substantial leeway in its efforts to obtain information from taxpayers. Based on developments involving that provision, it is perhaps understandable if taxpayers and their advisors question the usefulness of section 231.2, as there is no indication that it can offer any degree of protection to unnamed taxpayers.

Given the numerous changes affecting subsection 231.2, it may be helpful to briefly identify the relaxed situations in which it will apply. As per the preamble, the provision now applies for the enforcement of the Act, as well as tax treaties entered into by Canada. Where the information sought is in connection with unnamed persons, there is no longer a requirement that the Minister be carrying out a genuine and serious inquiry, but instead is merely acting in good faith. 103 Where the third party from whom information is sought is under audit, authorization may not be needed under subsection 231.2(2). 104 Finally, where the unnamed persons constitute a group, sizes of up to 10,000 taxpayers have been held to be an ascertainable group. 105

Limits to Subsection 231.2(3)

Despite the expansion of the CRA’s powers under subsection 231.2 that began post­ James Richardson, the provision does not allow an unlimited scope for CRA requests for information. There are two situations in particular that will prevent the CRA from making a request for information.

Unnamed Persons Not Under Investigation

One exception to subsection 231.2(3) can be seen where the unnamed persons are not the subject of an investigation. The preamble to subsection 231.2(3) specifies that a third party may be served with a request for information about unnamed persons where the judge is satisfied that certain conditions are met. One of these conditions in paragraph (b) is that “the requirement is made to verify compliance by the person or persons in the group with any duty or obligation under this Act.” 106 In other words, where there is no attempt to verify the compliance of the unnamed persons, an authorization under subsection 231.2(3) should not be granted.

Had Redeemer Foundation not involved a charity, the case would likely be decided differently. However, because of its charitable status, disallowing Redeemer Foundation’s charitable receipts inevitably resulted in a reassessment of the unnamed donors, thus bringing them within the requirements of paragraph (b); were this not the case, it appears that 231.2(3) could not be satisfied. Subsection 231.2(3) therefore offers protection to unnamed persons only where the CRA seeks information about them from a third party in a situation in which no investigation is taking place into the actions of the unnamed persons.

It is somewhat puzzling that a known person not under investigation can be compelled to provide information about another taxpayer under subsection 231.2(1), but that an unnamed person in the same situation cannot be so compelled, as subsection 231.2(3) would prevent their identification to the CRA. It is difficult to reconcile the distinction between these two situations;

103 GMREB, supra note 70, at 48. 104 Redeemer Foundation, supra note 87, at paragraph 22. 105 2008 FCA 348, supra note 77, at paragraph 11. 106 Emphasis added.

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surely any innocent third party caught up in a CRA investigation of a taxpayer could find the process time consuming and costly.

If this in fact is the protection intended for unnamed persons under section 231.2, the provision achieves a bizarre result. Where the third party is under investigation, but the unnamed persons are not, subsection 231.2(3) would appear to prevent the third party from being required to disclose information about the unnamed parties. However, this may result in the protection of the third party, as the CRA would not be able to interview the unnamed persons as potential witnesses. In this particular situation, section 231.2 would appear to protect a third party under audit my not requiring the third party to identify potential witnesses to the CRA where those witnesses are not subject to an audit.

Investigations Becoming Criminal Investigations

Once an investigation into the activities of a taxpayer becomes a criminal investigation, sections 231.1 and 231.2 can no longer be used to obtain information from a taxpayer. 107 Presumably, this would also apply where the investigation targets unnamed persons.

When a tax investigation that began as a civil matter becomes a criminal matter, the CRA loses the ability to issue requirements to provide information under sections 231.1 and 231.2; any further information obtained through these provisions cannot be used as evidence during a criminal trial. 108 However, any information obtained under these provisions prior to the investigation becoming a criminal matter may be used to prosecute the taxpayer. 109 Once the investigation reaches this stage, it is necessary to obtain a section 231.3 search warrant in order to obtain information from the taxpayer. 110

The administrative powers to obtain information cease to apply to criminal matters due to the fact that criminal investigations will afford the taxpayer certain protections under the Charter of Rights, 111 which will not apply where the provisions are used only for civil investigations. 112 From CRA’s perspective, an audit evolves into a criminal investigation once it is reasonable to believe that the taxpayer has committed tax evasion, 113 though there is far from a clear line indicating when this has occurred. 114 The problems associated with determining precisely when the nature of the investigation has shifted has prompted concerns from two commentators that the CRA may “sacrifice” a taxpayer’s rights for the sake carrying on an investigation without having need to seek a warrant. 115 While this will remove the burden of complying with section 231.2, obviously this exemption is less than ideal for a taxpayer who may be facing criminal charges.

FISHING EXPEDITIONS INVOLVING OTHER GOVERNMENTS

107 Kepes, supra note 101, at 33. 108 Ling v. R., 2002 DTC 7566 (SCC), at paragraph 32. 109 Jarvis v. R., 2002 DTC 7547 (SCC), at paragraph 95. 110 Kepes, supra note 101, at 33. 111 J.M. Flemming, “Audits and Criminal Investigations Under the Canadian Charter of Rights and Freedoms: Revenue Canada’s Perspective,” in Report of Proceedings of the Fiftieth Tax Conference (Toronto: Canadian Tax Foundation, 1999), 31:1­5, at 31:3. 112 Cambell, Colin, Income Tax Administration in Canada (Toronto: Thomson Carswell, 2002), at 7­12. 113 Supra note 111, at 31:3. 114 Ibid. 115 William I. Innes and Matthew G. Williams, “Protections Against Self­Incrimination in Income Tax Audits, Investigations, and Inquiries” (2001) vol. 49, no. 6 Canadian Tax Journal 1459­94, at 1464.

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Provincial and Municipal Governments The relationship between the CRA and other governments shows that when it comes to

fishing expeditions, other branches of governments can be both a source of CRA information and a seeker of CRA information. In either case, the CRA may be seen as participating in a fishing expedition.

The CRA has indicated that it views provincial governments as falling with the definition of “person,” 116 such that section 231.2 can apply to a provincial government just as it applies to an individual or a corporation. The basis for this opinion is that certain provisions in the Act refer to situations “where the person is Her Majesty in right of a province or a corporation controlled by Her Majesty in right of a province.” 117 The CRA has stated that “[i]n our view, a reference to Her Majesty in right of a province is a reference to the provincial government and, consequently, the government would be a person under the Act.” 118 That a provincial government qualifies as a person for the purposes of the Act was also the basis of the decision inMNR v. Braithwaite. 119

Similarly, the CRA has stated that the definition of “person” in subsection 248(1) includes “any corporation,” which would then qualify both Crown corporations and incorporated municipal governments as persons. The result of this is that it is open to the CRA to seek information from any provincial or incorporated municipal governments, and any Crown corporation, through the use of section 231.2.

Information exchange with provinces, as discussed below, takes place pursuant to either federal­provincial agreements or the CRA’s administration of the provincial corporate tax system. Information exchange with municipal governments may be somewhat more restricted. The first issue is that “information exchange” between the CRA and municipal governments is something of a misnomer. Section 241 prohibits the CRA from disclosing information to anyone, except as permitted by that section. Subsection 241(4), which permits disclosure to numerous federal and provincial officials and departments, contains no provision that would authorize information exchange with an official of a municipal government. Absent authorization under section 241, a CRA official who discloses taxpayer information to a municipal official is liable to a fine or imprisonment under subsection 239(2.2).

Given that information exchange with municipalities is seemingly a one­way street, it is not clear what incentives would encourage municipal cooperation. While the CRA could in theory serve a municipality with a request under section 231.2, there would be no negative consequences where that municipality failed to cooperate with the CRA. Subsection 238(1) specifies the penalties for failure to comply with section 231.2, but the fines and imprisonment provided for cannot be applied to a government. Where a local government refuses to comply with a section 231.2 order, it is not clear that any sanctions would apply to that government. As a result, municipal cooperation may stem from the fact that local officials recognize there is a benefit to society in general for providing information to the CRA, or it may be the fact that the municipal information most relevant to the CRA is already publicly available. Where the information is not publicly available, the Investigations Manual suggests that the CRA will attempt to rely of access to information legislation. 120

Communication with Federal Government Departments and Crown Corporations

116 CRA document no. 9908857 (April 12, 1999). 117 See subparagraph 149(1.2)(a)(iv), for example. 118 Supra note 116. 119 70 DTC 6001 (Ex. Ct.). 120 Supra note 25, at 22.

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When seeking information from a department or Crown corporation of the federal government, the CRA falls within exceptions of the Privacy Act 121 that allow for the distribution of the sought after information without the consent of the person to whom it pertains. This applies to information sought from any “government institution,” which is defined as Government of Canada departments or ministries, as well as certain listed government bodies or offices, and Crown corporations and their wholly­owned subsidiaries. 122 As the CRA is specified investigative body, 123 where the CRA makes a written request to a government institution seeking information regarding the affairs of a taxpayer the Privacy Act permits disclosure of information by the government institution to the CRA. 124 The only additional requirements for disclosure are that the information is sought in order to enforce a federal or provincial law or to carry out an investigation, and that the written request discloses the purpose of the request and specifies what is sought. 125

The ability to request information from federal Crown corporations is not merely a possibility; based on the policies contained in the Investigations Manual, the CRA most certainly carries out its ability to seek information from various branches of the federal government. CRA Headquarters maintains liaison “with all branches, bureaus, commissions, boards and services of the federal government, crown corporations and federal government­controlled companies, the Bank of Canada and the Royal Canadian Mounted Police,” and requires that subject to certain exceptions, Tax Services Offices should send requests for information through Headquarters. 126 The exception to this policy is that a TSO is authorized to directly contact the RCMP when seeking information related to the Special Enforcement Program, 127 which deals with income with origins in criminal activity. 128

Communication with Provinces and Municipalities

The CRA has documented its policies regarding information sharing with provincial and municipal governments in its Investigations Manual. 129 As of the November 19, 2002 date of the publicly available chapter in the Investigations Manual, non­public information held by a province or provincial agency, as well as any municipality or agency should be subject to a written request to the government or agency in possession of the information. 130 The Manual notes that a copy of this request should also be provided to the Director, Tax Operations Division, Investigations Directorate at CRA Headquarters. 131 Special policies exist for the provinces of Alberta, Ontario, and Quebec, where the CRA has entered formal agreements with the provinces for the purposes of information sharing. While the Investigations Manual describes policies in respect of these provinces, it appears the only significant differences as compared to

121 RSC 1985, c. P­21. 122 Ibid., at section 3. 123 Schedules II and III of the Privacy Act Regulations. 124 Supra note 121, at paragraph 8(2)(e). 125 Ibid. 126 Canada, Canada Customs and Revenue Agency, Investigations Manual, Part 2 ­ Tax and GST: Chapter 26 – Exchange of Information and Liaison (Ottawa: Canada Customs and Revenue Agency, November 19, 2002), 3. 127 Ibid., at 4. 128 J. Andre Rachert, "Current Trends in Audit Procedures: A review of the General Rules and What to Look Out For With Potential Criminal Investigations," in 2007 British Columbia Tax Conference (Toronto: Canadian Tax Foundation, 2007), tab 3, at 14. 129 Supra note 126. 130 Ibid., at 5. 131 Ibid.

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the remaining provinces is that the Alberta, Ontario, and Quebec agreements appear to specify the persons through which requests for information must be made. 132

The basis for separate exchange agreements with Alberta, Ontario and Quebec is that as of the date of the released Investigations Manual, those three provinces had not yet entered agreements with the CRA to collect corporate income tax on behalf of those provinces. For example, an Information Circular published by Alberta notes that these three provinces have entered into information exchange agreements providing for exchange between the three provinces. 133 Having since entered such an agreement with Ontario, it is likely that future versions of the Investigations Manual will no longer identify an information exchange policy specific to Ontario, as the corporate tax collection agreement contains an exchange of information clause. 134

International Fishing Expeditions

Much like in a domestic context, section 231.2 has proven to be an important tool for the Minister when fulfilling his information exchange obligations under a tax treaty. While Courts found that section 231.2 allowed the Minister to collect information for the purposes of fulfilling a request by a treaty partner, 135 the provision was once again amended to make this clear. Subsection 231.2(1) now allows information to be sought not only to ensure compliance with the Act, but also to enforce any tax information exchange agreements or tax treaties that Canada has signed.

As is the case with other levels of government in Canada, the CRA has developed particular practices when seeking information from other governments. Details of CRA policy regarding international information exchange can be found in Chapter 26 of the Investigations Manual, which is further dividend into commentary regarding “Exchange of Information with Other Countries” and “Canada­United States Income Tax Convention”.

Exchange of Information with Other Countries

Requests for information under a tax treaty are controlled by the Exchange of Information Programs Section, which is forwarded requests for information by the Director, Competent Authority Services, International Tax Directorate. 136 All requests for information by an investigator must initially be communicated to the Director. The CRA appears to treat requests under a treaty as something of a last resort, as the Investigations Manual directs readers to consider such issues as the amount of income involved, whether the information can be obtained under the Act, and “whether all reasonable efforts have been made to obtain the information from Canadian sources”. 137

132 Ibid., at 6­9. 133 Alberta Finance and Enterprise, Tax and Revenue Administration, Information Circular CT­6R1, “Reassessments,” April 1999, at paragraph 11. 134 Canada, Department of Finance, “Memorandum of Agreement Concerning a Single Administration of Ontario Corporate Tax” (Department of Finance, Ottawa ON) (available on the Web at http://www.fin.gc.ca/toc/2006/ TxMOA _­eng.asp) at Annex C, section 2.2(ii). 135 See Andison v. MNR, 95 DTC 5058 (FCTD) and Pacific Network Services Ltd. v. MNR, 2002 DTC 7585 (FCTD). 136 Supra note 126, at 10. 137 Ibid.

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Where the CRA is able to obtain information from a treaty partner, it generally cannot be shared with any other revenue authority, except where authorized by the Competent Authority. 138 However, the information may be shared with the taxpayer, though the level of detail provided may differ depending on the taxpayer’s involvement and the precise nature of the information obtained. 139 The information may also be used in court, subject to notifying the treaty partner from which it was obtained. 140

With regards to spontaneous information exchange, any information an Investigator feels would be of use to a treaty partner is exchanged in the same manner as a request for information is made: through the Director, where it is sent to the Exchange of Information Programs Section for transmission to the treaty partner. 141 This Section also receives spontaneous exchanges from treaty partners, and determines to which TSO it should be forwarded. 142

Exchange of Information with the United States

The Canada­US Treaty 143 expands the scope of information sharing from that which normally takes place. Paragraph XXVII(1) allows the information to be shared with other domestic revenue authorities; for example, the revenue authorities of the various provincial and state governments. 144 Information sharing is authorized through a combination of the obligation to share information contained in the treaty, as well as provisions of the Act that allow the CRA to disclose information.

Article XXVII is the information exchange provision of the Canada­US Treaty, and paragraph 1 states that Canada and the United States shall exchange information necessary to enforce the treaty or the tax laws of the two countries. Where one country requests information from the other, paragraph 2 obliges the party to obtain the information, even where it is not necessary for its own domestic purposes. Paragraph 3 contains an exception to this, and exempts the countries for being required to gather and exchange information that is not normally obtainable under its laws.

Where the information is requested from the CRA by the IRS, CRA disclosure is authorized by paragraph 241(4)(e)(xii). This provision permits the CRA to provide information, allow access to information, or allow the inspection of information pursuant to a provision in a tax treaty. Without authorization under section 241, CRA officials would not be capable of disclosing any information to foreign revenue authorities.

The Director, Competent Authority Services Division for the CRA and the Director, International for the IRS are responsible for exchanges with the United States once the information sharing requirements are met. 145 Where specific information is requested, the CRA has developed a lengthy list of information that should be provided to the IRS setting out, among other things, why the information is needed, the amount of revenue at issue, and any identifying information. 146 Where the IRS must rely on third parties for the information sought by the CRA, it may issue a summons to that third party requiring the production of the information; where the

138 Ibid., at 11. 139 Ibid. 140 Ibid. 141 Ibid., at 12. 142 Ibid. 143 Supra note 85. 144 McCracken, supra note 10, at 1885. 145 Supra note 126, at 13. 146 Ibid., at 14.

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information is public, the IRS can obtain it without a summons. 147 In this respect, once the request is made to the IRS, the means of obtaining the information on behalf of the CRA are similar to the CRA’s use of public information and sections 231.1 and 231.2.

Automatic, Spontaneous, and Specific Exchanges of Information Any discussion of information exchange pursuant to tax treaties must take into account

the various types of exchange that may take place. Generally, information exchange under a tax treaty or tax information exchange agreement (TIEA) may take one of three forms: automatic, on request, or spontaneous. 148

Automatic information exchange is analogous to reporting requirements under the Act. It involves the routine transmission of data from one treaty partner to the other, and most often captures information such as interest payments made to non­residents. 149 The OECD refers to information subject to automatic exchange as “bulk” information that is routinely collected within the source country, 150 possibly as a result of local third party reporting requirements. Due to its similarity to information subject to reporting requirements, the automatic exchange of information does not appear to be a significant threat to a taxpayer’s privacy, 151 or at least no more of a concern than any third party reporting that takes place in a domestic context, such as an employer reporting wages of an employee. The information received by the CRA pursuant to automatic exchange with a treaty or TIEA partner is not necessarily received for the purposes of commencing an investigation, as it has not been specifically requested by the CRA nor specifically sent by the other state.

Spontaneous information exchange takes place where a treaty or TIEA partner becomes aware of information it feels would be of interest to the CRA and discloses that information to the CRA without a CRA request. 152 The OECD presents several situations in which a spontaneous exchange of information may be appropriate, such as where there is a tax exemption in a source country that could affect tax in the country of residence, or where a country becomes aware of an avoidance transaction that could affect tax liability in another country. 153 In either of these situations, the country that possesses the information may decide to make it available to other countries in which the taxpayer’s tax liability may be affected. In other words, spontaneous exchange allows information exchange where the information would not be subject to an inquiry by one jurisdiction simply because the requesting jurisdiction is not aware of the existence of the information.

Though spontaneous exchange pertains to specific taxpayers and transactions, it is arguable whether or not it is analogous to a “fishing expedition” as there has been no attempt by the CRA to obtain information that would otherwise go unnoticed. It may also be the case that spontaneous exchange is of no use to the recipient. For example, while a foreign affiliate of a Canadian corporation may benefit from a local tax exemption, notification of this fact is of little relevance to the CRA where that foreign affiliate earns exempt surplus that can be repatriated to

147 Ibid., at 15. 148 McCracken, supra note 10, at 1881. 149 Ibid., at 1896­97. 150 Organization for Economic Co­operation and Development, Manual on Information Exchange: Module 3 Automatic (or Routine) Exchange of Information (Paris: OECD, January 2006) (available on the Web at http://www.oecd.org/dataoecd/15/43/36648027.pdf), at 3. 151 McCracken, supra note 10, at 1896­97. 152 Organization for Economic Co­operation and Development, Manual on Information Exchange: Module 2 Spontaneous Information Exchange (Paris: OECD, January 2006) (available on the Web at http://www.oecd.org/dataoecd/15/44/36647914.pdf), at 3. 153 Ibid.

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Canada free of any income tax. 154 Specific exchange, or exchange on request, however, can be compared to information sought be the CRA by way of a fishing expedition. Because this information subject to specific exchange is specifically sought by CRA request it may be reasonable to conclude that it is in some way related to a revenue authority’s belief that a taxpayer has engaged in avoidance or evasion behaviour. A specific request, therefore, may be made as part of an investigation leading to civil and criminal tax evasion charges. It has been argued, therefore, that specific exchange requests should allow the taxpayer protections similar to those offered to individuals facing criminal or quasi­criminal charges. 155 While this position may be appropriate in situations where the request for information is actually sought in connection with a criminal prosecution, it appears unnecessary where the request is intended to pursue a civil investigation merely resulting in interest and penalties. In such a situation, contrary to the commentary claims that criminal or quasi­criminal protections are warranted, the effect of international information exchange is no different than exchange taking place under section 231.2. As such, it does not appear necessary that any additional protections should be granted where the international exchange is not conducted with a view to criminal prosecution.

Section 241 Limits on Information Exchange with Other Governments

The CRA’s ability to engage in information sharing with other governments is subject to section 241, which governs the disclosure of a taxpayer’s information. Except as authorized by the provision, no CRA official is permitted to provide to a person any taxpayer information, allow any person access to any taxpayer information, nor use any taxpayer information for purposes other than the enforcement of the Act or certain other statutes. 156 Certain exceptions apply to this; for example, where legal proceedings have commenced, 157 there is a risk of death or danger, 158 or a risk to national security. 159

The provisions applicable to exchange of information agreements with other revenue authorities are dealt with in subsection 241(4), which contains a lengthy list of situations in which information may be disclosed. In the case of disclosure to provincial revenue authorities, subparagraph 241(4)(d)(iii) allows for information to be provided to “an official solely for the purposes of the administration or enforcement of a law of a province that provides for the imposition or collection of a tax or duty”. A related exception is found in subparagraph 241(4)(e)(xii), which allows disclosure, access to, or inspection of taxpayer information for the purposes of a tax treaty between Canada and another government.

Curiously, subsection 241(4) appears to authorize differing levels of information sharing depending on whether the sharing takes place between the CRA and a province or the CRA and another country. The preamble of paragraph 241(4)(d) states that an official may provide taxpayer information to a provincial official. In contrast, the provision dealing with international exchange in subparagraph 241(4)(e)(xii) allows the CRA to provide the information, or to provide access to or inspection of that information. Because subsection 241(1) prevents a CRA official from providing information or providing access to information, presumably these are two different forms of information sharing. However, the Act does not appear to allow provincial officials access to taxpayer information; they can only receive information provided to them by

154 Paragraph 113(1)(a). 155 McCracken, supra note 10, at 1896­97. 156 Subsection 241(1). 157 Subsection 241(3). 158 Subsection 241(3.1). 159 Subsections 241(9) and (9.1).

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the CRA. The provision’s wording appears to allow foreign governments access to the CRA data pertaining to a specific taxpayer about whom information is sought under a treaty. The result of this is that section 241 authorizes a greater degree of information exchange between the CRA and foreign governments than it authorizes between the CRA and their provincial counterparts. An explanation for this fact may be that under paragraph XXVII(7) of the Canada­US Treaty, Canada must allow IRS officials to enter Canada in order to conduct interviews or examine records. Without the expanded disclosure requirements for information subject to tax treaties, this treaty provision would be unenforceable.

ARE FISHING EXPEDITIONS JUSTIFIABLE?

Privacy Concerns

One of the main arguments against the use of the types of information gathering considered above is the impact the information collection has on taxpayers’ privacy. In some cases, such as the use of publicly available information, this impact is minimal. While the taxpayer may feel offended by the notion that the CRA can access information on the municipal assessment value of their home, in reality, the CRA has not done anything that a regular member of the public could not do. Where any other person can access the same information, it makes little sense to view the CRA’s use of the information as infringing on a person’s privacy.

The privacy argument may carry more weight when it comes to issues such as information obtained from third parties, or information obtained from other governments. On one hand, it is understandable why individuals may be reluctant to allow access to their financial information, as a person’s financial records may disclose a significant degree of information about them, from their religious and political beliefs to potential medical issues in their family. 160 However, to some degree this desire for privacy must give way to the revenue authorities’ need for information. In the case of the income tax system, granting privacy rights to a person suspected of non­compliance essentially increases the burden on other taxpayers, as it places the rights of the individual above those of the collective. As an example of this, Marjorie Kornhauser quotes former American President Benjamin Harrison as saying that

[e]ach citizen has a personal interest, a pecuniary interest, in the tax return of his neighbour. We are members of a great partnership, and it is the right of each to know what every other member is contributing to the partnership and what he is taking from it. 161

The United States offers a particularly interesting comparison when considering taxpayers’ rights to privacy. While Canada has been increasing the abilities of the CRA to gather information since James Richardson, over roughly the same time period the United States has been increasing the requirements that must be met by the IRS before information disclosure can be compelled, particularly when the situation involves third parties. The US move towards increasing taxpayer privacy results from cases that are analogous to some of the Canadian cases considered above. While James Richardson and Sand Exploration led the Department of Finance to increase CRA’s ability to gather information, Donaldson v. United States 162 and United States

160 Del Zotto v. Canada, 97 DTC 5328 (FCA), at 5335. 161 Marjorie E. Kornhauser, “Doing the Full Monty: Will Publicizing Tax Information Increase Compliance?” (2005) vol. 18. no. 1 Canadian Journal of Law & Jurisprudence 95­117, at 99­100. 162 400 U.S. 517 (1971).

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v. Bisceglia, 163 both decided in favour of the IRS, resulted in the US Congress increasing the Code’s protection of taxpayers.

Donaldson involved an employee who sought standing when the IRS sought to enforce a summons seeking employment records that was served on his employer, stating that as it was information relating to his taxes that was being sought, he should be allowed to intervene to dispute the summons served on his employer. The court concluded however, that there was no privilege between Donaldson and his employer, and the records were not Donaldson’s property. He therefore lacked standing as an intervener. As a result of this, sections 7609(a) and (b) were added to the Code. 164 Section 7609(a) requires the taxpayer to be notified when a third party is served with a summons requiring information about the taxpayer, and section 7609(b) allows the taxpayer the right to intervene in any hearings relating to the summons.

Bisceglia was the case which led to the Code provisions dealing with unnamed persons. Bisceglia was vice president of a bank that had transferred suspicious looking banknotes to the Federal Reserve. The IRS later served a summons on Bisceglia requiring he identify the account holder that deposited the bills. This case led to the introduction of section 7609(f), described above. Gordon Gidlund, an IRS attorney, notes that “[b]asically, then, subsection (f) intends that the district court will be the champion of the anonymous taxpayer.” 165

Though the case didn’t involve the use of section 7609(f), one example of the district court “championing” the rights of the anonymous taxpayer can be seen in the decision of a district court judge that declined to order disclosure of certain information sought by the FBI in connection with a tax avoidance investigation. The motion, In Re Grand Jury Subpoena to Amazon.com Dated August 7, 2006 166 involved an investigation into a used bookseller, who sold approximately 24,000 books through Amazon.com. During the course of investigating the seller for tax evasion and mail and wire fraud, the FBI requested from Amazon all its records involving the seller, including information about his customers, before reducing the demands to apply to only 120 customers. Neither Amazon nor the customers were being investigated; rather, “they simply are bricks in the evidentiary wall being erected by the grand jury.” 167 However, the judge found that Amazon’s motion raised a legitimate concern of the customers. Judge Crocker offered a strong defence of the taxpayers’ privacy expectations, stating that

[t]his presents a legitimate First Amendment concern. The subpoena is troubling because it permits the government to peek into the reading habits of specific individuals without their prior knowledge or permission. True, neither the government nor the grand jury is directly interested in the actual titles or content of the books that people bought, and I have enormous trust in the prosecutors and agents handling this investigation, with whom this court has worked many times before. But it is an unsettling and un­American scenario to envision federal agents nosing through the reading lists of law­abiding citizens while hunting for evidence against somebody else. …One might ask whether this court should concern itself with blogger outrage disproportionate to the government’s actual demand of Amazon. The logical

163 420 U.S. 141 (1975). 164 Gordon L. Gidlund, “The Raikos Irony and How the IRS Seeks Tax Truth” (1991) vol. 69, no. 2 Taxes: The Tax Magazine 83­89, at 85. 165 Ibid., at 87. 166 In Re Grand Jury Subpoena to Amazon.com Dated August 7, 2006, Case No. 07­GJ­04 (W.D.WI June 26, 2007). 167 Ibid at 2.

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answer is yes, it should: well­founded or not, rumours of an Orwellian federal criminal investigation into the reading habits of Amazon’s customers could frighten countless potential customers into canceling planned online book purchases, now and perhaps forever. 168

The solution to this dilemma, according to Judge Crocker, was for Amazon to contact some of the customers directly, providing details of the FBI investigation into the seller. Any buyers that were willing to cooperate with the investigation could do so by contacting the United States Attorney’s Office; any purchasers that wished to remain anonymous would have neither their names nor purchases revealed. 169

A recent Canadian example of the interaction between tax and privacy can be seen in Neumann v. Canada (Attorney General), 170 in which a taxpayer who was not the subject of an investigation was awarded $1.3 million in damages for a CRA search that was found to infringe on his privacy. 171 Neumann was engaged in business transactions in which his business was claiming the deductions, which were not being reported by the counter­party to the transactions. According to Wayne Adams, during the course of the investigation of the counter­party, the Department of Justice requested that the CRA obtain the original documents, which the auditors currently only had copies of. The CRA obtained a court order to search Neumann’s residence, and executed the warrant with RCMP officers present. The CRA has filed an appeal of the decision, though Adams acknowledged that the search could have been slightly more low­key. 172

If Neumann represents the beginning of a trend towards increased privacy in Canada, will it impact on the usefulness of information gathering tools such as subsection 231.2(3)? Arguably not. In Redeemer Foundation, Justice Rothstein noted that subsection 231.2 is intended to protect taxpayers from certain CRA requests for information. It was established in McKinlay Transport that a business is not entitled to a reasonable expectation of privacy with regards to its tax affairs. If the “protection” considered by Justice Rothstein in Redeemer Foundation is protection of their privacy, then this comment taken together with the findings in McKinlay Transport must lead to the conclusion that section 231.2 is intended to protect individuals, rather than taxpayers in general. However, Justice Strayer commented in Del Zotto that “[t]here cannot be the exaggerated claims to privacy connected with the administration of the Income Tax Act which the appellants assert. The Act requires all manner of disclosure.” 173 It may be the case that the precise nature of privacy when it comes to tax matters is still in flux; how Neumann will affect this, if at all, remains to be seen.

Revenue Collection and Future Reporting Requirements

As noted above, it is possible to view a fishing expedition, whether through use of public information, section 231.2, or from a treaty partner, as a form of CRA research. Ultimately, if one of these methods uncovers a particular group of persons or an industry that exhibits non­ compliance at an excessive rate, it certainly justifies suggestions that a statutory reporting

168 Ibid., at 4­5. 169 Ibid., at 6. 170 As of April 5, 2009, the judgment in Neumann has not yet been publicly released. However, an order addressing costs in the case has been published. See Neumann v. Canada (Attorney General) 2009 BCSC 324. 171 Louise Dickson, “Jury awards B.C. man $1.3M for taxman’s raid,” February 11, 2009 (available on the Web at http://www.vancouversun.com/story_print.html?id=1279189). 172 Question and answer session with Wayne Adams, Director General, Income Tax Rulings, Toronto, March 19, 2009. 173 Supra note 160, at 5341.

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requirement be included in the Act to deal with the particular group or transaction that has been investigated.

In addressing some queries about the CRA’s use of section 231.2 in the Redeemer and eBay cases, Wayne Adams made several interesting comments about the CRA’s position on several of these issues. 174 First, Adams noted that the CRA is not concerned about persons that are in essence using eBay to conduct an online garage sale to occasionally dispose of unwanted property. By seeking information on the 10,000 Canadian PowerSellers, it appears that the CRA was using a person’s PowerSeller status as a proxy for a person that was operating a business.

Second, the CRA will not disclose the results of large scale audits such as that of the eBay PowerSellers, so it is uncertain how effective this was at uncovering non­compliance and bringing in additional revenue. It is likely a safe assumption that analysis of the data obtained from eBay required a significant investment of CRA resources; each of the estimated 10,000 PowerSellers had sales ranging from US$1,000 to US$150,000 per month. 175 Did the revenue recovery offset the costs of conducting such a large investigation? According to Adams, while a future Auditor­General report might address the success of such an audit, the CRA will not release details of the rate of non­compliance or the amount of revenue recovery. 176 This makes it impossible to consider whether such audits are justifiable based on a cost­benefit analysis. Adams did indicate that if such audits were successful in uncovering non­compliance, there may be an expansion of the program. Short of comments by the Auditor­General, success of such bulk information audits will have to be assessed based on whether the number seems to be expanding or remaining static.

OTHER COUNTRIES Canada’s system of information collection and third party reporting was recently

compared with those existing in all other OECD countries, as well as certain other countries. The comprehensive OECD report 177 compared the administration of numerous tax systems, taking into account issues as diverse as the advance rulings process and the rate of electronic filing of tax returns.

One element of the study was a comparison of the ability of various revenue authorities to gather information. The comparison looked at nine tools available across the countries studied, which included the ability to require information from third parties, the ability to search businesses without consent or a warrant, and whether taxpayers are required to present documents on request. Canada had the authority or authority in certain situations on eight of the nine criteria, with one missed being whether the CRA had the ability to seize a taxpayer’s records without consent of the taxpayer or a search warrant. 178 The CRA’s powers to obtain information were some of the broadest of the 42 countries surveyed, indicating a substantial authority to demand information from taxpayers. Despite having some of the broadest investigation powers, the CRA falls on the lower end of the percentage of employees engaged in audits or investigations. The CRA had approximately 28% of its staff engaged in audits or

174 Supra note 172. 175 2007 FC 930, supra note 77, at paragraph 9. 176 Supra note 172. 177 Organization for Economic Co­operation and Development, Tax Administration in OECD and Selected Non­ OECD Countries: Comparative Information Series (2008) (Paris: OECD, 2009) (available on the Web at http:// www.oecd.org/dataoecd/57/23/42012907.pdf). 178 Ibid., at 134.

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investigations, with approximately two­thirds of countries reporting a higher percentage, and one­third reporting a lower percentage of audit or investigations employees. 179

The broad authority for the CRA to gather information from taxpayers should perhaps not be surprising given that the OECD report found the CRA is among the OECD countries with the strongest powers to collect information from taxpayers. However, given varying degrees of powers granted to the revenue authorities assessed in the OECD report, is it necessary for the CRA to wield such broad powers? After all, several of the countries have seen fit to equip their tax authorities with powers less than those of the CRA. It may also be argued that the ease with which the CRA auditors can acquire the necessary information may be the reason why the CRA ranks near the bottom third when it comes to comparing the portion of CRA employees engaged in audit or investigation work. It may be the case that the wide scope of powers to obtain information allows CRA auditors and investigators to achieve more with fewer people. In such a case, the abilities of the CRA to conduct a fishing expedition may not be solely based on the need to ensure compliance or to collect the maximum amount of revenue, but to allow for a more efficient audit and investigations department. The revenue recovery due to third party information gathering may come in part through reduced employee requirements within the CRA.

The report also addressed third party reporting requirements in various countries. Conceptually, the greater the number of transactions subject to third party reporting, the lower the need to engage in fishing expeditions, as a revenue authority will have a steady stream of information passed to them that they would otherwise need to obtain through investigations. The report found that nearly every country requires reporting of wages, interest, and dividends, but that there is a wide range of reporting requirements on other transactions, such as rental payments and real property transactions. 180 In a comparison of reporting and withholding requirements looking at ten forms of payments, Canada required withholding and/or reporting on eight of the payments, with the exception of rents and gambling winnings. 181 Amongst OECD members (with a few exceptions), withholding and reporting requirements are in place for most of the ten forms of income, indicating that Canada’s third party reporting requirements do not deviate from the international norm.

PROPOSED MODIFICATIONS

The expansion in the Minister’s ability to conduct fishing expeditions is due to both amendment and judicial interpretation of the Act. If it is accepted that the balance of power has moved too far in favour of the Minister, certain changes to the Act can correct this. It should be noted that such criticisms of the legislation pertaining to fishing expeditions do not apply only in the context of the Act. The Excise Tax Act contains similar provisions, 182 which have been found by the Federal Court to be subject to similar analysis as section 231.2. 183

OECD Model Tax Information Exchange Agreement

179 Ibid., at 95. 180 Ibid., at 153. 181 Ibid., at 176. 182 RSC 1985, c. E­15 at subsection 289.1(1). 183 The Queen v. Amex Bank of Canada, 2008 FC 972.

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The OECD Model Tax Information Exchange Agreement seeks to increase the amount of international information exchanged between tax authorities. 184 At the same time, the Model does not allow contracting parties limitless opportunities to seek information: the agreement specifically prohibits signatories from conducting fishing expeditions, stating that parties cannot seek information “that is unlikely to be relevant to the tax affairs of a given taxpayer.” 185 The information sought must be “foreseeably relevant” in order to bring it outside the fishing expedition prohibition. 186

In order to obtain information under the Model, specific information must be provided by the party making the request. Paragraph 5 of article 5 of the Model specifies that, among other things, the information request must pertain to an identified taxpayer and the reason the information is sought. 187 Such requirements, if incorporated into Canada’s tax treaties, would largely prevent fishing expeditions, as the authority seeking the information would likely need to have some idea of the offence alleged to have been committed in order for them to meet the requirements of making a request under article 5. Article 5 therefore seeks to prevent fishing expeditions by requiring the competent authorities of a jurisdiction to already be in possession of the most basic of taxpayer information.

Despite not having been updated since 2002, the language found in the OECD Model TIEA continues to be used recently signed agreements. For example, agreements between Denmark and the Cayman Islands 188 and the US and Liechtenstein 189 each follow the OECD Model, specifying in Article 1 the agreements pertain to forseeably relevant information, and specifying in Article 5 that a party making an information request shall provide, in addition to other information, the identity of the taxpayer being investigated.

The fact that the OECD Model TIEA requires a minimum amount of information despite its attempts to increase cross­border information exchange should be an indication that requiring some basis for the exchange will not result in an insurmountable hurdle for the revenue authorities. If the requirements for exchange under the OECD Model can be met, why can the same not be achieved in a strictly domestic context?

Re­implementation of Paragraph 231.2(3)(c)

An additional method of increasing the burden on the Minister when seeking authorization under subsection 231.2(3) would be to reintroduce the requirement that there be grounds for suspecting the unnamed persons are in non­compliance with the Act.

Given that courts have recognized the intrusiveness of section 231.2, it does not seem unreasonable to require the Minister to justify why the information is needed. If the Minister has a valid concern about the actions of a taxpayer, then this will likely prove to be an insignificant

184 Organisation for Economic Co­operation and Development, Agreement on Exchange of Information on Tax Matters (Paris: OECD, April 2002) (available on the Web at http://www.oecd.org/dataoecd/15/43/2082215.pdf). 185 Ibid., at 14. 186 Maria Flavia Ambrosanio and Maria Serena Caroppo, "Eliminating Harmful Tax Practices in Tax Havens: Defensive Measures by Major EU Countries and Tax Haven Reforms" (2005) vol. 53, no. 3 Canadian Tax Journal 685­719, at 715. 187 Supra note 184. 188 Agreement Between the Government of Denmark and the Government of the Cayman Islands Concerning Information on Tax Matters (April 1, 2009) (available on the Web at http://www.oecd.org/dataoecd/47/4/ 42480073 .pdf). 189 Agreement Between the Government of the United States of America and the Government of the Principality of Liechtenstein on Tax Cooperation and the Exchange of Information Relating to Taxes (December 8, 2008) (available on the Web at http://www.oecd.org/dataoecd/8/1/41818936.pdf).

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hurdle for the Minister to overcome. However, such a requirement will prevent the Minister from engaging in mere speculation about a taxpayer’s non­compliance, as reintroduction of paragraph 231.2(3)(c) would increase what is necessary to obtain judicial authorization beyond the current requirement of mere good faith on the part of the Minister.

The United States has legislation similar to section 231.2; section 7609(f) of the Code requires judicial authorization where information is sought about third parties. 190 As is the case under the Act, the Code requires that the information pertain to either a particular person or an ascertainable group. The other two requirements under the Code are similar to repealed paragraphs 231.2(3)(c) and (d): there must be reason to suspect that the persons have not complied with the law, and there must be no other source from which the information is readily available. Despite this seemingly increased level of taxpayer protection under the Code, courts have found that the requirement for judicial authorization can be bypassed through the use of a dual purpose summons, which seeks information regarding both named and unnamed taxpayers. 191 To some degree, this brings the scope of section 7609(f) in line with the findings of Redeemer Foundation that 231.2 should be more flexible where the third party is under audit. In this regard, Canada is not the only country in which revenue authorities are being allowed a greater scope in seeking information. Unlike Canada, however, the United States appears to recognize that tax records of a taxpayer are entitled to some degree of privacy, 192 which may be the basis for the requirement that there be, at a minimum, the suspicion that the taxpayer has not complied with the Code. While it has been suggested that more than a “mere suspicion” should be required under the Code, 193 this is clearly more than is currently required by section 231.2.

Repealing Subsections 231.2(2) and (3)

While this paper has been critical of the legislative revisions and judicial interpretations of subsection 231.2(2), it may be that another effective means of dealing with requirements to provide information relating to unnamed persons is to simply eliminate the necessity of obtaining judicial authorization prior to making the request.

Repealing subsection 231.2(2) would accomplish little by way of improving taxpayer privacy, nor would it prevent the CRA from engaging in any sort of fishing expedition. On the contrary, it would allow the CRA unfettered access to just about any record it wished. However, aside from limited circumstances, the current state of subsection 231.2(2) cannot be said to offer taxpayers any reasonable degree of privacy from the CRA. The erosion of the conditions that must be met in order to obtain judicial authorization has rendered the provision at most a nuisance that must be dealt with by the CRA in the course of an audit or investigation. At the same time, certain third parties served with such a request are as a practical matter obligated to seek judicial review, incurring sometimes substantial litigation costs to engage the CRA in a fight that the third party has little expectation of winning. For example, in Amex, American Express was of the opinion that both the Bank Act 194 and the Personal Information Protection and Electronic Documents Act (PIPEDA) 195 placed upon it a duty to not disclose customer

190 The Code, supra note 86. 191 Lee Drizin, “Tiffany Fine Arts: Dual Purpose Summonses and the Protection of Unnamed Taxpayers” (1987) vol. 5, Boston University Journal of Tax Law 65­78, at 66. 192 Watson, supra note 9, at 230. 193 Dean, supra note 15, at 622. 194 S.C. 1991, c. 46. 195 S.C. 2000, c. 5.

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information without a clear obligation to do so. 196 In addition, American Express took the position that a failure to challenge the authority of the CRA to issue a request for information could expose it to liability claims under PIPEDA. 197

Similarly, eBay’s terms of use require its information to be kept confidential except where disclosure is legally required. 198 It would therefore appear that at least a portion of litigation regarding requests for information pertaining to unnamed persons is due not to the belief of a third party that the Minister has failed to meet the conditions requiring disclosure, but to prevent the third party from incurring liability by providing the Minister with the information prior to exhausting all other options. Tax litigation, therefore, is being driven by non­tax considerations, at a significant cost to third parties. Given the unlikely prospect of a successful application for judicial review, third parties should be relieved of the burden of having to dispute a request solely for the purpose of minimizing potential liability under PIPEDA.

Schedule 5 of PIPEDA sets forth the statute’s privacy protection principles, and section 4.5 of the schedule states that “[p]ersonal information shall not be used or disclosed for purposes other than those for which it was collected, except with the consent of the individual or as required by law.” The concern noted by American Express was whether acquiescence to a CRA request under section 231.2 would satisfy the “as required by law” component of the PIPEDA principles, or if this could be satisfied only by applying for judicial review under subsection 231.2(5). Failure to ensure that disclosure was required by law could potentially result in damages being awarded against a third party that prematurely discloses information to the CRA under PIPEDA paragraph 16(c). Though Amex appears to be the only tax case thus far where PIPEDA concerns have been raised, the interaction between tax and PIPEDA will certainly be the subject of jurisprudence at some point.

Requiring Notice to Taxpayer

While providing notice to unnamed taxpayers is impossible, where the CRA seeks information from a third party about the affairs of a taxpayer, requiring that notice be given to the taxpayer about whom information is sought may provide the taxpayer with an opportunity to demand justification for the request. 199 Section 7602(c) of the Code requires the IRS to notify taxpayers prior to requesting information from a third party. While much of the preceding discussion has taken the approach that third party contact is undesirable, in certain situations the taxpayer might be indifferent to contact with third parties. For example, the taxpayer may not have maintained proper records for various income sources and would need to rely on the third party in any case to obtain the information. While Camp asserts that such a requirement results in an unnecessary escalation in the already adversarial approach to information gathering, 200 this will not necessarily be the case in every circumstance. Where the taxpayer is willing but otherwise unable to provide the information, requiring notice that a third party will be contacted may avoid creating a situation in which the taxpayer feels as if they are under investigation due to revenue authority requests for third party information. Similarly, where the taxpayers are unnamed and contacted by the third party, it may present an opportunity for the taxpayers to

196 Supra note 183, at paragraph 34. 197 Ibid. 198 2008 FCA 348, supra note 77, at paragraph 8. 199 Bryan T. Camp, “Tax Administration as Inquisitorial Process and the Partial Paradigm Shift in the IRS Restructuring and Reform Act of 1998” (2004) vol. 56, no. 1 Florida Law Review 1­134, at 129. 200 Ibid.

Mike Ziesmann Gone Fishing 33

assert their rights and positions at an earlier point in the investigation, thus preventing the feeling that they were “blindsided” by an unexpected CRA audit.

CONCLUSION

In recent years, the Canadian revenue authorities have seen a fairly rapid expansion of their powers to conduct fishing expeditions, under both the Act and tax treaties. In the 25 years since James Richardson, the scope of the authority to conduct fishing expeditions through third party information has gone from the inability to obtain any information unless it was sought about specified taxpayers, to a situation where mere good faith is required to justify such an expedition. In a system that should seek to balance the need of the CRA to assemble information for audit purposes with the right of taxpayers to assume their information is kept private, the pendulum appears to have swung too far in favour of the revenue authorities. The OECD Model TIEA indicates that the market for tax information and a taxpayer’s sense of privacy are not always mutually exclusive principles. At a minimum, requiring the Minister to have some suspicions about a taxpayer upon which to seek information through fishing expeditions would serve to move back towards a more balanced approach or at serve to reduce a sense among taxpayers that the revenue authorities are needlessly examining their personal lives.

Mike Ziesmann Gone Fishing 34

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