Case Report – SCC says CRA may audit one taxpayer through another

On July 31st, a 4-3 majority of the Supreme Court of Canada held that the Canada Revenue Agency need not seek judicial authorization to examine information about one taxpayer’s compliance by auditing another.

The case involved an audit of a university’s charitable foundation. The CRA sought to examine the Foundation’s records to determine whether it was receiving valid charitable donations. There was no dispute that, at the same time, it intended to pursue individual donors who may have made donations it expected to be invalid.

The question, given the CRA’s dual purpose, was whether it could seek Foundation records that would identify individual donors under its section 231.1 audit power (which allows it to look at a taxpayer’s records without judicial authorization) or whether it needed to rely on its section 231.2 production power (which allows it to look at a person’s records which relate to one or more “unnamed persons,” but only with judicial authorization).

The majority, in a judgement written jointly by McLachlin C.J. and Lebel J., held that the CRA does not need judicial authorization in conducting audits that are aimed at both parties to a tax-related transaction: “The s. 231.2(2) [judicial authorization] requirement should not apply to situations in which the requested information is required in order to verify the compliance of the taxpayer being audited.” It held that section 321.2 still has a meaningful role in the enforcement scheme because the CRA may need to seek information outside of a formal audit.

Rothstein J. wrote the dissenting judgement, and argued that the majority’s interpretation leaves no meaningful role for section 231.2. He argued that Parliament intended the requirement for judicial authorization that is embedded section 231.2(2) to be engaged whenever the CRA seeks information about “unnamed persons” through an audit of a taxpayer, even if the taxpayer’s own compliance is at issue.

This was a very close one to call, which makes me question whether it reveals something about the extent to which each of our top court’s justices value privacy. Justice Rothstein, however, adamantly declares that he differs with the majority only on a point of statutory interpretation and because the production power in section 231.2 ought to be given a meaningful role in the enforcement scheme. It seems to me that the eBay case (see here and here), where the CRA utilized section 231.2 to demand production of the account and transaction records of eBay “PowerSellers,” leaves a role for this provision despite the majority’s finding; in that instance, eBay was simply a record holder rather than a party to the tax-related transaction.

Redeemer Foundation v. Canada (National Revenue), 2008 SCC 46.