When employers provide employee benefits, they are required to include the value of the taxable benefits in the income of employees. If an employer does not properly report the taxable benefit, the Canada Revenue Agency (“CRA”) has considerable power to require employers to disclose the names and related information of the taxpayers who enjoyed the taxable benefit. As discussed in Minister of National Revenue v. Lordco Parts Ltd., this also applies if a business provides taxable benefits to its customers.
Following an audit of Lordco, the CRA noted that Lordco established an incentive program, which included a bi-annual cruise for its customers who had earned rebates based on the volume of their purchases of Lordco products. The customers could purchase tickets for the cruise using the rebates. Corporate customers nominated individuals to attend the cruise as representatives. Only 30% of the cruise related to business activities.
According to the CRA, Lordco was required to report the benefits enjoyed by the individual attendees. When Lordco failed to complete such reporting, the CRA issued a “named requirement” requiring Lordco to provide a list of the individuals who attend the cruise. Lordco refused to provide any names, addresses or registration forms, on the basis that the information related to unnamed third party individuals. The CRA applied, without notice , for an order of the Federal Court requiring Lordco to produce “information and documents relating to certain persons whose identities are unknown to the Minister”, being the individual representatives of customers of Lordco.
The Federal Court granted the order, recognizing that obtaining information relevant to the tax liability of some specific person(s) whose tax liability is under review is a purpose related to the administration or enforcement of the Income Tax Act (“ITA”) and does not violate any rights of taxpayers under section 8 of the Charter of Rights and Freedoms (the Supreme Court of Canada has previously stated that taxpayers do not have a high expectation of privacy in relation to documents concerning tax matters).
The CRA is permitted to request third party information related to unknown persons with the authorization of a judge. Two conditions must be met for an order to be made: (i) the individual or group is ascertainable; and (ii) the production is necessary to verify compliance with the ITA. Finding both conditions met in this case, the Federal Court ordered that the CRA was authorized to impose a requirement to produce the information regarding the customers who went on the cruise, failing which Lordco could be subject to fines under the ITA up to $25,000 or both fine and imprisonment up to 12 months.
This is a reminder of how far the CRA’s reach can be extended when it comes to obtaining information for the purpose of identifying tax payers and ensuring compliance with the ITA. Employers and businesses are not able to refuse production on the sole basis that the information pertains to unidentified third parties (e.g., representatives of corporate customers) when the CRA is attempting to verify compliance with the ITA.