The Canada Revenue Agency (the “CRA”) has broad powers of investigation in the audit process. In the course of conducting an audit, the CRA frequently requests that taxpayers provide records, answer questions, and attend interviews. For the most part, taxpayers will simply comply with CRA’s requests without much question.
However, the recent decision Canada (National Revenue) v Cameco Corporation, 2019 FCA 67 (“Cameco”) serves as a reminder that CRA’s investigative powers are not as broad as one may think. On April 3, 2019, the Federal Court of Appeal handed down a welcome decision in which it confirmed that the CRA may not compel oral interviews on the basis of paragraph 231.1(1)(a) of the Income Tax Act (Canada) (the “Act”). This decision, in the context of a taxpaying business is also relevant for registered charities and for non-profit organizations.
In Cameco, CRA requested oral interviews from a large number of Cameco Corporation (“CCorp”) employees in the context of a transfer pricing audit. CRA asserted that it had the power to require these employees to attend for interviews and compel answers to the auditor’s questions under the authority of paragraph 231.1(1)(a) of the Act. When CCorp refused, the Minister of National Revenue (the “Minister”) brought a summary judgment application to seek a compliance order, directing CCorp to comply with CRA’s request.
At the Federal Court, McVeigh J. dismissed the Minister’s application, finding that the Minister’s interpretation of subsection 231.1(1) was overly broad. The Minister appealed to the Federal Court of Appeal. Applying the modern approach to statutory interpretation, the Federal Court of Appeal reviewed the text, the context and the legislative history of paragraph 231.1(1)(a) and concluded that none of these methods of analysis were supportive of CRA’s position.
The Federal Court of Appeal found that the ordinary meaning of the language used does not suggest an unlimited power to compel a person to answer questions. The specific powers granted by paragraphs 231.1(1)(a) and (b) are the powers to “inspect, audit or examine”. The focus of these powers is to provide the Minister with unimpeded access to information that is documented in the books and records of the taxpayer. While paragraphs 231.1(1)(c) and (d) permit CRA agents to enter any business premise and to require the owner or manager to provide reasonable assistance and answer all proper questions, these paragraphs must be interpreted in view of the purpose and scope of paragraphs 231.1(1)(a) and (b):
[20] … The authority in (c) and (d) is to enable the performance of the powers granted in (a) and (b). That is the effect of the words “for those purposes” in the mid-amble of this subsection.
The Court noted that there is a difference between an obligation to facilitate the auditor’s access to documents, records, books and information as to what the taxpayer did, compared to an obligation to answer inquiries directed to understand the facts, assumptions and considerations of the taxpayer in preparing its tax return. The latter is not within the scope of subsection 231.1(1) –as the Federal Court of Appeal quoted from BP Canada Energy Co. v. Minister of National Revenue, 2017 FCA 61 at paragraph 82: CRA “cannot compel taxpayers to reveal their soft spots.”
The Federal Court of Appeal went on to note that subsection 231.1(1) had specifically been amended in 1986 in order to introduce limitations on CRA’s enforcement powers. Concurrent with these amendments was the introduction of section 231.4, which provides for an explicit power of inquiry together with procedural safeguards for the taxpayer that is subject to the inquiry. If CRA’s position were accepted, the powers granted by subsection 231.1(1) would be significantly broader than that set out in section 231.4, without the same procedural safeguards. This would be contrary to the intention of Parliament. If Parliament did in fact intend for the power to compel oral answers to be within the scope of subsection 231.1(1), it would have engaged specific language, as it did in section 231.4. The Minister’s appeal was dismissed.
Although the Cameco decision signifies a significant victory for taxpayers, charities in particular should be reserved in their determination as to the extent to which they rely on Cameco in refusing to cooperate with CRA’s requests.
When a non-charitable corporation or individual is audited and found to be in non-compliance with the Act, the consequences are generally monetary. The corporate or individual taxpayer may be required to pay to CRA an amount for taxes owing, plus penalties and taxes. While these penalties and taxes can be hefty and sometimes draconian, the stakes are even higher for charities. A charity that is found to be in non-compliance as a result of audit may be revoked for cause and deregistered. An appeal to the Federal Court of Appeal is available; however, it is fair to say that the odds of success on charity revocation appeals are poor.
The risk of revocation, coupled with the disruptive nature of prolonged audits and investigations, suggests that charities should almost always take a less combative approach in dealing with CRA inquiries than may be the case for other taxpayers. From a practical standpoint, charities may well find themselves to be in a better position by maintaining a fully cooperative attitude and complying with CRA’s requests (even if there may no basis for such requests in law), if doing so will appease the auditors and dissuade them from taking a hard stance in the audit process. While there may be situations in which even a charity should resist CRA audit requests, this should only be done after careful thought and on the basis of legal advice.
