Canada:
CRA compulsory disclosure against anonymous taxpayers upheld by court
August 25, 2021
Red Meat & Samulovitch PC
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Introduction – CRA’s authority to investigate according to p. 231.2
Under Section 231.2 of the Income Tax Act, the CRA has extensive powers to require third parties to disclose information about Canadian taxpayers in order to enforce the Income Tax Act. Section 231.2 gives CRA the power to require a third party to disclose taxpayer information, even if the identity of the taxpayer concerned is unknown to the CRA. The power of the CRA to force disclosure by third parties against unnamed persons has been the subject of considerable legal disputes, especially when there is suspicion that the CRA has made this disclosure request as part of a “fishing expedition” in which it only third-party institutions such as banks , Charities and utilities to disclose confidential tax information from large numbers of taxpayers without good cause for suspicion of non-compliance with income tax.
A recent case by the Federal Supreme Court, Zeifmans v. Minister of National Revenue, raised the question of when the CRA should seek court approval if it is forcing third party disclosure of tax information. The court ruled in CRA’s favor and upheld CRA’s broad leeway to coerce tax information from unnamed taxpayers without a court order, as long as CRA can argue that the unnamed taxpayers in question are not themselves the subject of a CRA investigation.
Zeifmans – the facts
The CRA issued an Information Provisioning Request (RFI) to Zeifmans LLP, an accounting firm, to three of Zeifmans’ clients, Mr. Vaturi, Ms. Vaturi and Mr. Ghermezian. As part of the request for information, the CRA asked Ziefmans to disclose all companies owned, operated, controlled, or otherwise associated with these three people. These three people have been subjected to CRA audits for alleged non-compliance with the 2012 Income Tax Act in order to coerceive this information.
The Law on the Power of the CRA to Enforce Third Party Disclosure
The basis for the CRA’s RFI was Section 231.2 of the Income Tax Act. Section 231.2 has three subsections. Subsection one empowers the CRA to compel a third party to disclose tax information for any purpose related to the administration or enforcement of the Income Tax Act. Subsections two and three of Section 231.2 places restrictions on the CRA when the CRA seeks information about anonymous persons from a third party. The CRA must obtain judicial approval to coerce information against unnamed persons from a third party by meeting the criteria set out in subsection 231.2 paragraph 3.
Zeifmans – The dispute
While von Zeifmans’ Canadian tax attorney raised four different grounds for contention, the dispute over the relationship between Subsection 231.2 (2) and Subsection 231.2 (3) was the most important point in our understanding of the CRA’s power to enforce disclosure. Namely, whether the CRA must seek judicial approval in accordance with subsections 231.2 (2) and (3) when attempting to coerce information relating to an unnamed person, or whether the CRA must seek judicial approval only if against the nameless person is determined because of possible unnamed investigations – compliance with the income tax law. Zeifmans took the former position, arguing that the CRA must seek judicial authority in this case, even if the targets of the tax audit are three named persons. While the CRA has taken the position that its disclosure request is not subject to the requirements of subsections 231.2 (2) and (3) as it is reviewing three named individuals in Mr. Vaturi, Ms. Vaturi and Mr. Ghermezian. In this context, it should be noted that the investigations have a larger scope than the tax audit. A person can be investigated by the CRA without the CRA initiating a formal tax review process.
Zeifmans relied on the Minister of National Revenue v Toronto Dominion Bank case law for the position that the CRA must obtain judicial approval for all disclosure requests against unnamed persons. The court ruled in favor of the CRA and found that the Toronto Dominion Bank was overridden by later jurisdiction such as Canada (Customs and Tax Service) against Artistic Ideas Inc. by nameless taxpayers only incidental to the CRA’s first investigation Forcing a CRA to force a third party to disclose tax information of an unnamed person without a judicial order. Overall, the intent of Section 231.2 was to protect unnamed individuals under investigation by the CRA, not all unnamed individuals. Since the CRA is already reviewing three named persons in this case, it does not require court approval to obtain information from Zeifmans about related but unnamed persons.
Conclusions
One of the most worrying findings from Zeifmans is that the federal court seems fairly unconcerned about the possibility of bad faith from CRA. The plaintiff in Zeifmans raised the possibility that, in the context of an investigation into named taxpayers, CRA might only be interested in information from unnamed taxpayers, but the CRA can later examine the unnamed taxpayers. The Ziefmans ruling would effectively allow the CRA to conduct an investigation and tax audit against unnamed parties based on information previously obtained without judicial approval. It is important to remember that CRA’s power to coerce third parties to disclose information does not extend to law firms because of the attorney-client privilege between attorneys and their clients.
In addition to the risk of potential future investigations and tax audits, a taxpayer who is subject to a disclosure requirement based on Zeifmans’ reading of subsection 231.2 could lose his or her right to use the voluntary disclosure program.
The general eligibility criteria for the CRA’s Voluntary Disclosure Program (VDP) are as follows:
- Voluntary: The CRA must have no prior knowledge of the taxpayer’s tax liability.
- Complete: The taxpayer must disclose tax information for all tax years in which his information was incorrect.
- Tax Debt: The taxpayer owes tax to the CRA due to incorrect filings.
- One year past due: the taxpayer can only disclose information for tax years that are at least one year after the filing due date.
If a taxpayer is potentially in breach of the Income Tax Act, even if the taxpayer is not currently being investigated or audited by the CRA, he may not meet the VDP’s “voluntary” criteria.
Pro Tax Tip-Tax Guidance – Due Diligence and Voluntary Disclosure
Our experienced Toronto tax attorneys can provide tax advice on the complex issues surrounding CRA’s disclosure requests and advise on whether a voluntary disclosure request may benefit you. We also have extensive experience representing taxpayers on CRA tax audits, appeals, and tax court appeals. We will defend your rights in all dealings with the CRA. All consultations with our undergraduate and experienced Canadian tax attorneys will be privileged and confidential, whether you hire us or not. Unlike accounting firms, legal secrecy between Canadian tax attorneys and their clients is the most strictly protected data protection secret under the law, and the law used to coerce information against Zeifmans LLP cannot be used to coerce information against Canadian tax attorneys. Our tax office can also grant attorney privilege to any auditor whom we hire on behalf of our clients.
The content of this article is intended to provide general guidance on the subject. Expert advice should be sought regarding your specific circumstances.
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